Riverside Logistics

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How does the price of a barrel of oil affect your freight cost?

Freight Rates have been going up at a record pace lately and one of the main reasons is that fuel prices are also at record levels.

In March, U.S. oil spiked to a 13 year high at over $130/barrel. A key driver was the Russian Invasion of Ukraine. In addition, US producers were slow to respond. They just didn’t have the capacity or willingness to ramp up quickly. Right now, demand is high, and supply is constrained, so that means the upward pressure on prices will continue.

When looking at how fuel relates to oil, it’s helpful to understand that refineries produce about 11 gallons of diesel fuel for every 42 gallons of crude oil, so the higher the cost of a barrel of oil, the higher the pump price for diesel. Diesel is the primary source of fuel for large tractor trailers and accounts for approximately 20% of a carriers cost to operate, so it’s going to highly impact trucking related freight rates. This will also take capacity out of the market as independent truckers adjust record high diesel prices. Now  let’s look at different types of loads and transportation methods and how high diesel prices will change your freight cost.

Trucking Types:

Linehaul rates, the base rates for moving product from point A to point B, are triggered primarily by supply and demand factors. Load to Truck ratios drive spot pricing (daily pricing on freight load boards). The more loads and less capacity the higher the linehaul rates. Fuel Surcharges, on the other hand, are usually setup as a sliding scale, based on the Department of Energy ( D.O.E.) national average price of fuel. The scale slides up and down in cents per mile or as a % of revenue in accordance with designated bands of fuel costs. Usually, these fuel surcharges (FSC’s) are in cents per mile for over-the-road truckers, and in % of revenue for Less-than-truckload and Small Package. Current FSC’s are running around 31% for LTL and 96 cents per mile for truckload with diesel at 5.51$/gallon. They have increased dramatically since the first of the year.

The same dynamic between oil costs and fuel costs impact the other modes of transport as well. Ocean, Rail and Air transport all have significant expenses tied to fuel costs.

Ocean

For Ocean, fuel costs represent 50-60% of their operating costs.

Air

For Air carriers it’s more like 40% and is their biggest variable expense. This expense affects air transport belly freight as well as parcel express freight.

Rail

For railroads fuel cost represent about 20% of their operating costs. When fuel prices rise, rail becomes a more desirable solution vs truck, the converse is true when oil and fuel prices drop.

What is being done about all this?

The Carrier community is doing a couple of things.

Air carriers buy fuel hedges to guard against upward price swings. However, when prices drop, margins get hurt. They pass along fuel costs in the form of surcharges on their rates. These are currently running in the neighborhood of 25% of linehaul costs.

Ocean carriers are doing what’s called “slow steaming” to mitigate fuel costs. By reducing their speeds, they can save up to 59% of their fuel costs. The downside is that the travel time increases significantly. From days to weeks in some cases. Ocean carriers charge what’s called a “Bunker Adjustment Factor” or BAF, which is usually tied to the cost of Brent Crude Oil. Currently these charges run by trade lane and are reaching all-time highs of over $600 per 40’ container.

Rail Carriers are running diesel-electric locomotives which capitalize on the benefits of both energy types to improve the efficiency of their travel costs. Railroads, however, also impose mileage-based fuel surcharges. These have doubled since the beginning of 2022. They are now around 76 cents per mile.

The EIA or US Energy Information Administration posts the national average diesel price every Monday. Using this number along with the MPG of a truck (usually around 6mpg) and a pre-determined baseline (typically $1.50/gallon) you can calculate the Fuel surcharges that a motor carrier would ask for. The surcharge scale used is open to negotiation with shippers. Many shippers create their own fuel surcharge tables and when contracting with carriers, may force the carriers to use them. At the end of the day, Line haul cost + fuel surcharges = the total cost of transportation. So, if the shipper has a shipper-favorable fuel surcharge table, then probably the line haul rates will be increased by the carrier to compensate. At the end of the day the carriers must try and protect their margins and recoup their costs.

Depending on what type of shipper you are, a lot of the fuel impact depends on your base rates and whether you buy transportation on a “spot” or a “contractual” basis. If you buy contractually, which is recommended, your base rates usually remain the same for the term of your contract. Most contracts are a for at least one year. If you buy your transportation on the spot market, then you are exposed to the vagaries of the market. Fuel cost is always a floating cost that traditionally moves with the price of oil. Linehaul Base rates float on the spot market based on supply and demand in each market. If there are more loads than trucks, then rates go up. If the converse is true, then rates go down. Just remember if your base prices go up, and fuel is reflected as a percentage of base rates, then you take a larger hit than you would if the base rates didn’t float, i.e.., if you had contractual linehaul rates that were stable for a period. Not only will this save you money, but it will also allow you to plan you costs better.

