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Fuel Surcharge Performance Report
 

Fuel Surcharge Performance Report

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Part 2 of my directed studies report.

Part 2 of my directed studies report.

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    Fuel Surcharge Performance Report Fuel Surcharge Performance Report Document Transcript

    • Presented by:Seth Lang Dan Turner 5/11/2011
    • 1 ACKNOWLEDGEMENTS The following individual’s contributed in making this project possible. This project could not have been successfully completed without a steady flow of support,guidance and leadership that was provided to us throughout our Directed Studies experience. A very special thank you goes to the following: Mountain Equipment Co-op Debbie Sung Mike Au Paul Robles Manager Supply Chain Logistics Analyst Logistics Analyst Services British Columbia Institute of Technology Gordon Kennedy Instructor and Project Advisor And all others who offered advice and assistance in contribution to the Mountain Equipment Co-op Directed Studies 2011. THANK YOU!!! And a special thank you goes to our families for your patience and understanding with late nights, early mornings, and high stress moments!! “In helping others, we shall help ourselves, for whatever good we give out completes the circle and comes back to us” Flora Edwards Mountain Equipment Co-op – Directed Studies 2011
    • 2EXECUTIVE SUMMARYThe purpose of this report is to provide the Mountain Equipment CO-OP (MEC) with information,understanding, and methodology that MEC can use to manage fuel surcharge rates. This report willlook at how the fuel surcharge rates that MEC has paid select carriers, from 2008 through 2010,compare to industry rates for this period. This report will allow MEC to reach a clear understandingof where they stand relative to industry norms, as well as provide the reader with a fullunderstanding of the components and methodology carriers use to calculate their fuel surcharges.The purpose is also to provide an understanding of how fuel surcharges may be reduced, or gainsmay be made through negotiation with carriers. This report was prepared at the request of Mr.Mike Au, Manager of Supply Chain Services at Mountain Equipment CO-OP. It can be separated intofour separate sections.Understanding Fuel Surcharges: This section is purely informative. It includes fuel surchargehistory, application techniques, components, rate methodology, and industry practices.Fuel surcharge analysis: The section of the report looked at a total of 1017 invoices from seven ofMEC’s major ground carriers used to transport merchandise through their supply chain in NorthAmerica. This information was used to compare MEC’s carriers to each other, and to a select groupof 8 companies that are comparable to MEC’s carriers. The carriers were categorized into crossborder and domestic hauls. Their fuel surcharge rate types were also separated by less thantruckload (LTL) and truckload (TL) rates. Next, a benchmark was established using the FreightCarriers Association of Canada’s (FCA) fuel surcharge formula, and a trend analysis was conducted.The findings key findings of the analysis are:  MEC had an overall weighted fuel surcharge score of .99 times the combined LTL/TL FCA benchmark for the period between January 2008 and December 2010. o Weighted LTL = 1.25 times the FCA benchmark o Weighted TL =.73 times FCA the benchmark  Using the r-squared statistical formula, MEC is able to rate carriers based on the strength of the relationship between movements in fuel prices and movements of their corresponding fuel surcharges. This information can be used to avoid or take advantage of fuel surcharge adjustment lag time in the short run.Negotiating fuel surcharges: This section is also information based and provides guidance whennegotiating fuel surcharge rates. Included is the case for and against fuel surcharges, MEC’sbargaining position, areas for improvement, evaluating gains, and a case of changing culture.Recommendations: This report recommends that MEC:  Implement a fuel surcharge information management system  Employ the “Fuel Surcharge Assessment Tool” that is attached to this report  Develop bargaining position assessment methodology  Enforce a policy were new carriers must be “SmartWay Transport Partners”, and provide an annual sustainability report.  Value improvements made in fuel efficiency by carriers as reductions to fuel surcharge rates Mountain Equipment Co-op – Directed Studies 2011
