What's the best price you think you could get for a portable DVD player? $100, $80, maybe even as low as $50? Well, university students this year went off to school with a $39 DVD player packed in the...
What’s the best price you think you could get for a portable DVD player? $100, $80, maybe even as low as $50? Well, university students this year went off to school with a $39 DVD player packed in their bags. That $39 DVD player, likely made in China, was an important symbol for a major driving force in our economy: the great push among all manufacturers to compete by constantly delivering lower prices for a wide range of products.
And, since manufacturing is an important customer base, this does have an impact on trucking.
Every summer our Transportation Media Research group conducts a survey of about 700 shippers across Canada. We ask them to identify their greatest challenges. Every year they tell us the same thing: Reducing costs is a major concern, particularly among manufacturers. Not only do the vast majority rate costs as a concern, most rate it as their top concern.
Our most recently conducted research found 83% of shippers using truck transport paid higher rates in 2005 with two thirds reporting increases greater than 4.1%. That motor carriers are justified in finally raising their rates to levels conducive to profitable management of their businesses is an argument I’ve made many times in the column and doesn’t need repeating. And I believe shippers can adjust to steady and predictable increases to their transportation rates.
What’s much more difficult for them to adjust to is cost volatility. Competing on the price of their products requires very fine calculations, and wildly fluctuating resource or transportation costs wreak certain havoc on the bottom line. Yet in many instances that’s exactly what’s happening thanks to the current nature of fuel pricing. The trucking industry has been more successful than any other mode in introducing fuel surcharges – 99% of shippers reported paying them. Forty percent of shippers reported hikes to their fuel surcharge of 10% or greater in 2005.
The volatility in diesel pricing we experienced in 2005 may have eased but we’re still stuck with prices 15% higher than a year ago and about 40% higher than two years ago. High fuel prices will be with us for some time; it’s an issue that can’t be ignored from the shipper or the carrier side.
The problem with the current practice of surcharging is that, although it provides a viable way for carriers to deal with rising fuel costs, it doesn’t neutralize the volatility of fuel pricing, it just passes it on to the shipper. And after a couple of years of hefty surcharge increases, shippers are getting anxious. The Canadian Industrial Transportation Association (CITA), a lobby group for shippers which includes big-name companies such as Unilever, Alcan, Noranda and Canadian Tire, has questioned the revenue based model of fuel surcharging because the charge depends on the dollar amount a shipper is billed, rather than on the carrier’s actual fuel consumed for that particular shipper’s haul. Their comments as well as that of others are included in this month’s issue.
Is the current fuel surcharge system really the best approach? Is the admittedly more complicated per-mile based formula better? Or is fuel hedging, which limits the maximum price the carrier pays for fuel over a given period, perhaps a better solution for both carriers and shippers?
I don’t know what the best approach is. What I do know is that for carriers to remain profitable they must have a viable way to recoup their fuel costs and that for shippers to remain competitive they must have an effective way to deal with cost volatility. I also know it’s time shippers and carriers got together for an intelligent discussion on all the options..
To that end, I will be participating in a cross-country speaking tour to discuss fuel price volatility and its impact on both carriers and shippers (see the scheduled dates below). I will be interviewing experts live at each venue to examine all the options. We too have been collecting data on this issue for a few years now and we want to share that with you. The tour is sponsored by our Transportation Media Research group in partnership with Markel Insurance. I hope to see you there.
Wednesday April 26,Holiday Inn Montreal-Airport
6500, Cte de Liesse, 514.739.3391
Thursday April 27, Four Points by Sheraton Halifax