5 Ways to Improve Fuel Surcharge Management in Freight Procurement

$150 to $2,700 per standard dry container. Such has been the fuel surcharge incurred by shippers, ever since the Red Sea Crisis. 

And this is over and above the skyrocketing baseline fuel costs.

Clearly, such supply chain disruptions (and traffic congestion) are resulting in millions of dollars in additional expenditures for your business.

To offset the heavy penalties related to surcharge volatilities, you could try to manually manage and optimize the shipping rates regularly. But, you will find that the workflows can be quite time-consuming and complicated — be it extracting the different fees, figuring out when they’re applied, getting approvals from logistics service providers (LSPs), or calculating updated pre-carrier, main, on-carrier, and lane spends.

So much so that you will need a dedicated resource to just do this day in and day out.

If you do not wish to pay more (for freight shipping) and are curious about how to efficiently manage contract and spot buying, then you are in the right place.

In this post, we discuss the 5 ways in which you can better manage fuel surcharges with a smart freight procurement platform.

But first, let's understand what the term fuel surcharge means.

What is the meaning of fuel surcharge?

Fuel surcharge rates, in the logistics environment, are additional fees applied by carriers to account for fluctuations in fuel prices. These surcharges help carriers manage the volatility of fuel costs, ensuring that they can maintain their profitability without constantly adjusting their base rates.

The surcharge varies by transport mode, distance, weight, and specific conditions.

• Mode-specific fuel surcharge examples: Trucking (diesel floater), air freight (ACFS), maritime shipping (BAF), and rail (diesel floater-based)

• Distance-based fuel surcharge examples: Per mile/km or zone-based

• Weight-based fuel surcharge examples: Per pound/kilogram

The surcharge rate structures can be flat-rate (fixed fees) or variable-rate (percentage-based or sliding scale). 

There are also surcharges for special conditions such as route-specific (domestic vs. international or lane-specific) or specialized (peak season or emergency surcharges).

Calculating fuel surcharge (and know what factors that affect it)

The specific components that influence the calculation of fuel surcharge are: freight charges, baseline fuel price, current fuel price, and surcharge rate.

Fuel Surcharge = Freight Charges x ((Current Fuel Price – Base Fuel Price) / Base Fuel Price)

To understand this formula better, let’s delve into a hypothetical example.

If the baseline fuel price is $2.50 per gallon, the current fuel price is $3.00 per gallon, the freight charges are $1,000, and the surcharge rate is 5% (for every $0.25 increase above the baseline), then:

Oftentimes, other factors to consider when managing the fuel surcharge rate calculation are fuel price volatility, geographical and geopolitical specificities, contract terms, and market conditions.

5 ways to start optimizing fuel surcharge rates today

Data analysis and monitoring (tracking fuel prices, analyzing historical data, and benchmarking), regular review and adjustment of rates, and risk management form the bedrock of better fuel surcharge management.

Let us dive right in to understand these strategies better:

Hedge against price hikes

Wouldn't it be nice to have information about previous instances of peak season surcharges so that you can be better prepared for what is to come? 

SHIPSTA does just that by offering a single source of truth. The platform pulls all your historical and current rate information (with current fuel surcharge) from different sources. This enables you to foresee whether your existing inventory of lanes will be sufficient for the busy seasons. If inefficient, you may procure more lanes ahead of time to hedge freight exposure and lock-in rates at ‘closer to normal’ price levels. 

For example, assume that Company A was analyzing the historical rates for one lane (Shanghai - Hamburg). And for this lane, they had purchased capacity for only 5 shipments per year. Meanwhile, SHIPSTA extracts data from the last 4 years that shows that Company A has been dispatching 7 shipments during the peak season alone. This alerts the business to the fact that they are likely to fall short of freight inventory. If they act on this insight and contract-buy their lanes in advance, they can be assured a better procurement rate. 

Apart from shielding you from freight price increases, SHIPSTA can also enable you to calculate additional costs and set aside extra budgets (as contingency funds) for unpredictable disruptions.

Leverage actionable rate data for better budgeting

Things change by the minute in the shipping industry. So, manually negotiating, refreshing, or adding surcharges to the rates becomes near impossible. 

SHIPSTA integrates with external index providers to extract real-time rate and supply-side data, in today’s volatile ocean, road, and air freight markets. The platform further automates the comparison of base rates with quoted rates and market rates analysis so that you always have access to the best pricing options.

What's more, over time, thanks to SHIPSTA’s machine learning capabilities, you can develop your own benchmark (for fuel surcharges). Thus, you may reduce dependency on any external index providers for spot or contract buying.

Automate index (non-index) surcharge updates

It's a time-consuming affair to, every quarter or month, calculate the new fuel rates (with updated surcharges), get it approved by the LSP, and add it to the rate card. 

That’s where SHIPSTA creates a paradigm shift in fuel price management. The platform automatically notifies your LSPs of the updated fuel card and secures the rate approvals centrally. 

By making sure the costs are up-to-date, we help you manage expenses better without compromising on productivity.

Keep procurement sustainable and cost-effective

It was recently announced that a new carbon emission surcharge will be applied to all bookings on maritime voyages subject to the EU ETS: IMO 2023 standards to reduce carbon emissions. 

In such a scenario, keeping your shipments sustainable (yet affordable) is a challenge. 

Luckily, you have platforms like SHIPSTA that analyze and compare complex carrier quotes and offer automated recommendations that align with your sustainability goals and are also within your budget.

Auto-procure as per market changes

Real-time updates on price fluctuations can help you optimally procure freight units before the rates shoot up. But as a busy business executive, your eyes and ears cannot always be tuned into which lanes offer better value. 

SHIPSTA not only helps you instantly identify lanes with savings potential, but also automatically triggers the tendering process – leading to huge cost-savings and compliance. The platform also allows you to create a watch-list to see the impact of market price developments on your preferred lanes.

Would you like to avoid these extra accessorial costs? At SHIPSTA, we can show you how– as per your specific business scenario. Book a demo with our experts to start optimizing your fuel surcharge management.