FUEL-COST BLUES

Michael Garry / Additional reporting by Christine Blank

While rising gasoline and natural gas prices weigh heavily on the budgets of most Americans, food distributors are grappling with the impact of soaring diesel fuel costs on their delivery operations.

Gas prices have actually abated somewhat from a peak in excess of $3 per gallon in September to $2.48 per gallon as of Oct. 31, according to the Energy Information Administration, Washington. Diesel fuel prices dropped by 28 cents per gallon during the last week of October, settling at $2.88 per gallon on Oct. 31. Still, that represents a climb of 67 cents from one year ago, and almost double the diesel fuel price reported in November 2003.

Moreover, the elevated cost of fuel "is not going to go away," said Mark Foster, vice president of supply chain, Supervalu, Minneapolis, adding that he doesn't expect diesel fuel to fall below $2.50 a gallon anytime soon.

Supermarket chains and wholesalers face the onus of rising fuel costs both as a receiver of goods from common carriers, as well as a transporter of goods to stores. For the latter, "grocery chains are in short hauls, so they're not as deeply impacted as long-haul guys," said Hal Booth, senior vice president, First Fleet, Fort Lauderdale, Fla. "Even so, fuel is still the second-highest cost in a trucking fleet, after labor."

These cost pressures are taking place at the same time as service levels are becoming more demanding, with stores and warehouses "requesting smaller, more frequent deliveries and tighter time windows," said Adrian Gonzalez, director, logistics executive council, ARC Advisory Group, Dedham, Mass.

What to do about fuel costs is understandably top-of-mind among fleet operators. In a poll taken by First Fleet at its spring Fleet Managers conference, 48% of those surveyed said they are now using on-site fueling stations, while 38% have issued credit or debit cards to their drivers to refuel at stations where they have negotiated rates with oil companies.

Dealing with fuel costs was also one of the pressing topics at a panel discussion on "Best Practices in Controlling Costs in Warehousing and Transportation," at Food Marketing Institute's 2005 Productivity Convention & Exposition in Orlando, Fla., Oct. 23 to 25. The convention took place despite conditions created in South Florida by Hurricane Wilma.

Supervalu's Foster participated in the panel, along with Bill Parry, vice president of logistics for Giant Eagle, Pittsburgh, and Bill Kearney, vice president of wholesale operations for Associated Grocers, Seattle.

All panelists agreed that more backhaul of goods was needed to reduce the "empty miles" experienced by trucks when they return from a delivery empty-handed. Supervalu, for example, is partnering with retailers and others to share backhaul loads. "If we can help third-party truck companies with their [backhaul] loads -- that is a big deal," Foster said.

Giant Eagle is working on a similar effort. "We've partnered with some of our suppliers," Parry said. "We'll tie in the backhaul to maybe going to the vendor's facility, where they're paying us to bring their raw materials back in."

But most of Giant Eagle's cost savings are realized by reducing idle times, when drivers sit at distribution centers or stores, waiting to get in and deliver orders. "Putting some incentives on idle times is where we've had our most success in controlling today's fuel environment," Parry said. Driver times are tracked by computer, and efficient drivers are rewarded with Giant Eagle gift certificates.

"We started to have communication with the drivers," Parry added. "When you introduce the team concept, they really embrace that." Supervalu also offers safety awards or recognition for process improvements, such as reducing idle time.

The panelists disagreed on the value of driving under 60 miles per hour to save fuel. Supervalu encourages it. "If you can keep it down below 60 mph, you're looking at a 3% to 4% economy [fuel savings]," Foster said.

But Kearney said that, while Associated is analyzing the effect of truck speed on fuel costs, it probably will not make a big difference. "Studies show that driving below 60 mph doesn't make an impact," he said.

Kearney suggested wholesalers create their own driver's institute as a way to train and keep drivers. "You have tractor-trailers. You already have fixed costs that you can defray to make that work for you," he said. "And there are state and city-funded programs to subsidize [training]."

The impact of rising fuel prices, of course, is felt no less keenly by food manufacturers. To cut down on deliveries to stores, some direct-store-delivery manufacturers, particularly of cookies and snacks, have begun approaching wholesalers about routing products through their warehouses (see SN, Oct. 24, 2005, Page 6).

