Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.
Mike Coronado thought he and his staff had the fuel surcharge problem licked. Back in November when they were drafting their business plan for 2008, Coronado, who is director of distribution for The Container Store, and his colleagues put a lot of They analyzed their surcharges for the last five years, sifted through the data looking for patterns, and then made careful month-bymonth projections for the upcoming year. But in the end, it wasn't enough. Just months into the new year, it became clear that their projections were falling well short of reality. "As good as it was, who would have projected a 53-percent fuel surcharge?" asks Coronado.
The Container Store is not alone. With diesel fuel prices spiking above $4 a gallon, shippers from coast to coast are getting walloped by fuel surcharges. Nearly 88 percent of the DC VELOCITY readers who responded to an online survey in April reported that their surcharges had increased in the past three months. The respondents said they were paying fuel surcharges of 24 percent above current freight rates on average. (For more on the survey results, see the sidebar titled "sharing the pain.")
But while shippers may feel they are paying exorbitant sums, some carriers say that fuel surcharges aren't keeping pace with their actual costs. "Ironically, few believe that fuel surcharges are fair or equitable right now," says Jim Butts, senior vice president of transportation for C.H. Robinson, a non-asset-based third-party logistics service provider. "Shippers feel they are paying too much in freight costs in general, and fuel surcharges are a large component of that. And carriers feel that revenues don't seem to be keeping [up with] rising fuel prices."
No one denies that soaring surcharges are adding up to substantial money, however. "It's not like we're $50,000 over plan; we're talking $600,000 to $800,000," says Coronado. "It's a huge number. So it's something that we as an entire company are focused on."
But however much companies like Coronado's focus on the problem, the question remains: Is there anything shippers can actually do about fuel surcharges? Or is the only option what one wiseacre survey participant suggested: "Pray a lot."
sharing the pain
If you're feeling the pain of rising fuel surcharges, you're not alone. In an online survey conducted among DC VELOCITY readers in April, 88 percent of the 206 respondents reported that they had seen increases in their fuel surcharges in the previous three months. On average, respondents said they were paying fuel surcharges of 23.8 percent above current freight rates.
Among other findings, the survey indicated that there's little uniformity in the way fuel surcharge programs are structured. Close to half (52 percent) of the respondents reported that their fuel surcharges were adjusted on a weekly basis. Another 35 percent said their surcharges were adjusted monthly, and 12 percent said adjustments were made on a daily basis. Only 18 percent of the respondents said their fuel surcharge programs contained a cap.
One obvious way to control fuel surcharge costs is to reduce shipments. And in fact, 24 percent of the respondents reported that they had deliberately cut down on the number of shipments they made in order to rein in fuel surcharge costs.
Asked what other techniques they were using to control freight costs (and by extension, fuel surcharges), respondents cited a variety of strategies. The most popular answers included consolidating loads or implementing an internal efficiency program (28 percent), and negotiating prices or shopping around for better rates (18 percent). Other responses included changing routes, redesigning the supply chain network, using software, and passing on the costs to customers.
Not all of the respondents were equally enterprising in their responses to the problem, however. A full 20 percent admitted that they were doing nothing at all to control their surcharge expenses.
Time to renegotiate?
As is often the case, the answer depends on whom you ask—and how far you're willing to go to solve the problem. Most observers agree that it's unlikely that shippers will be able to convince carriers to renegotiate their surcharge programs, regardless of what they might have done in the past. "Once upon a time, when it came to fuel surcharges, companies were willing to negotiate, and you could set your fuel surcharge," recalls Doug Bell, distribution center manager for General Paint, a Canada-based paint manufacturer and retailer. "Of course with the volatility of fuel nowadays, I doubt there's a carrier out there that's comfortable doing that."
But that's not to say surcharge programs are set in stone. In fact, Gary Girotti, vice president of the transportation practice at analyst firm Chainalytics, urges shippers to review their existing agreements with carriers to make sure they're in line with industry standards. For example, he says, there are probably truckload carriers out there that are still using an older method of calculating surcharges— that is, they're calculating them as a percentage of the total freight cost rather than pegging surcharges to the current price of diesel (see sidebar for a look at how fuel surcharges are calculated). If so, their customers have legitimate reason to ask to have their agreements revised. If you haven't gotten off a percentage basis for truckload shipments, says Girotti, you should, because the cost of freight has little to no bearing on how much fuel is needed to haul a particular load.
Girotti also urges shippers to make sure that their "escalators"— the price points at which surcharge provisions kick in—are reasonable. For example, a typical agreement might call for the shipper to pay the standard base rate of $1.20 per gallon and then pay an additional penny for every 5- to 6-cent increase in the per-gallon price of diesel. "If you have a 6-cent escalator, you are probably paying about right," he says. Girotti notes that during 2004-2005 when carrier capacity was a problem, some carriers convinced shippers to drop their escalator point from 6 cents to 5 cents, arguing that the new requirements for low-emission engines were making them less efficient. "But there's no data to support that," he says.
Go to market
If renegotiating fuel surcharges isn't feasible, renegotiating freight rates might be. In fact, several survey respondents reported that they had renegotiated their freight rates this year and that it was well worth the effort. "As the economy slows down, discounts have increased. It helps offset the fuel surcharge," wrote one survey respondent.
Girotti says that Chainalytics has helped 15 to 20 of its clients with their rate negotiations this past year. "All are getting double-digit savings in [the form of] rate reductions," he says. Those lower rates have taken some of the sting out of rising fuel surcharges.
