By now, you've all heard the media chatter about "cheap" gas— the average price of a gallon of diesel fuel has fallen this year and, at press time, sits at about $3.65 nationwide. And even though falling fuel prices bring out the inevitable bevy of deflation fear-mongers, one fact remains: for companies that ship a lot over the road, decreased fuel costs can be a good thing for the bottom line.
The problem with falling fuel prices is that they historically do not last long.
In the last major retreat of US diesel prices, the average national price per gallon fell from $0.94 in 2000 to $0.76 in 2002. Unfortunately for the shipping industry, the price snapped right back to $0.94 in 2003, and it hadn't looked back until this year.
Think about that— $0.94 in 2003 to over $4.00 per gallon last year. That's well over a 400 percent increase over the last 10 years. The only real constant about fuel prices is that, over the long-term, they go up. So what's the best defense for companies that have to shoulder that cost?
Plan for increases and save whenever you can, however you can.
How can you plan to save on shipping?
That all comes down to the logistical network you (or your third-party providers) build.
It's great that fuel prices are falling right now. But one should bear in mind, when outsourcing during a downward price trend, that distance to potential shipping locations will be of crucial importance when prices go back up.
According to supply chain consultant Brittain Ladd, the best strategy is to "identify opportunities to increase the number of distribution centers to minimize distance travelled for outbound transportation and to make operational changes to trade down to lower cost transportation such as air to ground."
In other words, the closer you can stage your goods to their end delivery points, the better off you're going to be when fuel prices normalize.
To that end, partnering with a fulfillment or logistics provider that is based in relatively near the Lower 48's mean center of population is probably a smart idea. By going with centrally located providers, you can minimize your fuel surcharge costs and deliver your goods quickly to the majority of your customers.
In the meantime, make sure you aren't overpaying for fuel while prices are low.
According to a recent survey of 150 supply chain professionals, conducted by Logistics Management, almost 6 out of 10 shippers report that they are paying 15 percent or more over base rates for fuel surcharges. This is likely due to many companies having signed fuel surcharge contracts that do not vary with base rates, and if that's the case, you should probably consider making this a negotiation point when it gets to be contract renewal time.
A flexible shipping company should be able to work with you to ensure that you are never overpaying for your fuel surcharges.
Be wary of quick turnarounds in the market.
That said, you need to anticipate quick shocks to the market. Right now, the dollar is strong. Since crude oil is priced in US dollars by international convention, a strong dollar will always translate into cheaper oil. And the United States is in the middle of a boom in shale oil production, which has contributed to America having this year become the world's leading oil producer— over and above rival producers Saudi Arabia and Russia.
But the problem with a strong dollar and increased supply, at least as they pertain to the extension of lower diesel prices, is that they will quickly lead to a correction in the market.
As the price of a barrel of crude falls, oil producers will cut back production to conserve price levels. Moreover, producers will scale back plans to explore and open new wells. So by this time next year, we'll all likely be looking back wistfully at the end of 2014, when diesel was relatively cheap.
The bottom line for companies needing fulfillment? Watch your bottom line.
Enjoy cheap diesel costs while you can. They're likely temporary, and there is very little chance that we're truly in for an energy sector-led deflationary cycle. So continue to plan your shipping strategy as if prices were still high.
- Look providers that employ the solid technology and workflow management to manage costs associated with preventable returns and lengthy turnarounds.
- Choose a third party provider that can stage your goods close to their intended end-users.
- Negotiate fuel surcharge contracts that do not exceed 15 percent of base fuel costs.
Order fulfillment needs to be done right the first time, every time, to make sure that you are maximizing your profits and keeping your customers satisfied.