    • 3 TABLE OF CONTENTSExecutive Summary ................................................................................................................................................................ 2Table of Figures ........................................................................................................................................................................ 4Part 2: Fuel Surcharge Analysis ......................................................................................................................................... 4Introduction ............................................................................................................................................................................... 5 Purpose and Objective ...................................................................................................................................................... 5 History of Fuel Surcharges.............................................................................................................................................. 5Establishing Rates ................................................................................................................................................................... 6 Fuel Surcharges by Country ...................................................................................................................................... 6 Formula Method ............................................................................................................................................................. 7 Industry Standards ............................................................................................................................................................ 9Industry Fuel Surcharge Analysis ..................................................................................................................................... 9 Data Used ............................................................................................................................................................................... 9 The FCA Benchmark ........................................................................................................................................................ 10 Analytical Methodology ................................................................................................................................................. 10Introduction to Analysis ..................................................................................................................................................... 11Cross-Border Analysis ......................................................................................................................................................... 12 YRC Reimer.......................................................................................................................................................................... 12 Hercules ................................................................................................................................................................................ 13 Industry Cross-Border Carriers .................................................................................................................................. 14 Domestic Analysis ............................................................................................................................................................ 16Internal Analysis .................................................................................................................................................................... 25 Relationship and Predictability of MEC’s Carriers .............................................................................................. 25 Weighted Findings ........................................................................................................................................................... 26Negotiating Fuel Surcharges ............................................................................................................................................. 27 Justification ......................................................................................................................................................................... 27 MEC’s Bargaining Position ............................................................................................................................................ 27 Disclosure ............................................................................................................................................................................ 27 Improving Efficiency ....................................................................................................................................................... 28 Updating the Base Rate .................................................................................................................................................. 29 Changing Culture .............................................................................................................................................................. 29Summary ................................................................................................................................................................................... 29 Mountain Equipment Co-op – Directed Studies 2011
