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May 23, 2022 by Logistics

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!

 

Filed Under: Supply Chain, Third-Party Logistics (3PL), Transportation News Tagged With: Diesel Fuel Cost, Freight Choices, Freight Cost, How does the price of a barrel of oil affect your freight cost?, Richmond, Riverside Logistics, Supply Chain Cost, Transportation Cost, VA, Virginia, Warehouse

February 5, 2021 by Logistics

What is Expedited Freight, and Who Uses it?

Expedited freight services are utilized by shippers to deliver goods to the customer on a specific date and sometimes at a specific time of day. Overall standard, non-expedited, transportation services have delivery accuracy rates that can range from a high of 98% to less than 50% on-time.  This fluctuates based on overall industry capacity and individual carrier management.

The most common mode for expedited freight to move is by air. Freight is picked up and delivered by truck but ends up travelling most of the distance by plane. If possible, expedited freight can be driven in various types of equipment. Of course, the shipment must cross a drivable distance within your timeframe, so sending freight this way only makes sense for short distances (usually less than 500 miles).

The challenge with sending expedited freight by air charter or road is that it is more expensive than standard freight.  Premiums can range anywhere from a 20% to 3 or 4 times the amount normally paid for a standard transit shipment.  Shippers use this method only when it is necessary to maintain customer commitments.

There are six major industries that frequently utilize expedited freight companies for a variety of reasons.

  1. Medical Industry – Used when valuable devices cannot sit in the back of a freight vehicle for long periods of time.
  2. Pharmaceutical Industry – Advantageous for  patients who rely on their medications for survival allowing them to receive  them immediately.
  3. Manufacturing Industry – Meeting deadlines is often a challenge. If parts do not come in on time, projects can get delayed or whole operations can be shut down.  Depending on the size of the operation those costs usually outweigh the cost of the expedited freight.
  4. E-commerce Industry – Retail stores are growing tremendously, and many of them offer their products online. Several big retailers also offer fast shipping options, including two days, overnight, or even same day delivery.
  5. Seasonal – This industry sells most of its products once a year in holiday-themed pop-up stores. With the help of an expedited shipping provider, business should not be running out of stock when customers are buying the most, which helps cut down on inventory costs.
  6. Perishable high value food – For expensive high value food products like Ahi Tuna, getting product across the world in hours instead of days ensures the food can be consumed within hours of receipt.

Expedited freight is used to make sure cargo gets to its location as soon as possible. It is important to consider the increased cost of expedited freight with the cost of not having the product at your location when it is needed.  If you need this type of service reach out to us.  Riverside Logistics can help match your needs with the best value expedited service.

Filed Under: News & Events, Transportation News Tagged With: Air Freight, Certified Transportation Broker, E-Commerce Industry, Food Warehouse, Freight Brokers, Freight Services near the Virginia Ports, Full truckload (FTL), Less than Truckload (LTL), Manufacturing Industry, Pharmaceutical Freight, Richmond, Riverside Logistics, Seasonal Freight, Virginia, Warehouse

March 26, 2018 by Logistics

Riverside Logistics Sponsors/Participates in Junior Achievement Bowl-a-Thon

Riverside Logistics is a proud sponsor of Junior Achievement.  On Saturday, March 17, 2018 our largest group of employees, family and friends joined other companies and bowled two games to raise funds to support students in the Central Virginia area.  It is Riverside’s fourteenth year sponsoring and participating in the Junior Achievement Bowl-a-Thon.

Junior Achievement is the world’s largest organization dedicated to preparing students for success in a global economy, through the development of financial literacy, entrepreneurship and work readiness skills!  JA of Central Virginia serves 26,000 students in 162 schools; in the last 50 years, over 450,000 students have benefitted from their programs.

Riverside Logistics is honored to support Junior Achievement’s hard work and dedication to students in our community.

Junior Achievement Bowl-a-Thon

Filed Under: News & Events Tagged With: 3pl, Junior Achievement Bowl-a-Thon, Richmond, Riverside Logistics, Third Party Logistics, Transporation, Virginia, Warehouse

January 17, 2018 by Logistics

Trends in Transportation + New Driver Requirements (Electronic Logging)

Riverside Logistics International BusinessVIRGINIA INTERNATIONAL BUSINESS COUNCIL, INC.

Enabling International Trade Success Since 1948™

Join us at our Monthly Luncheon Program on Jan. 24th for:

Trends in Transportation + New Driver Requirements (Electronic Logging)

Featured Speakers: Rick Holden + Jim Durfee, Riverside Logistics

Presentation will include presentation on phases of international transportation. Discussion about recent legislation requiring truckers to replace current paper logbooks with electronic logging devices (ELD) and its impact on freight rates, delivery times, and driver hours of service.  There will be time for questions following the presentation.

