There are a few things Ed Patton wants truckers to know about fuel surcharges that drive him crazy. First off, Patton understands that trucking companies and owner-operators are finding it difficult to absorb the increased cost of fuel within their thin net margins. Second, he really isn’t trying to rip anybody off when he tells carriers that he’s reluctant to fork over a premium to help pay their higher diesel bills.
In fact, Patton, distribution manager for Rheem Canada Ltd., a maker of water heaters in Hamilton, Ont., would be more receptive to a surcharge plea if carrier sales reps approached him with a little more tact and a lot more logic about their rates. It’s a view shared by many shippers these days.
Patton, a former sales executive in the trucking industry, says too many carriers who seek a surcharge should have done a better job pricing their services in the first place, and furthermore can’t adequately justify the surcharge amount they seek. And it really burns him when he sees a truck idling at the dock or a rig passing him on the highway at 140 km/h, and then truckers grumbling about fuel prices on the 6 o’clock news.
What approach should carriers take with their customers? A general rate increase that takes skyrocketing fuel prices into account? Or some sort of temporary surcharge?
Dave Sirgey, manager of logistics information for the Fort Erie, Ont.-based Freight Carriers Association, says shippers will resist an overall rate increase based by rising fuel costs if they feel that diesel prices will come down. In order to implement an immediate rate increase to recover higher fuel costs, carriers would have to renegotiate all their rate agreements, a complicated process which could take weeks, if not months. “A large company for example, may have several thousand different customers,” he says. “To go back and renegotiate with each and every one is just too prohibitive, and wouldn’t be possible.
“Obviously, shippers want to pay as little as they can. It’s their job to save money throughout the supply chain. But an awful lot of shippers will pay for the surcharge because it’s in their best interest to keep up the level of productivity they have known.”
Also, fuel surcharges are viewed by shippers as a temporary measure. There is an expectation on the part of shippers that when diesel prices begin to fall, so will the application of the surcharge. The Freight Carriers Association has suggested that the only practical and fair method for both shippers and carriers is to establish an escalation clause (see sidebar for an example) that is based on a fuel surcharge formula that’s separate from the terms of the original contract. This would clearly illustrate a carrier’s costs, and show how fuel surcharges are assessed when prices change, and how they would be phased out when prices return to base levels.
But what exactly are base levels nowadays?
“Everyone is still based on this 45 cents a litre (retail rack price) figure,” Patton says. “Lets talk about the reality here and get back to where fuel really is. Fuel will never get back to 45 cents a litre, so why are we talking like it should be?”
Patton is an advocate of smarter pricing up front, when the contract is initially negotiated, not ad hoc surcharges. He admits that since deregulation too many large shippers are perfectly comfortable with taking advantage of the unbalanced bidding war. “Some shippers use the approach that there’s a long line of fools waiting at the door. They’ll change carriers every minute if they have to, if it means maintaining their costs,” he says. “Then there are shippers who are setting the costs themselves, saying, ‘We’re only going to give you $500 for Montreal, and if you don’t want it, to hell with you.’ “I refuse to do that. I would sooner pay more and give it to someone reliable.”
But Patton isn’t going to shed any tears for truckers who feel hard-done-by. He says carriers are doing a good job blowing out its tires all on their own by accepting low-ball rates, or worse still, setting the low-margin bids themselves.
“I had one carrier come in here and bid as low as $400 for Toronto-Montreal, and another guy come in and bid around $700,” he says. “I’d rather give it to the second guy somewhere in the middle, but when I do, he calls me cheap. That’s hard to swallow. I could have gotten it for $400.”
Giving the job to the more expensive and “reliable” bidder means the fuel surcharge is built into the cost, and Patton doesn’t necessary have to worry about new charges on his invoice the next time Saudi Arabia decides to hold back a few million barrels of oil. He says taking the $400 bid from the company desperate for work is a dangerous move that will come back to haunt him when the carrier realizes that it can’t cover its running costs.
This bait and switch routine, more than any example of idling, speeding, or other fuel-wasting practice, is the shipping community’s biggest pet peeve and the centre of the fuel surcharge-collection problem. What many carriers fail to realize is that the penny-pinching shipper whose business goes to the lowest bidder is likely the same type who will scream the loudest when those carriers (who now need to make up the margin for that low bid) start imposing sudden fuel surcharges.
“When someone who bids really low comes back on his knees two months down the road saying his fuel surcharge has to go up to 15%, well, we already committed to what we’re going to do with him. Those extra costs have to come off our bottom line as extra non-budgeted freight costs,” Patton says. “I’ve had guys call up and tell me they’re going to have to give me a great big increase because they haven’t given Rheem an increase in many years. I can work with it bit by bit, but don’t hit me all at once.
“Actually, I say forget this surcharge all together. I would sooner see my rates increased from the start and be done with it, and have carriers manage all of their costs per year.”
If he has to pay a surcharge, Patton says he does support some sort of formula that will help smaller carriers and independent operators clearly define their indicators for setting fuel surcharges. He also questions why surcharges vary so much among fleets who are essentially doing the same job. Furthermore, Patton would like to see a surcharge formula clearly established in the freight agreement, showing how they are being determined, with proof that owner-operators are getting reimbursed.
Patton isn’t finished. He says that shippers can’t be so naive to believe an extremely low bid will remain that way, and carriers need to think long and hard before accepting a contract.
“Don’t bid the work if it’s going to cost you money, and don’t use fuel surcharges as a catch-up,” he warns. “If you’re 4 to 6% away from breaking even on this job, then buddy, you shouldn’t be doing it. If you can’t run without paying for fuel, then what’s happening to your safety?”
It starts with discipline in the sales department, says the former freight salesman. Many sales people are overly concerned with filling their quota at whatever cost, without even knowing whether they can service that price.
“I go over it with the salesman when he’s got that distant look in his eyes. I ask, ‘Are you sure you can do this? You want my work, but do you really want it?'” Patton says. “The salesmen need to know what business to reject and what to take.”
There are known cases, however, where a carrier takes all the necessary steps to justify his fuel surcharges and, even still, the payment comes with the surcharges on the invoice crossed off with red pen. “In that case, a carrier needs to evaluate the account and decide whether it’s something it should keep or go look for something else,” says Dave Sirgey.
It’s times like these that will drive anyone in this business crazy.
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