Logistics Pricing Analysis: Understanding the Fuel Opportunity

This post is based on material from the 2013 Spend Matters / Procurian research brief: Summer 2013 – Logistics Pricing Review and Outlook (free, registration required). Contributors from Procurian include Ed Sands, Global Practice Lead-Logistics and Scott Youngs, Logistics Category Management Group Leader. Spend Matters contributors include Jason Busch, Executive Editor, and Pierre Mitchell, Chief Research Officer.

Across categories, it can be invaluable to explore sourcing opportunities as early as possible in a procurement transformation and/or strategic sourcing program that go beyond looking at traditional line-level negotiations based on unit price. Within a manufacturing environment, for example, understanding the cost trade-offs associated with different order requirements (e.g., volume), materials specifications, and lead times can ultimately yield more significant savings than negotiating custom parts or components on a SKU basis.

The same is true of logistics spend, especially in the area of fuel – an opportunity that can yield potential returns as significant as other negotiation levers (and avoid having suppliers shift margin from one line-level cost component to another). Unfortunately, most logistics organizations today do not fully understand the opportunity that new fuel programs can bring. Consider the case of a fuel table for truckload that has a range of $1.20-$1.25. Organizations will pay five more cents per mile without knowing the carrier’s costs based on estimates. But what is the true mile-per-gallon (MPG) that carriers are getting? Is their pricing based on liquid, compressed natural gas, or diesel, and how efficient is their fleet?

All too often companies are paying for 5 MPG but getting 9 in reality. Changing a fuel program can be a very big savings opportunity. A natural assumption is that line haul is going up. However, when going out to bid with carriers both small and large, discounts are possible. Whether it is JB Hunt, Swift, or Knight, the true costs per carrier can be variable. It is important to know just who you’re dealing with – know where their margins and profitability come from, and this can help you design an optimal network.

Moreover, from a tactical sourcing perspective, energy, fuel, and MPG calculations are all levers in negotiation. These factors can help transportation buying teams negotiate as market dynamics change – even based on the delta between what was previously an acceptable number and what is acceptable today. For example, if your fuel index was based on 5 MPG a year or two ago, you can ask for 6 or 7 MPG today. Carriers themselves have gained 5-15 basis point efficiencies through changing to more efficient fleets. If negotiated, this is savings that can be shared.

For further analysis of this topic, download the complete Spend Matters and Procurian research brief today: Summer 2013 – Logistics Pricing Review and Outlook.

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