In Case Study #2, the shipper had proudly negotiated rates to include the fuel surcharge. With the belief that they were saving themselves money, the shipper did not consider the reality the fuel volatility means the prices often go down and the shipper would never see this benefit.
Each year when the carrier came to talk about rates, the shipper pointed out the struggling economy and negotiated a rate freeze. At the time of the audit, the shipper was proud to point out the great rates they had negotiated which had not moved in a two year period.
This analysis involved separating out what the fuel surcharge would have been at the time the original rates were negotiated, in order to determine the base rate. On the assumption that the shipper would have negotiated the same rate freeze, we could then apply the current suggested fuel surcharge to make our comparison.
Here is the comparison:
This shipper had convinced themselves they had negotiated the best rates with fuel surcharge included, when in fact, they were over paying by almost 20%!
The carrier’s risk is that the cost of diesel went the other way, and they would lose the margins they had assumed when the rates were negotiated. Carriers who negotiate fuel-in rates must issue slightly higher rates to accommodate upward swings in fuel costs.