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  Oct. 5 , 2006 - Supply Chain Digest Newsletter
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Featured Report

Special Report: Comparing ERP WMS Functionality to Best-of-Breed Solutions

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First Thoughts by Dan Gilmore, Editor

Getting the Fuel Surcharge Genie Back in the Bottle

Just in case you hadn’t noticed, oil and gas/diesel prices have been dropping like a rock, and many observers expect prices to continue to fall for some time.


In fact, as we reported two weeks ago (see $1.15 a Gallon? Leading Oil Industry Analyst Says Prices Could Plummet) prominent industry analyst Philip Verleger is suggesting we could temporarily see consumer prices at the pump as low as $1.15, as oil futures traders run for the exits.


We’ve generated a lot of feedback with previous columns on the impact of rising oil prices on the supply chain, the whole notion of “peak oil,” and related topics. Does this latest downward price windfall just show that supply and demand forces almost always work (high prices lead to greater supply coming to market, ultimately depressing prices, as happens in virtually every commodity category)? Or do peak oil scenarios combined with rapid growth in worldwide demand from China, India and others mean we’ll soon look back at this period of  retreating prices as just a strange aberration in the upward pattern? I don’t know, or I’d give this gig up for a career trading oil, but one thing is for sure: geopolitical tensions and terrorist activity alone could send prices right back up just as fast.


Which is a long-winded introduction to my question for the week: should shippers use this (relative) break in the price of fuel to get the carrier fuel surcharge genie back in the bottle?


Fuel surcharges have become a big issue – and a huge expense. As many know, on the rail side the government is on the verge of regulations to restrict the ability of the carriers to levy potentially excessive surcharges (see Have an Opinion On The Rail Fuel Surcharge Issue? There’s Still Time).


To be honest, when I started working on this piece I was absolutely convinced the majority of carriers actually profit from fuel surcharges. Now I am not quite as sure that they do so in total, though clearly some individual shippers are paying unfair costs.


I just read a report from Ed Wolfe, Bear Sterns’ excellent transportation analyst, with this opinion: “Our sense is that generally the LTL carriers make money on fuel surcharges and that earnings for LTL providers would be hurt by sustained lower fuel costs, while TL and rails generally break even over a four quarter period on fuel costs, net of surcharges and hedges.” He goes on to note that the reason LTL carriers can more easily make money is because of the pooled nature of the freight, so that the surcharge is based on some percent of the freight bill, not directly per mile of travel.


Certainly the charge that carriers profit from fuel surcharges is widespread, and is a factor in the proposed Surface Transportation Board’s regulations on rail fuel surcharge practices - a charge the carriers vigorously deny. The true state of affairs is complicated by the fuel hedging that many of the larger carriers use, which impacts positively and negatively their true cost of fuel.


Regardless of the net impact on the carriers’ bottom lines, I’ve heard fairly wild differences in what shippers are paying in fuel surcharges (see below).


But the real question is really this: Should shippers take all the risk in terms of fuel increases? I recently spoke with one VP of Transportation who emphatically said No.


“We’ve allowed the carriers to totally shift the risk of rising fuel prices onto the shipper,” he told me. “We need to get fuel costs back into the base, negotiated rate, and put more of the risk back on the carrier.”


That probably sounds good in an era of ever rising fuel prices. Does it sound as good with fuel prices dropping like a rock?


Of course, many larger shippers have move fairly quickly in the past 18 months from a practice of negotiating with each carrier separately on surcharges to setting a standard rate they will pay to all TL carriers, but again even here I still see some significant differences in what shippers are paying.  As an aside, gaining the ability to make that switch effectively is one of the key factors that led salty snack manufacturer Snyder’s of Hanover to adopt new TMS technology, Transportation Manager Frank Pison recently told me, in preparation for our upcoming Supply Chain Videocast on Cutting Transportation Costs With On-Demand TMS.


Another recent Bear Stearns report confirms the wide range of surcharge payment practices by shippers across all modes. From its survey of hundreds of shippers in Q2 2006, Bear Sterns reports, for example, that “Roughly half of our shippers polled pay 100% of their LTL fuel surcharge bill, while 10% of the shippers polled pay less than half. 28% responded that they pay less than 75% of their LTL fuel surcharge bill.” Data was similar for other modes.


It just seems to me there is a lot of confusion and opacity in this whole surcharge area, and that it is one that lacks clear best practice and or norms. Is regulation, as is likely to happen in the rail arena, the answer in trucking as well? This period of much lower fuel prices, however long it lasts, might allow everyone a chance to re-think this whole issue.


Is there “best practice” for managing fuel surcharges? Should shippers bear all the risk for rising fuel costs? Would you like to see more or all of the potential cost of fuel captured in the base rate as opposed to surcharges? Is tighter regulation the answer in the end?

Let us know your thoughts.

Dan Gilmore


Supply Chain Videocast Series

Spend Management Success at One of the World's Greatest Companies

How a Comprehensive Approach to Purchasing and Procurement Can Deliver Substantial Operational Improvements and Bottom Line Savings; Success at Johnson & Johnson

More information or to register

Cutting Transportation Costs With On-Demand TMS

How Snyder's of Hanover is Driving Real Results

More information or to register

Workforce and Labor Management Success at DSC Logistics

How They Did It, and Real Feedback Straight from the DC Floor

More information or to register


Integrated Supply Chain Organization Research Project

Help SCDigest and The Logistics Institute at Georgia Tech with the important research.

Fast, easy web survey.

