Franklin Logistics, a 60-truck carrier based in Houston, Miss., pays 8 cents less per gallon of fuel than the national average. Like 65 percent of the respondents to a recent Commercial Carrier Journal survey, the company uses fuel cards. It also gets rebate checks from some travel centers. But operations manager John Ford says these strategies are not the reason for his cost savings.
Ford credits his savings success to his ability to monitor and control daily fuel purchases. He uses Prophesy’s FuelLogic, an Internet-based service, to find the shortest routes and the cheapest fuel prices for each driver. He then sends this information to his drivers using the fleet’s PeopleNet mobile communications system. Even given his cost savings, Ford says his strategy is not complete. The next phase, he says, is to consolidate his fueling.
In theory, cutting fuel costs is simple: Limit out-of-route miles, discourage idling and buy at the lowest prices. In the real world, defiant drivers and a volatile fuel market impede your success. Still, managers such as Ford know it is possible – and necessary – to develop a fuel-buying strategy to help win the war against unpredictable fuel prices and noncollectible surcharges.
The key to any fuel-purchase program is to reap volume discounts by consolidating purchases. Your options include buying bulk fuel, using fuel networks, joining a co-op program or using fuel optimization software. Chances are, you’ll need to use a combination of these tactics to get the best price.
Terminal fuel
Buying terminal fuel can be an effective cost-saving strategy for local and regional fleets. Buying yard fuel lets you squeeze out the retailer’s pumping fee and negotiate volume-based discounts.
“Generally speaking, you can purchase terminal fuel significantly cheaper than truck stop fuel,” says David Owen, president of the National Association of Small Trucking Companies. “But then there’s the risk of building a pumping station and some expenses that go into that as well. If you do it right and keep your tanks maintained, it will probably save you money,” he says.
Many vendors offer several pricing programs for bulk fuel. These include cost-plus programs, fixed-term prices and flexible-term prices with a cost floor and a cost ceiling. The sales price depends on the contract period, amount purchased and the price of fuel at the time, says Brad Simons, vice president of Simons Petroleum, a fuel marketer in Oklahoma City.
Tri-West Transportation, a 75-truck fleet in Albany, Ore., burns 38 percent of its fuel from the yard, says operations manager Don Hendrick. The company buys its yard fuel at “rack” prices and pays its vendor a markup and delivery fee. The average cost of yard fuel this year was $1.16 per gallon – significantly less than the $1.48 per gallon the company pays on average in its fuel-card network.
Carrol Geer, president of Rite Way Milk Inc., a 60-truck carrier in Holdrege, Neb., also buys terminal fuel, but through a one-year contract for a fixed-price. The company pumps about 20,000 gallons a month from its terminal. Geer says he sometimes saves 20 cents per gallon compared to retail prices in his region, but usually his costs are 10 cents cheaper.
While using terminal fuel can save you money, don’t expect to immediately recoup your costs. Keep in mind that the price of bulk diesel fuel is not your only consideration. Freight charges, insurance, labor and other costs require serious analysis.
“You have to look at the total transaction cost,” says Scott Susich, president of Advanced Energy Commerce in New York City. “If, for whatever reason, [the carrier is] taking a load of fuel and very little volume, or they are leaving their inventory sitting in the tank, it is far better to send trucks to the local truck stop.”
Branching out
To reap volume-buying discounts, many carriers pool their fuel purchases at select truck stops. In fact, in a recent Commercial Carrier Journal survey, nearly 30 percent of respondents said they negotiate fuel prices. At independently owned truck stops, you can negotiate discounts or cost-plus agreements in exchange for a volume guarantee. The same holds true at regional or national truck stop chains, but their programs are more regimented.
You can also negotiate volume discounts at commercial fuel networks, which are supplied and maintained by local or regional vendors. Commercial fuel networks are unattended, card-locked pumps located on dedicated islands at truck stops or near highways and in industrial areas. The marked fuel prices shown at the point of sale are reconciled to the negotiated discount or price by the fleet’s fuel card, says Cindy Condon, a spokesperson for the Pacific Pride network.
Hendrick at Tri-West Transportation says his fleet often uses commercial fuel networks for regional fuel purchases. “It’s pretty good pricing, but it gets worse the farther you get away from home,” he says.
Co-op programs
For fleets that lack the volume to negotiate their own discounts, joining a co-op program can lower fuel costs on point-of-sale transactions.
As both a regional and national carrier, Edwards Express Inc., a 35-truck operation in Pulaski, Tenn., buys all of its fuel in the Quality Plus Network, a fuel co-op program of the National Association of Small Trucking Companies. Fuel prices at each location in the network are calculated daily on a cost-plus basis. Adding the applicable taxes, shipping charges and a pumping fee to the average rack price in that region equals the cost of fuel. The “plus” is a margin negotiated at each truck stop location. It averages 4.75 cents a gallon, NASTC’s Owen says.
In areas where fuel prices are not as competitive, Owen says fleets can save 10 to 11 cents per gallon. If the cost-plus is higher than the marquee price, which happens sometimes in very competitive markets, the member pays the marquee price, he says.
Truckers B2B also sponsors a fuel network that pools its members’ fuel buying. Tri-West Transportation, a TruckersB2B member, receives a monthly rebate check from its fuel purchases at any of the 400 TruckersB2B affiliated truck stops. The rebate – about 3 to 4 cents a gallon – is not added to any prenegotiated discount the carrier may already have with a truck stop, says Michael Dunlap, CEO of TruckersB2B. The trucking company takes the cheaper of the two at the point of sale, Dunlap says.