    • 4Recommendations................................................................................................................................................................. 30Bibliography ............................................................................................................................................................................ 31Appendences ........................................................................................................................................................................... 32 Appendix (1) Freight expenses 2008 to 2010 ...................................................................................................... 32 Appendix (2) Weighted Averages .............................................................................................................................. 33 Appendix (3) Key interviews ....................................................................................................................................... 33 Appendix (4) SmartWay Transport Partnership: Innovative Carrier Strategies ................................... 34Additional Resources Found On Accompanying CD. .............................................................................................. 36TABLE OF FIGURESFigure 1A Fuel price history................................................................................................................................................ 5Figure 2A: YRC Reimer’s rate history with MEC vs. FCA benchmark (2008 through 2010).................. 12Figure 3A: Hercules rate history with MEC Vs. FCA benchmark (2008 through 2010)........................... 13Figure 4A: MEC’s Carriers vs. Industry fuel surcharge rates ............................................................................... 15Figure 5A: Day and Ross LTL rate history with MEC vs. FCA benchmark (2008 through 2010) ......... 16Figure 6A: Day and Ross TL rate history with MEC vs. FCA benchmark (2008 through 2010) ........... 17Figure 7A: Clarke LTL rate history with MEC vs. FCA benchmark (2008 through 2010) ....................... 18Figure 8A: National Fast Freight LTL rate history with MEC vs. FCA benchmark (2008 through2010) .......................................................................................................................................................................................... 19Figure 9A: Comox Pacific LTL history with MEC vs. FCA ltl benchmark (2009 through 2010)............ 20Figure 10A: Comox Pacific TL history with MEC vs. FCA TL benchmark (2009 through 2010) .......... 21Figure 11A: Quick X’s TL history without discount with MEC vs. FCA tl benchmark (2009 through2010) .......................................................................................................................................................................................... 22Figure 12A: Measuring MEC’s carriers against East West carriers’ fuel surcharge rates ....................... 24Figure 13A: R-Square cromparison by carriers’ relationship between their fuel surchargemovements and movements in Canadian weekly average diesel fuel prices. .............................................. 25Figure 14A: MEC’s Weighted Average Scores ............................................................................................................ 26PART 2: FUEL SURCHARGE ANALYSIS Mountain Equipment Co-op – Directed Studies 2011
    • 5INTRODUCTIONPURPOSE AND OBJECTIVEThe purpose of this report is to both develop a comparative analysis of less than truckload (LTL),and truckload (TL) fuel surcharge rates within the industry and compare them to MountainEquipment CO-OP’s (MEC) current service providers, and to recommend fuel surcharge practisesthat will reduce MEC’s transportation expenses.By identifying MEC’s past fuel surcharge performance, MEC will be able to better understand wherethey currently stand as well as what changes need to be made to get where they want to go. Thisunderstanding will assist MEC’s logistics team in making better decisions as they conductnegotiations with carriers.This report will give the logistics team a clear understanding of fuel surcharges, and their correctapplication. In addition the factors that make up the charges and the methodology that is used tocreate fuel surcharges will be uncovered. This report will dissect the fuel surcharge and look at itselements separately, giving the reader a greater variety of negotiating options. Finally, this reportwill package this knowledge so that it may be used as a valuable decision making tool for thelogistics team at MEC.HISTORY OF FUEL SURCHARGESFuel surcharges came into effect in Canada during the oil embargo of the 1970’s. Transportationcompanies were looking for a method by which they could pass on additional cost caused by theembargo. They found their answer in the first Canadian fuel surcharge. The surcharge was designedas a temporary method to allow the transportation companies to adjust to the uncertain outcome ofthe oil crisis. This initial fuel surcharge was overseen by the Motor Carrier Commission, who was incharge of establishing non-binding fuel surcharge rates to be used by carriers. As prices began toretreat and stabilize in the 1980’sthe carriers held on to the surcharge FIGURE 1A FUEL PRICE HISTORYand continued to apply it wheneverfuel prices made upwardadjustments. The current reasons for the widespread use of fuel surcharges can belargely attributed to three factors:rising diesel prices due tospeculation, the September 2001World Trade Centre attacks, and thesubsequent military actions in theMiddle East. Many of the formulasthat are in use were based on fuel (US Energy Information Administration)prices in or around 2002. Additionally, the earliest available fuel surcharge rate histories posted onmost transportation companies’ websites also reference 2002 fuel prices or begin in 2002. Fuel Mountain Equipment Co-op – Directed Studies 2011