The goal of any shipper is to negotiate a fuel surcharge that is favorable to their business and helps them maintain a strong competitive position. There are a few items that shippers should consider when deciding on a carrier to ship their goods.

  • Make sure the carrier fully explains how their fuel surcharge formula works and when it is adjusted. For example, weekly, monthly, quarterly, every Tuesday, etc.
  • Don’t assume that a high fuel scale base rate is bad. When the base fuel rate is higher, fuel surcharges usually are lower. Also make sure your cost bands are as large as possible. This will help minimize fluctuations.
  • If you negotiate a favorable FSC scale, make sure that your base linehaul rates are fixed for at least a year. This way your base doesn’t change except when it’s time to re-negotiate the contract. Thus, allowing you to better plan your costs for the year.
  • Make sure that when comparing carriers and modes that you fully understand how their individual fsc’s apply. Also, don’t forget to calculate the transit implication of using one mode over another. Dollars saved on transport can be lost because the products don’t arrive as soon as they are needed.

What does all of this mean for your freight cost in the next year? Lot’s of uncertainty and increasing complexity of solutions that provide a secure supply chain at a market price that allows your business to compete and grow. With all of this uncertainty, small & mid-size companies are going to find it challenging to mitigate cost and remain competitive.

Riverside Logistics is an expert in logistics costs and can help you with fuel surcharge negotiations and setting up scales favorable to your business. Give us a call at 804-474-7700 extension 82. We are here to help!

 

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What does it cost to hire a third-party logistics company to manage your transportation?

Often, a third-party logistics Company (3PL) can allow you to save money!

The cost to hire a Third-Party Logistics Company (3PL) is usually done on a pay as you go basis.

For example, if you use a 3PL to handle and manage your transportation needs, the typical way that they charge you is by marking up their transportation costs before they invoice you.

Here are some good reasons to hire a 3PL to manage your transportation:

  1. BUYING POWER: Riverside has numerous clients, using the same carrier base. This allows them to leverage this volume into lower rates than if you dealt directly with the carrier yourself. The amount of discount and reduction that Riverside receives, plus our markup percentage, is usually very competitive to the level of cost you yourself could find or negotiate. This means that we are usually more competitive, even with our markup than you would be on your own. Lower cost means cost savings.
  1. EXPERIENCE: Riverside has negotiating experience across many industries. We know carriers give more competitive pricing the better they understand the characteristics of the freight (i.e. commodity, dimension, weight, origin, destination and product value). Our goal is to find the best cost/service ratio for our customers using our visibility of a larger network portion of the supply chain.
  1. MANAGEMENT: Riverside has experience and expertise that allows us to be your Transportation Department. This means you don’t have to pay for a staff to manage and execute your transportation needs. We do it. This represents a substantial advantage to you. We handle all your freight audit and pay activity, making sure that the invoices are fully documented and are correct before we pay them. 
  1. SYSTEMS: Riverside uses technology to capture the relevant transportation data to efficiently run your business. This is important in today’s supply chain. It means we can track your shipments, transaction cost, and shipping and receiving metrics. All this can be done in real time. A 3PL utilizes these systems to properly manage and execute a logistics strategy that keeps you competitive.

In summary, a transportation 3PL brings a disciplined approach to purchasing and executing your transportation strategy. The ultimate goal is delivering service to your customers at a competitive price while saving you money.

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WHY ON EARTH WOULD YOU WANT TO SHIP TO THE EAST COAST?

Strategically located on the East Coast, Riverside Logistics is ready to help you with your supply chain.And if you decide to ship to the east coast here’s why Virginia may be the best destination port to use.

Here are some compelling reasons to consider changing how you route shipments originating in ASIA.