Optimization
Whether your fuel-buying strategy includes using a co-op program, bulk buying or a fuel network, maximizing your savings means you must watch fuel prices, including state fuel taxes. Some fleets use fuel optimization software to help them make their daily purchasing decisions.
Sitton Motor Lines in Joplin, Mo., for example, uses OptiYield, a program from Logistics.com, to coordinate its fuel stops. “We can’t do it as efficiently as the optimizer,” says Steve Bellis, Sitton’s fuel management director.
You can also check retail fuel prices at the major truck stops on the Internet. The national franchises post daily prices on their websites. Many fuel cards also have proprietary software and online programs that list the fuel prices in their network. At Gocomchek.com, Comdata’s free online service, users can check prices and truck stop amenities at the 10,000 Comdata-serviced locations.
Implementing an effective fuel-buying strategy is critical to the success of your business; most likely you already have a system in place. But you can still find ways to further decrease fuel costs, even within your current system of fuel cards, truck stops and fuel vendors. Don’t hesitate to try something new, such as consolidating your purchases or using terminal fuel. The fact is, you can no longer wait for retail prices to drop back to their budgeted levels or for all shippers to pay fuel surcharges. Either you control fuel costs, or they control you.
Save the transaction fee: Buy direct
Bruce Waters, a dispatcher at Drue Chrisman Trucking, a 35-truck company in Lawrenceburg, Ind., is skeptical about the discounts on his fuel-card statements. As a member of a fuel network, he receives a monthly rebate check for about 4 cents per gallon. But sometimes the rebates just balance out the transaction fees from the fuel cards.
“You try to overcome the cost of fuel one way by getting a discount, but then they charge you a cost per transaction,” he says. “Sometimes you’re not saving any money. It’s very difficult to tell.”
Fuel cards can help manage your fuel transactions: You can set daily purchase limits for drivers and restrict the locations of their purchases. You can also receive daily reports and monthly summaries and gain online access to control security and cash outflow, such as block fuel purchases. But such benefits come with a cost – the transaction fee – that may negate the point-of-sale discounts given by the truck stops.
Fortunately, you can eliminate transaction fees by narrowing your network and working directly with truck stops. For instance, instead of using your fuel card as a third-party billing service, have the truck stop bill you directly, and if possible, develop a credit account. Many truck stops offer weekly or semi-weekly billing programs.
“You can use your fuel card for data capture, but not for billing,” says Rick Russell, president of American Truck Management. “Settle directly with the truck stop. It’s good for your fuel bill – you can get 72 hours float on that money and improve your cash flow.”
Hedging your bets
Even with a discount or rebate, buying from truck stops, commercial fuel networks or local petroleum marketers leaves you vulnerable to overnight spikes in fuel prices. Many oil distributors and truck stops offer hedging programs that let you lock in a price in exchange for a guaranteed volume over a set time period. For example, Sitton Motor Lines, a 600-truck carrier in Joplin, Mo., hedged its fuel for the next 18 months at some locations.
“We’re big enough that we’re a national account for most suppliers,” says Steve Bellis, Sitton’s fuel management director. “We do hedging with Simons Petroleum and also with Petro, Ambest and Pilot Travel Plazas. We work with their national account reps. They cut us good deals as long as we get the gallons.”
Experts say even carriers with fewer than 600 trucks can lock in fuel prices without emptying their bank accounts.
“All fleets should be considering hedging at a certain level,” says Brad Simons, vice president of Simons Petroleum, a fuel marketer in Oklahoma City. “They should be considering locking in a certain percentage to where they know they can be profitable.” Because a fuel budget is figured into your rates, other than getting shippers to pay fuel surcharges, hedging is the only sure way to meet your fuel budget, he says.
For all size carriers, Simons recommends hedging 12 to 18 months in advance as a “window of comfort.” He suggests hedging 40 to 60 percent of your fuel with a certain vendor. Carriers that hedge with Simons Petroleum, for example, use its Pathway Network of 185 fueling locations. The pump prices are reconciled to each carrier’s prenegotiated price through a fuel card.
Some carriers also hedge their fuel in the futures market, which enables them to reduce exposure by temporarily shifting risk to a substitute commodity, says Scott Susich, president of Advanced Energy Commerce in New York City.
“When hedging, one must find a commodity that is highly correlated to the item you are going to hedge,” he says. “Fortunately for trucking companies, the New York Mercantile Exchange Heating Oil contract is nicely correlated to diesel fuel.” The contracts are sold in 42,000-gallon increments.
Owning a futures contract is not linked to fuel prices at an individual truck stop, Susich says. Instead, once a carrier buys a contract, equal and offsetting positions are placed to achieve the risk/return balance of the fleet.
For example, say a carrier wanted to hedge its December diesel fuel. On December 1, it buys a futures contract at $1.50 a gallon, and the average rack price is $1.55 per gallon. The rack price is used assuming the carrier purchases fuel on a cost-plus basis. During the month of December, the rack price moves up 5 cents per gallon to $1.60. On December 31, the carrier sells its futures position for $1.55 per gallon.
Even though the market moved up 5 cents per gallon, it does not adversely affect the carrier’s cost of fuel because the profit from one position offsets the loss from the other. In this scenario, you would break even. But if you make money and deal through a broker, he will send you a check for the difference when the contract is sold, Susich says. On the other hand, if fuel prices drop below your hedge, then you are not balanced and you lose money.
Rather than get involved in the futures market, Susich recommends most carriers hedge with a vendor, which in turn executes the paper instruments to lock in a price. “Having to buy in the 42,000-gallon increments [required in paper hedging] is an obstacle,” Susich says. “A company may not have that much volume.”