    • 6prices steadily rose between 2002 and late 2008, and with this rise there was a subsequent rise infuel surcharge rates. However, the upward trend was broken by the onset of the “Economic Crisis”which caused fuel prices to fall and freight carriers to lower their fuel surcharge rates.In the beginning of 2009, carriers began to look at innovative ways of reducing the then loweredsurcharge as a strategy to attract business. They also looked at how to use the rate as a bargainingtool.ESTABLISHING RATESWith an upward trend in fuel prices, questions about fuel surcharges and how to calculate themfairly and accurately become important. From the perspective of carriers, long-term strategies toreduce fuel consumption do not necessarily address the short-term immediate need to deal withvolatility in fuel prices. The solution that carriers have successfully employed is the fuel surcharge,which is the topic of this study. Though this solution works favourably for the transportationindustry, problems begin to occur when customers seek disclosure, transparency, andunderstanding in regards to how the charge is calculated and applied. Some carriers becomesecretive and guarded about their practices, others are more forthcoming though not completelywilling to be specific about the factors that they use to create the rates that they charge. Ideally,from a customer’s perspective, freight carriers would only charge the actual amount caused by achange in fuel price, where if fuel prices were to drop or fuel efficiencies were to be found, thecharge would no longer be applied.One of the first steps to create a dynamic fuel surcharge model is to establish an accurate fuel pricereference. Transportation companies will often look to sources such as the Canadian Government’sNational Resources Canada website or the US Energy Information Administration website whereaccurate fuel pricing information is available. Additionally, private sector resources such as KentMarketing Services and Provincial Transportation Associations provide accurate references. All ofthe methods of calculating fuel surcharges in practice use this information directly or indirectly asthe variable in their rates.There are two basic methods of establishing a fuel surcharge. The first is by following an indexedmatrix which is published and widely accessible where fuel surcharges are found by crossreferencing applicable values. The second method is to use a formula that takes into account thespecific variables that affect the carrier’s cost of doing business, which can be adjusted by inputtinga current fuel price.FUEL SURCHARGES BY COUNTRYCANADAIn Canada, the method often used to calculate a fuel surcharge is formula based. The FreightCarriers Association of Canada (FCA) publishes weekly surcharge rates that are often used as areference in the carrier industry. This method has its advantages in that it sets a standardised rateto be charged, it uses the average cost of fuel in Canada and it sets different rates to be chargeddepending on the capacity or weight of the type of haul. The FCA also provides a reference for crossborder movements which take into account the difference in fuel prices between the US and Mountain Equipment Co-op – Directed Studies 2011
    • 7Canada. This index is not exactly followed by carriers, as it is not dynamic and cannot reflectregional issues such as the geography of Western Canada or local differences in fuel prices. The FCAmodel also ignores fuel efficiencies experienced by the individual carriers as they operate in theircorridors. Because of this carriers create their own tailored formulas that meet their specific needs.USMost American and some Canadian transportation companies that operate in the US use the USmatrix system. This matrix takes the national average price of diesel fuel as posted by the USEnergy Administration as the indicator as to what fuel surcharge rate will be charged. The price pergallon is first identified by the user and then the corresponding fuel surcharge is charged,depending to the type of cargo. Companies create customized tables for both LTL and TL fuelsurcharge rates. Many of the tables that are displayed on-line do not include current price levels.See Table 1A below for an example of a Ranger Express’s matrix.TABLE 1A RANGER EXPRESS FUEL SURCHARGE TABLE(Express, 2011)FORMULA METHODThe second and most widely usedmethod of calculating fuel surcharges isthe use of a formula. The products of the Fuel Surcharge = ((C - A) / A) x Bformulas are regularly expressed as a Where:percentage. The percentage is applied in A = price per litre of fuel when you last set your freightthe same manner as a tax, as the dollar rate (cents/litre)amount charged is a percentage of the B = the percentage that fuel represents of yourfreight charge before tax. An example of operating costs (percent)a formula which is recommended to its C = the current price that you are paying for fuelmembers by the British Columbia (cents/litre)Trucking Association (BCTA) is shown. Mountain Equipment Co-op – Directed Studies 2011