Another option is to revamp transportation technology, which is what Frito-Lay, Plano, Texas, is doing. In May, the company began a national rollout of routing, tracking and planning software from Cube Route, Toronto. The system has helped Frito-Lay to "fully optimize routes and reduce the number of drivers by 20% on a given day," said John Robinson, senior project manager, Frito-Lay. He spoke about the technology in a recent Web seminar, sponsored by Cube Route, called "Oil Approaching $100 a Barrel: Strategies for Fleet Operators to Remain Competitive."

The Cube Route system also gives Frito-Lay "real-time visibility" into deliveries, providing updated data throughout the day via cell-phone technology. "We can tell retailers where deliveries are during the day and help them with their wait times," Robinson said. The system also generates driver scorecards.

New Fuel Study

In an effort to develop new strategies for reducing fuel consumption by tractors, First Fleet is sponsoring an 18-month fuel economy study that launches in January. In this study, First Fleet will install nearly 200 trucking "telematics" devices in a cross section of Class 8 tractors in 10 private truck fleets, supplied by companies in the grocery, manufacturing, fuel and retail distribution industries.

The telematics devices will monitor fuel usage, driver performance, methods of operation, and the effect of truck specifications and equipment technology on fuel consumption rates. The data will be transmitted wirelessly to First Fleet's headquarters. First Fleet said it hopes the results of the study will help it boost fuel economy by 0.3 gallon per mile, an average savings of $2,000 per year per tractor.

First Fleet's plan is to develop a baseline of results during the first six months of the study. "Then we'll take half the trucks and make changes in the drive train, axle ratio and tire pressure, etc., and then on a quarterly basis see what the improvement in fuel economy is," said First Fleet's Booth.

The company, which is investing close to $500,000 in the study, will publish results at significant benchmarks, beginning next April, Booth said.

The study, Booth noted, is geared toward preparing companies for the 2007 federal standard for engine gas emissions, which will require the use of low-sulfur fuels. "The oil guys tell us that with low-sulfur fuel, there will be a fuel mileage loss," he said. Another, even more dramatic engine-emission standard change will take place in 2010, he added.

After the initial engine emission standard was released in 2002, requiring a change in engine design, "there was a half-mile per gallon less in fuel efficiency," Booth said. However, since then engines have been redesigned to almost make up for the drop-off in efficiency.

In the new Fleet study, the telematics devices will be divided equally among trucks with pre-2002 emission engines and post-2002 emission engines. The study will also include some 2007 emission standard engines.

Insurance Policy

Over the past decade, food distributors have arranged to take on the delivery cost of inbound shipments from manufacturers, rather than have the manufacturers include that in the cost of goods. Chains like Giant Eagle invested in software that allows them to streamline the process of working with common carriers to make those deliveries.

However, those carriers have been inclined to pass on rising fuel costs to food distributors in the form of fuel surcharges, which can represent up to 44% of the freight bill, said Jim Burr, vice president, FC Stone Group, Des Moines, Iowa.

In September, FC Stone introduced a fuel surcharge management program, intended to provide "insurance coverage" to companies that pay surcharges caused by increases in the cost of diesel fuel. The program can also apply to a company's own trucking fleet.

The program is comprised of three levels: gold, silver and bronze. The gold level offers complete coverage whenever the price per gallon of diesel fuel (based on Department of Energy figures) rises above the current market price in the upcoming 12-month period. The other, less expensive levels require deductibles before the coverage kicks in.

Burr said that the up-front premium for the coverage varies with the common carrier used, but cited one example of gold coverage in which it would cost 23.8 cents per gallon used over 12 months.

Another way to offset surcharges is to "become lower-cost customers for carriers to serve," according to a new report by Aberdeen Group, Boston, called "Best Practices in Transportation Management." Such companies "are receiving much lower rate increases (and even rate decreases)," according to the report.

The report suggested some tactics for becoming a lower-cost customer, including: tendering earlier (two to four days in advance of a pickup); reducing driver turnaround time at pickup and delivery locations; increasing hours of operations or drop yard use to provide more schedule flexibility to carriers; and paying carriers faster (within one to three weeks of delivery) and more dependably.

Along these lines, Giant Eagle has been focused on "providing carrier-friendly systems" and getting information "up front, from purchase orders through scheduling all the partner information," Parry said.