Fuel costs squeeze logistics

 April 10, 2011
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The distribution of packaged media is so efficient these days that you scarcely know it is happening. Vehicles travel through the night to meet precise deadlines and more often than not deliveries arrive on time, snow permitting. Operators have honed the apparently effortless efficiency of the process over the years to ensure that costs are stable and predictable – in all but one area.

At a time when retail stores seek to implement yet more cost savings, the transport element represents a stubbornly high proportion of the selling price. The relentless rise in the cost of fuel has challenged every transport provider in the market.

Cinram European Operations Managing Director Neil Ballantine says that it is important to build a distribution business founded on robust principles, including cost reduction and efficiency. He acknowledges that increased fuel costs are undesirable, although they are a present-day reality: “Box fill, vehicle utilisation, units per journey, and fuel prices are clearly part of our cost analysis, but there are other areas that contribute to running a successful distribution operation. For example, we will always try to optimise delivery slots, both to retailers and into Cinram.”

Cinram has the ability to provide clients with a merged box solution. “Freight costs are minimised as product is shipped in a single shared box rather than multiple boxes shipped separately. We have to implement efficiencies and employ a lean supply chain, which also takes the environmental impact into account,” says Ballantine.

But no amount of box sharing can change the unpalatable fact of rising fuel costs. Since January last year, the global oil price per barrel has risen from $79 and went up by more than $10 in the past week alone to $124. This is still lower than the August 2008 figure of $147, but the crisis in Libya and unrest in the Middle East means there is little chance of a downward move. According to Reuters, a recent poll of major oil traders indicates that the $130 level will be broken before the end of the year while the IMF predicts that oil prices will climb back to their previous peak and beyond as demand from China and the US outstrips supply.

The Freight Transport Association (FTA) calculates that fuel represents more than 36% of the total operating cost of vehicle and driver in a typical 44 tonne articulated vehicle. The price of bulk diesel rose by 15% during 2010, adding around £6,500 to the annual operating costs for each HGV.

The bulk-contract diesel price last week was 113.7p per litre (ppl), of which significantly less than half is the actual cost of the fuel. Fuel duty accounts for more than 50% of the price, with VAT on top of that, while just 4.5 ppl must cover all other costs. Campaigning web site FairFuel UK says that Chancellor George Osborne garners £28,000 in duty from every UK registered truck on the road.

Unsurprisingly in a business where operating margins average around 4%, the government’s recent budget decisions to freeze the fuel duty escalator, postpone the scheduled inflation-linked rise until 2012 and reduce fuel duty by a penny were welcomed by all involved in logistics.

DHL Transport and Ireland Supply Chain MD Hugh Basham recognises that sea and airfreight carriers charge a premium because of higher fuel rates but he says that by improving efficiency DHL endeavours to not pass on these increased costs to its customers. “Fluctuations in fuel price over the past few years as well as our carbon reduction commitments have encouraged us to pursue innovative technologies and programmes to alleviate our exposure to potentially sharp rises in fuel costs,” Basham says.

One such innovation is DHL Supply Chain’s internal Electronic Freight Exchange programme, which allows all of its operations to use spare capacity within its delivery programmes and thus maximise back-loading opportunities. The company’s driver training programme is a further example of fuel efficiency initiatives. “DHL has reduced wasted kilometres and improved the overall carbon footprint of all its transport operations through these efficiency procedures,” Basham says.

TNT Express, market leader in the media and entertainment logistics sector, is one of the UK’s biggest consumers of fuel. UK & Ireland Operations Director Simon Harper welcomes the budget announcement and tells Cue Supply Chain, “TNT implements index-linked fuel supplements in some parts of the business to ensure that we pass on charges only in line with changing fuel prices. Our aim is to keep the supplements fair and transparent.”

The variable fuel supplement, which rises and falls in step with movements in the cost of fuel, is a practical response to price volatility but the universal application of such charges is not possible, eroding competitive advantage in an already price-sensitive market. “Large customers are more price sensitive than small and medium customers. In the UK, we are already disadvantaged by the fact that competitors on the continent enjoy lower diesel prices so we are always looking at innovative ways to minimise operating costs, and protect the services we provide to our customers,” Harper says.

The fuel cost advantage for foreign competition is significant with drivers under instruction to fill specially modified large tanks in Belgium or France before crossing the English Channel. In the port town of Dunkirk, a popular crossing point for commercial vehicles, the retail price for 100 litres of fuel is €135 (£119.10) and across the border in the Flemish town of Veurne, diesel can be had for as little as €125 (£110.30). Once across the channel in Dover, the cost for the same 100 litres rises to €160 (£141.00) at the pump.

Harper says, “The hikes in fuel cost are hurting us, as they hurt any transportation company. It represents a massive cost to the business and inevitably our margins are being squeezed. However, I am a firm believer that if it wasn’t fuel prices, there would only be something else causing us economic pain.”

The FTA and FairFuel UK campaign mustered the support of more than 140 MPs against fuel price rises along with a petition signed by 120,000 road users. “Times are incredibly tough in the logistics sector right now, with carriers unable to recoup rising costs and facing a cash flow squeeze,” says a representative of the FTA. FairFuel UK organiser Peter Carroll urges all those with an ongoing interest in fuel prices to sign up to phase two of the campaign, to be launched on April 11.

With the budget announcement of the first cut in duty in living memory, the victory for the campaign was both symbolic and real. The FTA acknowledges that carriers face multiple challenges not all of which are fuel-price related, “The chancellor is right to recognise that going ahead with an above-inflation fuel duty policy would have been suicidal for the UK’s economy. The decision to keep Vehicle Excise Duty unchanged shows how intently the government has listened to us,” the representative says.

TNT exploits alternative fuels to stay competitive with one of the UK’s largest electric truck fleets, and innovation in trailer dynamics (pictured) have led to lower fuel costs and a reduction in carbon emissions for the transport operator. The increased use of telematics (integrated telecommunications and information systems) to track driver and vehicle performance also assists in controlling costs, in some cases it cuts fuel consumption by as much as 30%.

Despite TNT’s commitment to clean technology, Harper says that “going green” is not the answer to all fuel cost challenges: “It can be economically viable and of obvious benefit to the environment but zero emission vehicles present big investment challenges, not least the lack of a widespread support infrastructure.”

Basham says that DHL Supply Chain can only realise its environmental and efficiency goals through the efforts of individual employees: “We are working to equip staff at all levels with the knowledge and skills to change behaviour and raise employees’ awareness of environmental issues.”

TNT’s Harper says, “Business needs to innovate and be more agile in deployment of strategy. However, in the long haul, organisations with a sustainable strategy to deal with what are no more than short-term fluctuations in fuel prices will always come out the other end stronger and fitter. As a result, they will take their customers with them and continue to grow their businesses.”

Basham says that DHL is always on the lookout for new transportation technologies to lessen dependence on fossil fuels and reduce carbon output: “For instance, we recently worked with JD Wetherspoon to trial the use of old cooking oil to fuel a company lorry.”

Better not tell the chancellor – there might be duty to pay after next year’s budget!