Summary report to all participants. Go to link above


Optimizing Warehouse Facility Design

Make the process data driven, with attaining balance a key operational goal, say

Ciber's Mike Krabbe and Jan Klingberg


Oct. 4 , 2006

Importers Dodge the California Container Tax for Now

Schwarzenegger vetoes bill calling for $60 tax per 40-foot container, but the state will continue to look for money sources to address logistics infrastructure

Oct. 4 , 2006

Inventory Management: Annual Working Capital Report Shows Strong Improvements in Inventory Levels Across Nearly All Industries

Pharmaceutical Manufacturers and Wholesale Distributors show largest improvements; how do you stack up?

Oct. 4 , 2006

Procurement Benchmarks Show Wide Variation between Top and Bottom Performers

APQC benchmark study shows big gaps in performance; how many POs per person does your staff execute?


Sept. 28, 2006

Supply Chain Best Practice Tip of the Week: Using Two-Step Reverse Auction Processes in Procurement

Single stage on-line “reverse auctions” are fast and effective, but may not be best when the buyer has less information or control


Q. In the past year, what percentage of total operating costs does fuel represent for truck load carriers?

A. Click to find the answer below


New Report on Value-Added Warehousing: Differentiation in a Dynamic Logistics Marketplace

Why adding new, information-driven capabilities in your warehouse is an essential component to acquire new business and keep existing customers

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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're still behind - be patient if your letter has not yet been published. 

We had a number of readers who took exception to our story on the new oil find in the gulf of Mexico, with nearly all arguing the find is an insignificant drop in the bucket versus worldwide demand. That's true - the question, we think, is whether this find portends perhaps many more such deep water finds that can add substantially to known reserves.

Our feedback of the week is from Robert Clista at Wright Patterson Air Force Base on this topic. You'll find a couple more on the same subject, plus letters on i2 suing SAP over software patents (our responder doesn't like software patents), and perspective on our piece on the challenges of matching supply and demand (see Balancing Supply and Demand – a Long Way to Go).

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – on New Oil Find and Peak Oil

You've got to be kidding me !  15 billion barrels??   That's a drop in the proverbial bucket.   The world will consume that in less than 6 months.


What most people forget is that the heyday of oil discoveries occurred in the 50's and 60's when annual discoveries often exceeded 100 billion barrels a year!  We are still living off of those prodigious finds of over 50 years ago and that's the problem.  Over half of the world's consumption is from these super super-giant fields that are now over 50 years old on average.  The real problem is these big boys are rapidly approaching the day when they will start declining ( if they haven't started already ).    When you have a million barrel a day field decline by an average of 40,000 barrels a day per annum, it takes a lot of little fields or a few giant fields to offset that decrease.   And that's the problem. That is peak oil!  We are finding a new giant field on average only once a decade and we need to find one once a year and it's not happening!


These new fields can't be brought on fast enough to offset this decline and that's why we are in a pickle today.


Robert Clista

Wright Patterson Air Force Base

More on New Oil Find and Peak Oil

This discovery is minuscule compared to remaining world reserves of over 1 trillion barrels. This will have no impact on peaking of oil production. US alone consumes 7.5 billion barrels of oil every year and consumption is growing. Even if this area has oil reserves at the upper end of the estimate, the field has about 2 years supply of oil just for the US consumption. People should stop the hysteria. If you want to learn more, I suggest http://www.theviewfromthepeak.net

Subhi Andrews

On Balancing Supply and Demand

There are leading companies like Nestle and Gillette (before merger with P&G, not aware of post merger) who have institutionalized the whole S&OP process to integrate it even to the smallest of countries level rolling it up to geos and global level for each product line.

They have distinct organization layer for Demand Planning/S&OP, generally headed by a person responsible for both demand and supply planning. This team iS involved very early in the promotions, new product planning process and each new product is taken as a separate project with cross functional team of brand, manufacturing, procurement and demand & supply planner. I have seen it working to a great extent ...but for near term demand changes because of wrong anticipation where reaction time is shorter then the lead time.

Abhay Sharma
Solution Executive, SCM Global Delivery



And throw in the long inbound supply chain.  Inventory problems are directly proportional time and compounded by time.  Long supply chains add to that time, especially with short product life cycles.  The issue is inventory yield maximization.


It is interesting that little has been done—or even recognized--about the inbound supply chain, in terms of its negative impact on inventory or in terms of Sarbanes Oxley—and inventory that is not a de facto off the balance sheet transaction.  Think about the time just from PO placement to a foreign supplier until that product is on store shelves.  Then throw in what homeland security has done to the inbound supply chain by adding delays.  The definition of insanity per Franklin (or is it Einstein) is doing the same thing over and over and expecting different results.  SCM is a horizontal process being applied to a vertical organization.


Tom Craig

LTD Management

Logistics / Supply Chain Management Consulting

On Software Patents

As a software professional, I view most software patents as inimical to the very purpose of patents, namely to encourage innovation.  The typical software patent throws out a few vague, overly broad ideas in a transparent effort to extort settlement money from competitors.  The equivalent in literature would be to copyright some general story line (boy meets girl, they overcome various difficulties on the way to love), then sue the publishing competitor with the deepest pockets, even though the various novels are completely different in expression, and plagiarism is absent.  My son has a T-shirt reproducing a story from the satirical newspaper The Onion with the headline "Microsoft Patents Ones and Zeroes".  That says it pretty well.


Ric Merritt

American TV

Q. In the past year, what percentage of total operating costs does fuel represent for truck load carriers?

A. About 22%, according to Bear Sterns research

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