While there is still time to take advantage of lower rates, this wave may be running out."Given the amount of carrier failures that are happening in the market," says Girotti, "we're starting to see a rate bottoming, where the carriers aren't going to be able to go much lower."
Whether they're preparing to renegotiate an agreement or simply getting ready for the next round of regular contract negotiations, shippers will face complicated tradeoffs between rates and surcharges. Although some shippers have tried negotiating lower base rates or escalators, Chris Caplice, who is executive director of the Massachusetts Institute of Technology's Center for Transportation & Logistics, warns that this strategy can backfire. Research conducted by Caplice and Chainalytics shows that shippers that pay lower fuel surcharges generally end up paying higher line-haul rates.
Rethink your operations
Even if they can't negotiate lower rates or surcharges, there are still plenty of other things shippers can do to control costs. To begin with, they can look for ways to reduce the number of shipments they make. In fact, nearly one-quarter of the respondents to DC VELOCITY's survey are cutting back on shipments in order to rein in fuel surcharges. "You can't control the cost of fuel," says Coronado, "but you can control the number of truckloads that you're processing."
Coronado reports that in the last few years, The Container Store has developed a number of techniques for cutting back on shipments. For example, it has implemented a program that has reduced the number of trucks returning to its Dallas DC from stores by 50 to 60 percent. It has also begun using a transloading partner to consolidate shipments of its Elfa shelving units from Sweden. "What we have been able to do is to reduce the number of containers from Sweden to the United States, which has had a dramatic impact on freight costs," says Coronado. The retailer is also using a new demand forecasting and demand truck scheduling program that has enabled it to ship products on a just-in-time basis and do a better job of determining precisely which products a given store needs.
Electronics manufacturer Philips has also found that consolidating shipments can take a big bite out of freight costs. "Five to 10 years ago, it wouldn't be unusual to have two and three and four shipments going out the same day to the same customer, shipped independently of each other," says John Brooks, the company's director of distribution and transportation. Over the last couple of years, Philips has worked to combine order drops to distribution centers, consolidate loads, and reduce the number of shipments to customers.
"A lot of customers prefer once a week or twice a week to receive deliveries from companies like ours," Brooks says. "So we have worked to really put them on more of a scheduled shipping process, and that's helped with transportation costs as well as minimizing the impact of rising fuel prices."
Butts of C.H. Robinson urges shippers looking to control freight costs to consider whether there are ways they can help their carriers hold down expenses. These could include reducing deadhead miles, cutting down on dwell time, or simply making sure that dispatchers provide drivers with clear information and directions. The more efficient the carrier's operation, the lower the shipper's costs.
Along with consolidating shipments and working to improve efficiency, a number of shippers are re-evaluating their modal choices. Girotti is an advocate of this approach. He's urging his clients to take a closer look at intermodal. In the past, shippers tended to shy away from intermodal because of its reputation for inconsistent service. Now, however, the cost advantage is too big to ignore, he says. In addition, a drop in imports from Asia has freed up capacity, which has enabled the railroads to bring service levels up a notch.
Still others are rethinking their entire supply chain networks. Several survey respondents said they were changing their routes, sourcing closer to home, or evaluating DC locations. "We're starting to look at, instead of reducing distribution centers, do we need to have more distribution centers because the closer you are to the customer, the lower your transportation costs," says Brooks.
Wrong answer!
Despite the many options available to them, it appears that when it comes to the problem of soaring surcharges, a sizable number of shippers have opted for the prayer route. A full 20 percent of the survey respondents, for example, said that they were doing nothing to counteract rising freight costs.
In Coronado's opinion, this is the wrong answer. "You just can't throw your hands up and say, 'There's nothing we can do about this,'" he says. "There is nothing we can do about the fuel surcharges. But in your supply chain, you can really take a look at what you do …each and every day and see whether there are opportunities for improving efficiency."
making the calculations
So how are fuel surcharges determined? The details will vary depending on the carrier and the type of service— truckload or less-than-truckload (LTL). But in general, the process works as follows.
For truckload freight, surcharges are typically tied to the current price of diesel—usually the national average weekly retail on-highway diesel price published each Monday by the Department of Energy. Oftentimes, carriers establish a "peg" or base rate and then charge shippers a set amount for every X cents-per-gallon increase in the current average price. For example, an agreement might call for the shipper to pay the standard peg rate (which is around $1.20 per gallon) and then pay an additional penny for every 5to 6cent increase in the price per gallon. A peg rate of $1.20 may seem arbitrary, especially considering that diesel fuel routinely runs over $4 per gallon these days. But fuel surcharges were created back in the 1990s and that's a fairly accurate reflection of the price of diesel back then, says Gary Girotti, vice president of the transportation practice at analyst firm Chainalytics.
For less-than-truckload (LTL) service, fuel surcharges are typically based on a percentage of the total freight cost, rather than on mileage. With LTL hauls, freight moves through a network of terminals, which means there's often little correlation between the shortest route for a given shipment and the distance it actually travels.
As diesel prices soar, there are signs that some truckload shippers are rethinking their surcharge programs. For example, Chris Caplice of MIT's Center for Transportation & Logistics reports that he's recently seen an uptick in interest in tiered fuel surcharge arrangements. A tiered system might work as follows: When the price of fuel rises above the peg rate of $1.20, a shipper would pay, say, an additional penny for every additional 5 cents per gallon until the price per gallon hits $4. Then the shipper would pay an additional penny for every 6cent increase in the per-gallon price of diesel. There aren't many companies using a tiered program right now because it requires significant management time and information systems to administer, says Caplice. Yet he believes more companies will be looking into this option as fuel prices continue to rise.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."