Details:  Wednesday, January 24, 2018

11:45am – 12:00pm:   Registration & networking

12:00pm – 1:30pm:     Luncheon meeting and program

Venue for this Luncheon Meeting: Omni Hotel, 100 S. 12th Street, Richmond, VA

Cost:   Early registration [by January 18, 2018]:

$25 for VAIBC members

$35 for non-members

Registration after January 18th:  $35 members, $45 non-members

Register online:  www.vaibc.org

About the speakers:

Jim Durfee – Vice President Business Transformation, Riverside Logistics – Jim is tasked with driving the strategic planning and infrastructure improvements necessary to help Riverside achieve its long term growth targets.  Jim has 33 years of Logistics experience across Manufacturing, Retail and 3PL settings. Most recently running the centralized global logistics operations at Meadwestvaco Corporation. This operation controlled over 400 million in logistics spend and handled shipments across 6 continents.  Mr. Durfee has worked on a variety of TMS platforms using both in-sourced and out-sourced logistics resources. He taught Logistics as an adjunct Professor at the University of Richmond for a number of years and is a licensed ICC Practitioner, a Licensed U.S. Customs Broker, a certified Six Sigma Black Belt, a TIA Certified Transportation Broker, and a Certified Member of AST&L (now APICS). He is also a former President of the Central Virginia CSCMP roundtable and holds a BS in Business Logistics from Penn State and a MBA in Management from Loyola University.

Rick Holden – Vice President of Business Development and Corporate officer for Riverside Logistics. Having joined Riverside in 1998 he has over 22 years of diverse, multi-disciplinary, and multi-industry experience in areas of supply chain management, 3PL Sales, logistics, transportation, warehousing, and contracts management and negotiations in industries including medical surgical supply, pharmaceutical, food, manufacturing, chemical and controlled substances, and various consumer products. Rick Holden is currently responsible for all business development and consultative sales activities for Riverside Logistics. Having started the warehousing operations and previously managing the transportation functions at Riverside, he has worked in almost all of the operational facets of the company.

Mr. Holden holds a BS in Operations Management from Virginia Commonwealth University, with advanced graduate studies in Logistics Management at University of Richmond. He is also certified in ISO 2000 procedures, and is a past president of the Council of Logistics Management, Central Virginia Roundtable (now the Council of Supply Chain Management Professionals)

Filed Under: News & Events Tagged With: 3pl, Certified Food warehouse and Distribution Facilities, East Coast Ports, Henrico, Inc., International Distribution, International Trade, Jim Durfee, Norfolk Ports, Richmond, Rick Holden, Riverside Logistics, Supply Chain Manangement, Third Party Logistics, Trade in the U.S., Virginia, Virginia International Business Council, Virginia Ports, Warehouse

March 1, 2016 by Logistics

Why use Riverside Logistics for Local Transportation in Richmond, Williamsburg, Ashland, & Charlottesville?

By James Durfee

Use it or lose it. The name of the game in local transportation is “immediate gratification”. You usually pickup and deliver multiple times a day, and your pickups may be stretched out over the course of the 24 hours each day, night or day, rain or shine. Every time you make a pickup you provide the customer with immediate logistics gratification.

Riverside Logistics handles a vast amount of dedicated local movements in the central Virginia area (Richmond, Williamsburg, Ashland, Henrico, and Williamsburg markets). Headquartered near the Richmond International Airport, Riverside manages over 500 thousand square feet of warehouse space, Riverside doesn’t project a profile like your normal local shuttle operator. Riverside has been moving freight from warehouse to manufacturing, from manufacturing plants to warehouses, from warehouses to Ports (Richmond and Norfolk) and from Port(s) to warehouse. Riverside has moved product for locally based, nationally based and international customers for 20 years. They have a strong fleet of locally-based drivers that they utilize. Some of these drivers have been handling Riverside business for over 17 years. It is Riverside Logistics goal to demonstrate an unmatched level of commitment to its drivers and ultimately to its customers.

If your company needs freight to move within the Central Virginia market, either across the street or across the region, Riverside can move it, each and every day. Most shippers that Riverside does business with are repetitive, daily and/or weekly shippers, moving product within and across the Central Virginia marketplace. Local shippers are typically very demanding. They usually allow little room for error. They usually want extra services over and above the norm on an on-demand, as requested basis (ad hoc) and they also want the rates to be extremely competitive. That’s why Riverside has so much local Central Virginia business. We deliver and we use a repeatable process to make sure that we meet ALL of our shipper’s demands, consistently, every day.

Filed Under: News & Events Tagged With: and Williamsburg, Ashland, Henrico, Local Delivery Companies, Local transportation, Richmond, Richmond MSA, Riverside Logistics, Transportation, Virginia, Warehouse, Williamsburg

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