    • 8Example: BCTA MethodIf you last set your freight rate with a fuel price of 105 cents per litre, fuel represents 25 percent ofyour operating costs, and the current price of fuel is 135 cents per litre, the fuel surcharge will be:((135-105)/105) x 25% = 7.14%Note that you do not have to use cents per litre, but can also use dollars per litre, cents per gallon ordollars per gallon.The Freight Carriers Association of Canada (FCA)uses the same basic formula as the BCTA. Theybase their rates on the national average price of Example:diesel fuel from May 1998 which at the time was 135 - 39.0 X 8.8% LTL = 21.7%39cents per litre. They also differentiate types ofloads in their calculations depending on whether 39.0 20.7% TL = 53.4.%the shipment is LTL, TL, and Heavy TL. The fuelprices they index are quoted without tax being 23.2% Heavy TL = 57.1applied. The fuel price in the example to the rightof 135 cents per litre is without tax.An emerging trend in the TL trucking market is toseparate the actual fuel cost of the operation and include it as a line item on the invoice. Thismethod has companies disclosing their true fuel costs and allows customers to have access to fuelreceipts if they are requested. This disclosure promotes understanding and trust around the issueof fuel surcharges and removes the charge from the bargaining table. Disclosure also leads to moreaccurate environmental impact auditing for customers. An example of this formula is seen in thebox below. Fuel Surcharge = (C – A) * B A = price per litre of fuel when you last set your freight rate or base rate (cents/litre or gallon) B = The actual amount of fuel consumed (litres or gallons) C = the price that was paid for fuel (cents/litre or gallon) B in this formula can be modified to be an established amount of fuel consumed as to allow for ease of invoicing. This is done by dividing the distance traveled by the carrier on route by an agreed upon fuel efficiency rating experienced by the company in MPG or l/km. Mountain Equipment Co-op – Directed Studies 2011
    • 9INDUSTRY STANDARDSAll fuel surcharges incorporate a current cost of fuel, a base rate cost of fuel, and an operationalcost. For the most part, the single variable that companies agree upon when establishing rates is thegiven cost of fuel. In the domestic carrier market, the closest thing to a standard practice whencreating fuel surcharge rates is the FCA formula. Cross border carriers often use matrices withspreads for fuel charge movements.ApplicationMost of the companies that were looked at applied the fuel surcharge as a percentage to the freightcost, though a few intermodal TL carriers also have a per mile rate option for cargo. Intermodalcarriers also tend to use a flat fuel surcharge rate which is independent of the volume of the load.When conducting research it was found that all of the industry interviewees felt that fuelsurcharges should not be applied to non-transportation or assessorial charges that do not requirethe engine to be engaged. Exceptions would be services not normally required by MEC such aspumps and cranes.CommunicationFuel surcharges can be as unique as the carriers that charge them, with tailored variables, base fuelrates, and LTL and TL differentials. The task of comparing or measuring various companies’ ratescan be confusing from a customer’s perspective. Carriers use this confusion to their advantagecreating an almost incomparable environment for customers as they try to identify who offers thebetter overall deal. When conducting this study it was found that all of the carriers that werequestioned about their fuel surcharge were guarded when asked specifics about their formula,stating that the information was “proprietary”. This shows that an unwillingness of the industry toopen disclosure of rates is still strong.INDUSTRY FUEL SURCHARGE ANALYSISThis section of the report looks at MEC’s relationship with seven of its major carriers who operatein two main areas of road hauling in MEC’s supply chain. The first area that will be examined iscross border carriers Hercules and YRC Reimer who move merchandise from MEC’s upstreampartners in the US. That will be followed by an examination of MEC’s domestic carriers Clarke,Comox Pacific, Day and Ross, National Fast Freight, and Quick X.DATA USEDPast InvoicesTo compile the information needed for this analysis, a sample of 1017 invoices from 2008 to 2010were taken and analysed. The data taken from each invoice was recorded in separate spread sheetsby company and included date, weight, freight charge, fuel surcharge as a percentage and dollaramount, route, and if the load was LTL or TL. Mountain Equipment Co-op – Directed Studies 2011