  • Ports in California have been making headlines because of unprecedented delays both on the water, and then thru and beyond the ports. During this same time frame the Port of Virginia has been running smoothly. It has also been performing better than other ports along the East Coast. The Ports in Virginia have different operating structures than others, especially those on the West Coast. Virginia Ports are run by one entity, the Virginia Port Authority. If one terminal starts backing up the VPA will switch traffic and unloading to another terminal to avoid costly delays and congestion. In addition, VPA also has sole authority and control over the trucking aspect. The west coast, by comparison, has 3 different truckers that they need to deal with. This gives Virginia another advantage in managing the flow of goods thru and beyond the port. Last, but not least, the VPA has automated stacking cranes. This means fewer shifts are necessary to unload containers. Adding this all up means that Virginia is clearly winning the port war and should be considered a strong option for freight originating in Asia.
  • So, let’s change gears a bit and talk about LABOR. The ILWU, International Longshore and Warehouse Union, has labor contract negotiations coming up in 2022 for its entire West Coast labor force. The last negotiation 6 years ago, produced severe disruptions. At that time, many shippers were caught flat-footed and had to divert to Gulf Coast and East Coast ports to compensate. This time around you don’t want to get caught off-guard and un-prepared. The ILW Union has already rejected an offer by the terminal operators to delay negotiations until 2023. The head of the union told its workers to “save up” as they prepare for negotiations, meaning that this time around it may be even more painful and take a “long time” to iron out. A really long time with lots of disruptions and down-time.
  • The West Coast is a logjam right now and into the foreseeable future. Ships and containers are stacking up like cordwood. The port has a significant backlog of ships waiting to be unloaded. Once they are finally unloaded then there are backups in getting the containers on trucks or railcars for movement to their final destinations. Overall transit times from ASIA have tripled. What used to take 30 days, now takes 90 days. That represents a lot of idle cash, sitting unused.

Time is money, if for example, your cost of capital is 3-4% and your carrying costs are 25%, then each day, each dollar of inventory sits for longer than it used to or should, then it ends up costing you $35 per $50,000 of in transit inventory value per day, more than it should. This adds up very quickly and turns into big dollars wasted. One container on the water for 60 extra days could cost $2100 more with the longer transit. If you ship 100 containers annually then that’s over $200K in additional cost to you each year. Safety Stock levels would be lower for a 30-day transit than for a 90-day transit pipeline. Safety stock is money sitting too, not being converted back to cash, not generating sales. These costs add up fast and are very un-productive.

  • Since the ultimate customer maybe closer from the east coast than the west coast, domestic transportation costs will be lower and transit times faster. More than 2/3rds of the US’s domestic population is within 2 days of the Virginia Ports. Unit costs (per carton, per lb., etc.) will be lower. Damage and loss risk is lower on the domestic pipeline when using east coast unloading vs west coast unloading. The longer the transit, the more opportunity exists for damage and loss. Damage and loss will create unhappy customers, and unhappy customers will create lower sales and less profits.

Now let’s look at Norfolk and Richmond as destination ports versus other east coast facilities.

  • Virginia serves 2/3rds of the US population within 2 days. Virginia is a crossroads to the west, the south and the northeast either by truck, intermodal or rail modes. Its central location makes it ideal as a distribution point for the entire East coast, Southeast and Midwest.
  • Warehouse rates for inventory are lower and more space is available in Virginia than anywhere on the east coast. Labor costs and insurance costs are extremely competitive.
  • Trucking rates outbound from Virginia are very competitive with other east coast ports. If you ship south from Virginia, vs more northern ports, you costs will be substantially lower. If you ship to the Midwest rates will be competitive.
  • The availability of transportation alternatives is very high in Virginia. The ratio of loads to trucks is balanced better here than at other east coast locations.

All in all, the east coast is an attractive alternative to the west coast as a destination port from Asia. Out of Europe it’s a no brainer, transit is substantially shorter and freight rates are much better. Virginia has some key advantages over other east coast ports, that will produce a competitive edge for shippers. Depending on the distribution of your customer base and its density in proximity to Virginia, you may have a real opportunity to advance your competitive position by shipping thru and stocking product In Virginia.

One last point. Although breaking up your inventory into east coast and west coast lots makes for a more difficult management process, it may allow for enhanced supply chain risk as well as increased leverage when dealing with warehouses, carriers, and vendors. Depending on your business model, you may decrease your inventory pipeline, lower your supply chain risk, enhance your competitive position, and provide a higher level of customer service. It’s worth looking into and Riverside Logistics will be happy to help you make a decision. Now is the time to be working on this before it is too late to make changes.

