Ways to Reduce Freight Expense – Standardize Your FSC Schedule
by Mike Starling
One of the three major components of LTL freight expense is Fuel Surcharge (FSC). This one has been around for decades now and probably is not going to go away anytime soon. So how does the shipper know if he is getting a “fair shake” based on the FSC Rate Schedule the LTL carrier is using to add this line item charge to the freight invoice?
Just like the carriers' Rules Tariff’s, the LTL carriers' Fuel Surcharge Schedule varies from one carrier to the next. Specifically you can notice:
⦁ The baseline PEG rates varying from one schedule to another.
⦁ The various incremental rates or percentages used used to calculate the charge as it goes up or down.
⦁ The various EIA diesel fuel regions cited as the base reference for calculating the FSC.
⦁ The various frequency schedules for recalculating and updating the FSC.
Now, take a portfolio of 6-10 LTL carriers and mix and match the above variability in calculations and frequency and try to come up with an estimated annual freight surcharge freight expense. WOW, that’s gotta be a lot of fun!
The reality is that the FSC came into being under the premise of being a way to insure the carrier could “break even” on the added fuel expense as the price of diesel spiked above the established baseline rate. Most shippers viewed this as a reasonable added expense to insure the viability of their carriers to service their customers. Over time, some carriers have found ways to utilize the FSC to add to profit margin, but none will admit to that.
For example, most FSC schedules assume that the carrier's tractor gets 5 mpg. This factor is used as a basis for calculation of the carrier FSC rates and incremental rate/percentage increase tables. However, the reality today is that many carriers' tractors' new engines get a standard 8 mpg, and as such would require less fuel to accomplish the shipment. But there has been no action on the part of the carrier to adjust their fuel surcharge schedules to reflect the reality of this increased engine efficiency.
NOW, given all the above, how can the shipper reduce freight expense when it comes to the fuel surcharge?
One easy way is to STANDARDIZE the Fuel Surcharge Schedule used by all the LTL carriers in the shipper's portfolio. Eliminate all the variability that comes with each carrier using their own unique FSC schedule. Not only will this lead to a reduction in freight expense, it will simplify the freight invoice audit process as well.
How can this be done? One of several ways. The shipper could pick the most favorable FSC schedule from among the carriers in the current portfolio and use the selection as the “standard” for all carriers. Or better yet, the shipper could create their own FSC schedule based on their assessment of current reality and definition of what is considered a “fair rate” that will make the carrier whole for fuel expense incurred, eliminating the game of padding the FSC calculation to produce hidden margin for the carrier.
Example: One shipper did an extensive analysis of their LTL carrier portfolio’s FSC schedules and confirmed the variability across the board. They then analyzed and developed a standard for what they believed was a fair and equitable basis to reimburse the carrier for the “added” fuel expense above a baseline rate that the shipper selected. They also analyzed the various rate escalation methods (X cents increase in FSC rate/mile per X cent increase in fuel and % increase in FSC rate for every X cents increase in fuel, etc.) to determine the best method they could live with and apply consistently across the board. They then created their own FSC rate schedule, and proposed to all carriers in the LTL portfolio that the new schedule be adopted as an amendment to the current carrier contract. In addition, carriers who had FSC schedules deemed to be excessive were informed of the same and strongly advised to adopt the new schedule if they wished to continue to participate in the shipper’s business.
At the end of the day, the majority of the carriers agreed to adopt the shipper's new FSC rate schedule as an amendment to their current contract.
It is worthy of note that many of the larger LTL carriers like to use their size and coverage as a way to rebut any attempt by the shipper to change the carriers' published FSC rate schedule. Remember, it is a very competitive marketplace out there, and the probability is high that the shipper has multiple LTL carriers to choose from to service any given lane. Therefore, shippers should not be intimidated by carrier push-back. Rather, stand your ground, justify your reasoning behind the FSC “fairness,” and choose a carrier who is willing to collaborate and cooperate with the shipper.
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