    • 10Fuel Price History Sample of Clarkes DataThe two sources that were used to create anaccurate fuel price history of both Canadaand the US were the Canadian GovernmentsNational Resources Canada website and theUS Energy Information Administrationwebsite. This history is necessary as toestablish pricing trends, company reactiontimes, and relationships between thecarriers and the index that they gauge theirsurcharge level from.THE FCA BENCHMARKTo conduct a comparison of MEC’s carriers, first a benchmark needed to be established by which tomeasure their level of performance.While conducting the research for this project it became apparent that many of the carriers in theindustry, as well as all of the trucking associations, pointed towards the Freight CarriersAssociation of Canada (FCA) as their reference when establishing fuel surcharges. In fact, all of theCanadian transport companies that were found to post more than one year of their fuel surchargerates history on-line, publish the same or very similar rates to the FCA. The broad recognition ofthis rate source, plus their having data that covered the timeframe of the study, makes it an idealreference tool for benchmarking MEC’s carriers. The benchmark was created by summing the fuelsurcharge percentages over the same period of time as the timeframe of the fuel surchargeinformation for each carrier. This was done for all LTL and TL fuel surcharge rates.ANALYTICAL METHODOLOGY R-Squared is a statistical term saying how good one term is at predicting another. This was used toidentify the relationship between the Canadian and US historical fuel price indices and themovement of the fuel surcharge rates that were being charged to MEC within the time frame of thestudy. To understand the significance of the results, one must be aware that a score of 1 would be aperfect relationship, where a movement in the cost of fuel would result in a perfectly relativemovement in a carrier’s fuel surcharge. A score of .7 indicates that there is no conclusiverelationship between the factors. Scores also reflect each company’s reaction time to fuel pricemovement. As so, they also act as good predictors of future movement behaviour by the companies.All of the carrier’s LTL and TL rates were separated, summed and then divided by a correspondingsum of the FCA’s rate over the same period of time. This produced a percentage of the FCA rate thateach carrier charged during the period. The US carriers were also benchmarked against the FCArates. Additionally, 8 carriers (5 North South and 3 East West) were selected to be compared by thesame criteria giving the study an external industry picture of comparable rates.To give a more accurate picture of MEC’s level of performance, a weighted average was used basedon the amount of funds allocated to each carrier from 2008 through 2010. Mountain Equipment Co-op – Directed Studies 2011
    • 11INTRODUCTION TO ANALYSISThe analytical portion of this report is separated into two main parts. First, an industry analysis willlook at MEC’s cross border carriers and compare them to selected North and South carriers. In thesame section, a comparison of the East West carriers to MEC’s domestic carriers is included.Findings will be reported at the end of each section. Second, an internal analysis will be presented,with the intention of quantifying MEC’s carriers’ behavioural patterns as well as establishing anoverall position for MEC in regards to fuel surcharge history.Consider the following when looking at the results of this section:  Both areas of the analysis look at the information linearly. It is not separated by year; it looks at the whole period in order to include both upward and downward trends in fuel price history.  The report also looks at TL and LTL rates separately.Industry Analysis ConsiderationsThe inclusion of eight carriers to establish external information about fuel surcharge rate levels willonly provide a very basic or limited picture of rate levels in the industry. As this is the case, onlydirect comparison of the carriers is valid. Assumptions should not be made about the wholeindustry based on the findings comparing these selected external carriers. To strengthenmeasurement indicators, the FCA benchmark was selected as a third measure.Industry Analysis Sections:  Cross Border Analysis  Cross Border Comparison Key Findings  Domestic Analysis  Domestic Comparison Key FindingsInternal analysis considerationsThis section will give MEC its most accurate picture of overall performance. The carriers that wereselected for this study account for a large percentage of MEC’s total logistics budget. To refine theresults to indicate only information about road carriers, all Canada Post information wasremoved from data sources. Removing this data allows the study to focus on the selected carriersand provide more accurate findings. This part of the study only looks at MEC’s carriers. They arecompared using analytical methodology.Internal Analysis Sections  Internal analysis  Relationship and predictability of MEC’s carriers  Weighted findings Mountain Equipment Co-op – Directed Studies 2011