 

About the author

Jim Durfee
Vice President Business Transformation
Headquarters: Riverside Logistics, Inc. , 5160 Commerce Road, Richmond, VA 23234
Riverside Logistics is a full-service third-party logistics company (3PL), delivering world-class supply chain management solutions.

If you would like more information or have questions about this article,  please call Jim at 804- 474-7700 Option #4.

 

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Do you use Logistics contracts, or do you buy on the spot market? If you spot buy, I’ll bet that’s been painful lately.

The current commercial transportation market is a “mess” right now. “Mess” is a technical term; it means everything is going in the wrong direction. Capacity is hard to find. Rates are going up by leaps and bounds. Service levels are dropping like a stone. Carrier relationships are becoming frayed. It’s just a “mess” out there in the logistics space.

If you have annual contracts in place with your transportation providers, then you are somewhat insulated from the vagaries of the marketplace for right now. Eventually as the environment persists, and it will, this will catch up with you too. Regardless of your contracts, you may still be seeing carte blanche service embargoes from the LTL segment. These have hit a broad base of shippers and 3PL’s, no matter their size and scale. Depending on your location the pain could be severe as you scramble to change carriers (if that’s an option) to get capacity to handle your freight.

If you buy on the spot market, good luck and God bless! First off, you must find a truck to haul your products. Then you must live with the price of the truck. Truck rates have gone thru the roof, with no end in sight right now. It’s a trickle-down effect. As the truckload segment gets maxed out, the freight shifts down to more expensive modes like LTL (less than truckload). As LTL gets overwhelmed the same thing happens to parcel. Networks get out of balance; rates continue their march skyward and good service levels become a thing of the past.

How did this happen? In a macro sense, it’s a simple equation. More freight, less drivers, and workers to handle it. Carriers furloughed drivers anticipating that the Covid pandemic would persist, and freight volumes would reduce for quite some time. The opposite happened. Freight volumes dipped, then came roaring back. Carriers could not adjust their pools of labor, drivers, dock workers, etc., fast enough to compensate and the network became overloaded.

When is it going to change back to the “good old days”? Not sure about the when, but if I were you, I would plan for the long haul well into late 2022.

What can you do about the spot market if that’s where you live? Tap into a reliable 3PL who already has contracts in place and can provide you with consistent rates for FTL, LTL, Parcel, and Intermodal (if you use it). 3PL’s typically negotiate their rates in annual contracts. Because of this they can provide you with rate stability. The biggest problem in business is dealing with the unknown. If you cannot predict your costs, then you cannot predict your future. A 3PL solution to the current mess is a step in the right direction to controlling your logistics costs.

 

Jim Durfee – Vice President Business Transformation

If you would like more information on our consulting services please call at 804- 474-7700 Option #4

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Why is my Less Than Truckload (LTL) freight pricing going up and my service level going down?

As it stands right now, the LTL (Less-than-Truckload) market is best described as “STRESSED”. This is probably an understatement. All carriers, regional and nation-wide, are saying the same thing. It’s a tough environment out there. Terminals are over-loaded, service levels have deteriorated, embargoes are in place in select markets and pricing is under extreme pressure.

The first question should be “how did we get here”? In one word = PANDEMIC. Carriers anticipated that volumes would dry up due to the pandemic lockdowns. They furloughed and retired staff and drivers only to be left without enough help when the volumes not only returned but increased from pre-pandemic levels.

Now as we fast-forward to today, we are seeing multiple carriers, especially the nationals, shutting down flows into and out of specific terminals to reduce terminal congestion from excess supply. These “embargoes” are causing further stresses to the system. As one carrier shuts off capacity, another gets overloaded, and on and on and on. It’s a domino type effect that is not dissipating quickly.

So, let’s turn to service levels. They are lower, in some cases much lower. Your freight is sitting in the pipeline longer and delaying delivery to your customer. You identify the problem, push for better delivery, but it back-fires on you by causing more delays. The driver shortage is making it very tough for carriers to get the job done.

Finally, the pricing is going up. If you have contracts in place good for you. If you don’t, we would suggest you either get them in place or deal with a 3PL who has solid contractual commitments that won’t rise with the tide.

It’s not all doom and gloom. Carriers are slowly recovering, and capacities are adjusting to volumes. As supply improves, demand subsides, and capacity levels out, the service, pricing and overall market conditions will improve. How fast? Not fast enough. I would anticipate the network balancing in late 2021 or early 2022. Until then, make sure you align with the right partners who can help steer you successfully through this current environment.

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