As we enter the summer months, fuel costs continue to rise, putting even more pressure on pallet companies that are doing their best to keep costs low as they wait for business to pick up.
Fuel Market Trends
With crude oil prices already at their highest in more than two years, the U.S. Energy Information Administration (EIA) expects fuel prices to continue rising over the next couple years, and forecasts that the annual average diesel fuel retail prices, which averaged $2.99 per gallon in 2010, are forecast to average $3.89 per gallon in 2011 and $3.93 per gallon in 2012.
In the near term, the EIA forecast that the counter-balancing forces of the continuing economic recovery, which tend to boost gasoline and diesel fuel consumption, and the effect of higher retail prices, which tend to dampen it, would be prominent features of the summer driving season. The administration expects a 37% increase in diesel prices from an average of $2.98 per gallon last summer to a projected average of $4.09 this year.
EIA still expects oil markets to continue to tighten through 2012 given the projected growth in world oil demand and slow growth in supply from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC). These conditions cause an expected drawdown of global petroleum stocks and a call for increasing production from OPEC member countries, which will reduce surplus crude oil production capacity at a time when the disruption of crude oil exports from Libya and continuing unrest in other Middle East and North African (MENA) countries already highlight significant supply risks, according to the EIA.
With fuel prices projected to continue rising in both the near and longer term, pallet companies need to utilize all possible ways of offsetting their fuel costs. Following are some strategies that companies can utilize to help reduce losses that result from high fuel prices.
Reduce Empty Backhauls
For most pallet companies, particularly recyclers, this is a no-brainer and something that they did long before fuel costs were really considered. But for that very reason this efficient cost-saving measure must be mentioned.
“We always try to go loaded in every direction,” said Darren Bronco, president of Pallet Services which is headquartered in Mount Vernon, Wash. “We drop off pallets to customers and picking up from our supply lines on the way back.”
Any company that does not already do so should take a good look at its truck routes and see if there are any ways to structure them more efficiently. Companies use long-established routes and should review them periodically to ensure that they are still the most efficient.
Set Fuel Surcharges
Implementing fuel surcharges on pallet deliveries is another common sense solution to higher fuel costs. One of the benefits of implementing a fuel surcharge instead of increasing pallet prices is that the cost can be understood by the customer.
“The only good thing about the fuel going up is everyone experiences that,” said Darren. “Everytime you stick the nozzle in your personal car you’re paying more money, and you’re quite aware of that. It’s an easier sell than raising pallet prices. We don’t incorporate our increase in fuel by raising pallets. We do it with a charge that they can understand and pass along to their people that can be approved because it’s an understandable expense.”
There are multiple ways to structure fuel surcharges and many companies have created ways based on what works for them. Some companies keep their charges quite simple by designating geographical delivery zones with set fuel rates. For example, delivery zone 1 could include all deliveries within 15 miles of the facility. Any delivery made within this zone is charged the same fuel surcharge, regardless of whether it is one mile or 15 miles away.
Midtown Pallet in Toledo, Ohio takes a different approach by figuring its fuel surcharges based on a combination of both distance and the size of the load, but also makes individual arrangements with some customers. “For some companies we have a separate fuel surcharge that we add and there are other companies that we incorporate the amount into the price of the pallet,” said Rita Stang, president. “And that doesn’t even recoup all of the costs because diesel fuel is continuing to go up.”
Bruce Kintop, director of at sales Soderstrom Pallets in Aurora, Ill. is one of several company officials that said their company has had to work out fuel surcharge agreements on a customer by customer basis. “It would be nice if you could do one thing across the board,” Bruce said. “But some people you can just raise the delivery price, some you can add a fuel surcharge to and some people you can’t do anything with.”
Rob Meister, owner of Industrial Pallet Corp. in Lafayette, Ind., takes a similar approach, as some of his customers prefer a per pallet price increase instead of a fuel surcharge because it is simpler to put that into their information systems.
Market Close to Facility
An alternative to adding fuel surcharges to orders is to scale down the number of long distance deliveries, particularly for cheaper pallets.
“You don’t have the margins in the #2s to take any kind of impact,” said Darren Bronco of Pallet Services. “And the fuel surcharges on the long distance hauls are pretty steep, and that makes you somewhat uncompetitive against people who are based locally in those areas.”
Because of this, his company has been re-evaluating shipping low cost pallets, such as #2s and #3s, long distances. In addition, Pallet Services has been focusing its marketing efforts closer to home, to pick up more local business instead of regional. “Shipping it long distance is almost not feasible to do anymore so that’s part of our marketing, to market closer to our location versus long distance,” Darren said. “Down in our area it can be as much as 300 miles round trip from a customer. So we’re starting to rethink marketing pallets at that range.”
Utilize Third Party Carriers
Another element is to know what size truck fleet your company needs and being flexible with the use of independent transportation providers, utilizing their capacity strategically to keep your network efficient and streamlined. Because of the product and logistics routes coming into Phoenix, Southwest Forest Products has found that shipping through other carriers works best. “We can hire outside trucks at a much more affordable price because we are a logistically dead-end town,” said Scott Van Der Toorn, executive vice president of Southwest Forest Products. He said there is a large amount of product imported into the state from California, but not back out. “A lot of trucks are running empty from Arizona into California,” added Scott.
Though not located in a logistical dead-end area, General Pallet in Fort Smith, Ark. uses common carriers for any deliveries over 150 miles, enabling the company to keep its own fleet close by and cutting down on long distances with empty trailers. Phil White, the president of General Pallet, estimates that 30% of its production is hauled by common carriers where the customer pays for freight charges. “On those out of town, I have a freight charge on top, not buried in it, so I can slide that cost right along to the customer,” he said.
Quote Fuel Suppliers
A smaller, but still important, fuel expense is the propane used for lift trucks. At Industrial Pallet Corp., most of the forklifts are run on propane and the company works with suppliers to keep their empty tanks replaced with full ones. But rather than sticking with a single supplier, they research prices of various suppliers on a regular basis.
“A couple times a year we quote the business out to make sure we’re getting the best price,” said Rob Meister of Industrial Pallet Corp.
Though fuel costs for lift trucks is much less than that of big rigs, you have to stay price conscious. Checking out the price of several suppliers every few months can insure that your company is not paying more than it needs to for fueling lift trucks.
Redesign Pallets
Though fuel prices cannot be controlled, pallet companies may be able to lower pallet costs, at least for some customers, by redesigning pallets. Rob Meister has discovered that due to higher costs, his customers are more willing to look at cost-saving pallet design changes.
“At times like this when costs are going up, customers are more willing to sit down and look at redesign options to take costs out of the pallet,” Rob said. “We’ll propose design changes that save costs, that way when their component cost goes up due to fuel their overall cost stays the same.”
Rather than simply adding on fuel or freight charges, taking the time to talk with customers can unveil other cost saving measures that customers can appreciate. It is importance to be transparent and honest about your costs to your customers. As mentioned earlier, fuel costs are something that many customers will understand if it is explained. Honest explanations and incremental increases can help forms stable partnerships with customers leading to the retention of customers as well as avoiding accusations of price gouging.
Rising costs have brought more scrutiny to all possible avenues of offsetting fuel costs. And if prices continue to rise as projected, companies will have to find ways to offset the costs just to remain profitable. Though some of these practices may create only small savings individually, when multiple strategies are combined they can cumulatively add real savings to your fuel costs. Managing the escalating costs of fuel can make the difference between a negative and positive account balance at the end of the day.