    • 12CROSS-BORDER ANALYSISYRC REIMERYRC Reimer (YRC) is responsible for MEC’s largest crossborder road carrier expense with almost $1.3 million dollarsbeing allocated to them from 2008 to 2010. In this period YRCaccounted for just over 9.5 % of total road carriage costs, withnearly all of that being cross border traffic.Through analysis it was found that the most accurate index to Carrier Type: Cross Borderaccount for movements in fuel surcharges was the Canadianaverage diesel fuel price rates. YRC had an R-squared of .94, Account size: $ 1.3 Millionindicating a strong symmetry of movements between their fuel Relationship strength andsurcharge and the Canadian average diesel fuel price rates predictability of Fuel Surchargeduring the period. Movement: 0.94133 of YRC Reimer’s invoices were looked at and it was found YRC Reimer vs. LTL FCAthat MEC’s primary type of shipment with YRC Reimer is LTL. Benchmark: 1.46Therefore, only the LTL fuel surcharge rates will be used forcomparison. The result of comparing the fuel surchargecharged to MEC by YRC Reimer against the FCA benchmarkrates from 2008 through 2010 is that YRC charged 1.46 timesmore than the benchmark rate.FIGURE 2A: YRC REIMER’S RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010) 0.45 0.40 0.35 0.30 0.25 0.20 YRC LTL Rate 0.15 FCA ltl Rate 0.10 0.05 0.00During this period it is evident that YRC Reimer’s rates are consistently higher than the FCAbenchmark. Mountain Equipment Co-op – Directed Studies 2011
    • 13HERCULESDuring the period of study, Hercules was paid just over $280thousand dollars for freight services for cross border Carrier Type: Cross Borderoperations. This amount equals roughly 1% of all Account size: $ 280 Thousandtransportation costs, not including Canada Post. This carrier isresponsible for inbound to DC shipments from upstream Relationship strength andpartners. predictability of Fuel Surcharge Movement: 0.99Through analysis, it was found that the strongest relationship Hercules vs. LTL FCA Benchmark:between fuel price movements and corresponding movement 1.38in fuel surcharges exist with the US Energy InformationAdministration`s weekly average fuel prices with an R-squared result of over .99. This was the highest score of any ofMEC’s carriers and indicates that Hercules is very responsiveto changes in fuel prices with an almost non-existent lag timewhen adjusting fuel surcharges on a weekly basis.When looking at the companies carrying history from 2008 through 2010, a total of 124 invoiceswere analyzed. It was found that all of the invoices were for LTL shipments and as such the carrierwas measured against the FCA LTL benchmark. Hercules charged 1.38 times more than thebenchmark for the same period of time.FIGURE 3A: HERCULES RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010) 40% 35% 30% 25% 20% HERCULES LTL Rate 15% FCA LTL Rate 10% 5% 0% 01/01/2008 01/03/2008 01/05/2008 01/07/2008 01/09/2008 01/11/2008 01/01/2009 01/03/2009 01/05/2009 01/07/2009 01/09/2009 01/11/2009 01/01/2010 01/03/2010 01/05/2010 01/07/2010 01/09/2010 01/11/2010Hercules fuel surcharge rates were consistently higher than the FCA Benchmark. Mountain Equipment Co-op – Directed Studies 2011
    • 14INDUSTRY CROSS-BORDER CARRIERSThe companies that were selected for cross border comparison had to be C-TPAT/FAST1 accredited,had to move freight between the US and Canada, and had to disclose their fuel surcharge ratehistory or provide a matrix based on average weekly fuel prices. The following carriers wereselected: AFB Freight Systems, Con-Way, Midland Transport, Ranger Group and Road RunnerTransportation Services.AFB Freight systems AFB provides a fuel surcharge rate history between May 25, 2009and December 27, 2010 for both LTL and TL loads. The followingresults are looking at LTL rates only. (Fuel Surcharges, 2011) NAME: AFB FREIGHT SYSTEMS Carrier Type: Cross Border  R square against the US Energy Information Administration Index was = .999 Relationship strength and  2009-2010 LTL FUEL SURCHARGE rates divided by FCA predictability of Fuel Surcharge Benchmark = 1.482 Movement: 0.99 Vs. LTL FCA Benchmark: 1.48Con-Way _____________________________________Con-Way provides a fuel surcharge rate history between May 25,2009 and December 27, 2010 for both LTL and TL loads. The NAME: CON-WAYfollowing results are looking at LTL rates only. (Con-way, 2011) Carrier Type: Cross Border  R square against the US Energy Information Relationship strength and Administration Index was = .966 predictability of Fuel Surcharge  2009-2010 LTL FUEL SURCHARGE rates divided by FCA Movement: 0.97 Benchmark = 1.473 Vs. LTL FCA Benchmark: 1.47Midland Transport _____________________________________Midland provides a fuel surcharge rate history between May 25, NAME: MIDLAND TRANSPORT2009 and December 27, 2010 for both LTL and TL loads. The