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We all understand that the logistics space is packed with procedures and regulations that are, quite frankly, convoluted. Among the most common of these are the often-misunderstood fuel surcharges.
Surcharges have been around for quite a long time across just about every industry. Fuel surcharges in the logistics industry are no exception.
However, when you break down the reasons why carriers apply the fuel surcharge, it's easy to understand that it's not just a quick get quick rich scheme. It's actually a well-rounded system of checks and balances, that is needed in a few primary ways. The problem with this is that it has a tendency to create a much more competitive landscape, making negotiation of these fees considerably tougher and leaves prices open to wild amounts of inflation.
Let's take a look at what fuel surcharges are and how you can protect yourself from inflated fuel surcharges.
If you have never had the pleasure of dealing with fuel surcharges, let's start from the beginning. A fuel surcharge is an agreement between a carrier and a shipper as to the average cost of fuel. This agreement allows both parties to arrive at a fair price for the cost of fuel that may be needed for the transportation of goods.
The reason that fuel surcharges are needed is that fuel costs tend to fluctuate often. To add to the price fluctuation, the cost of fuel is also dependent on the region in which the carrier stops to fuel up as one town's fuel prices are bound to be different than another and so forth.
So, to account for this potential price fluctuation, a fuel surcharge is added to the shipping contract to ensure that there is enough money in the budget to cover higher gas prices.
There are times during the year when the cost of fuel is lower than the negotiated fuel surcharge. During these times, it is largely profitable for the carrier.
But there are also times when the cost of fuel is higher than the negotiated fuel surcharge. When this happens, it's a great deal for the shipper. When you look at the average length of time for a negotiated fuel surcharge, it tends to balance equally on both sides. However, many shippers don't realize that fuel surcharges are not regulated or managed by any agency.
However, according to the US Department of Transportation, the price for diesel fluctuates about $0.10 every week. It's essentially a gentleman's agreement (but documented on a legal contract). It is a deal made between a shipper and carrier to ensure neither party is taken advantage of over fluctuating fuel prices. There are several factors that impact the price of diesel fuel. Some of these include things such as crude oil prices, geopolitical situations, and other items outside the control of either party. As such, it is important for partners to have a clear understanding of the value of a fair fuel surcharge.
Carriers and shippers alike should always be looking after their own best interest, first and foremost. Granted, this thinking has a tendency to create quite a hassle when it comes time to negotiate fuel surcharges. Below are a few important steps that shippers can take to verify that the fuel surcharge is fair and balanced.
The first thing that any shipper can do is strengthen the lines of communication with the carrier. Asking their carrier how they determine their fuel surcharge can yield quite a lot of valuable information. If the carrier is happy to discuss this, that is a good sign. This typically indicates that they are operating ethically and with a fair degree of transparency.
If a carrier doesn't want to share their fuel surcharge process, however, put on those running shoes and head for the hills!
The best way to protect you from inflated surcharges is simple; strive to educate yourself about this topic.
The more you know about how each carrier establishes its unique fuel surcharge in comparison to the 'going rate', the better prepared you will be for negotiating a fair price. Remember, when fuel prices dip below the negotiated average price, you win. As that average cost spikes though, you need to be well-prepared to roll with those additional surcharges.
Dealing with fuel surcharges is frustrating. As a shipper, you have so many items on your plate to deal with on a daily basis. Why not let an experienced 3PL provider like Redwood Logistics do some of the legwork for you?
Surcharges are not really all that intimidating or confusing once you understand them. But some shippers simply do not have the time or patience to deal with doing the research to learn common tactics. This is where having a dedicated team who has your back to handle all that paperwork and number-crunching comes in really useful.
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