Carrier Type: Cross Borderfollowing results are looking at LTL rates only. (Midland, 2011) Relationship strength and  R square against the US Energy Information predictability of Fuel Surcharge Administration Index was = .999 Movement: 0.99  2009-2010 LTL FUEL SURCHARGE rates divided by FCA Vs. LTL FCA Benchmark: 1.48 Benchmark = 1.482 _______________________________________Ranger Group INC. NAME: RANGER GROUPRanger provides a fuel surcharge rate history between May 25, Carrier Type: Cross Border2009 and December 27, 2010 for both LTL and TL loads. Thefollowing results are looking at LTL rates only. (Express, 2011) Relationship strength and predictability of Fuel Surcharge Movement: 0.59 Vs. LTL FCA Benchmark: 1.301 US/Canadian cross border customs security programs. Mountain Equipment Co-op – Directed Studies 2011
    • 15  R square against the US Energy Information Administration Index was = .585  2009-2010 LTL FUEL SURCHARGE rates divided by FCA Benchmark = 1.304 NAME: ROAD RUNNER Carrier Type: Cross BorderRoad Runner Transportation Services Relationship strength andRoad Runner provides a fuel surcharge rate history between May predictability of Fuel Surcharge25, 2009 and December 27, 2010 for both LTL and TL loads. The Movement: 0.99following results are looking at LTL rates only. (Roadrunner, 2011) Vs. LTL FCA Benchmark: 1.48  R square against the US Energy Information Administration Index was = .999  2009-2010 LTL FUEL SURCHARGE rates divided by FCA Benchmark = 1.482CROSS BORDER COMPARISON KEY FINDINGSIt was found that the MEC Logistics Department paid close to normal fuel surcharges for crossborder LTL shipments. When looking at Figure 4A it is apparent that with the exclusion of Ranger,MEC`s fuel surcharge performance is better than the posted performance of the other carriersstudied, when measured against the FCA LTL benchmark.It was found that when comparing Hercules to YRC Reimer, that Hercules is quicker to react bychanging fuel surcharge rates to compensate for changes in weekly fuel prices.Looking at MEC carriers, it was found that over the period of the study Hercules outperformed YRCReimer with fuel surcharges that were closer to those posted by the FCA, being lower than YRCReimer’s rates.It was found that ABF, Midland, and Roadrunner share the same fuel surcharge structure as well asrates. The relationship between movements in fuel prices and movements in fuel surcharge is verystrong and proportional for these carriers at 0.99. FIGURE 4A: MEC’S CARRIERS VS. INDUSTRY FUEL SURCHARGE RATES The bars Cross Border Carriers Vs MEC shown in light green indicate 1.50 carriers that Times the FCA Rate 1.45 were used by 1.40 MEC. Dark 1.35 green bars are comparable 1.30 carriers. 1.25 1.20 Road YRC Midland Ranger AFB CONWAY Hercules Runner Reimer LTL 1.482 1.304 1.482 1.473 1.482 1.380 1.461 Mountain Equipment Co-op – Directed Studies 2011
    • 16DOMESTIC ANALYSISDAY AND ROSSDuring the period of the study Day and Ross transported goodsmainly within Canada. They were used to transfer inventorybetween retail locations, to ship out bound from the DC, and toa lesser extent to import goods from the US. The carrier wasused extensively in central and Eastern Canada. Day and Rosswas the recipient of over 17% of MEC’s logistics spending with Carrier Type: Domestica total of $2.3 million dollars. Account size: $2.3 MillionThis study looked at a total of 280 invoices that were charged Relationship strength andto MEC by Day and Ross. Of the invoices that were studied, 178 predictability of Fuel Surchargewere LTL and 102 were TL. Consequently, Day and Ross were Movement: LTL 0.93, TL 0.976measured against both the LTL and TL FCA indices separately. DAY & ROSS vs. the FCADay and Ross LTL Benchmark: LTL 0.93, TL 0.82When looking at the relationship of movement and responsetime to changing fuel prices, it was found that Day and Rossscored a R square of .926 when adjusting fuel surcharge rates.When comparing Day and Ross to the FCA LTL benchmark, itwas found that MEC was charged 0.958 times the benchmark rate. Day and Ross came under thebenchmark.FIGURE 5A: DAY AND ROSS LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010) 30% 25% 20% 15% Day & Ross LTL Rate 10% FCA LTL RATE 5% 0% 07/01/2008 07/03/2008 07/05/2008 07/07/2008 07/09/2008 07/11/2008 07/01/2009 07/03/2009 07/05/2009 07/07/2009 07/09/2009 07/11/2009 07/01/2010 07/03/2010 07/05/2010 07/07/2010 07/09/2010 07/11/2010Day and Ross’s LTL fuel surcharge rates closely followed the FCA benchmark rates. Mountain Equipment Co-op – Directed Studies 2011
    • 17 Day and Ross Continued…Day and Ross TLWhen looking at the relationship of movement and responsetime to changing fuel prices it was found that Day and Rossscored an R square of .9764 when adjusting fuel surcharge Carrier Type: Domesticrates. This relationship is slightly stronger than the LTL Account size: $2.3 Millionrelationship. Relationship strength and predictability of Fuel Surcharge Movement: LTL 0.93, TL 0.976When comparing Day and Ross to the FCA TL benchmark itwas found that MEC was charged 0.821 times the benchmark DAY & ROSS vs. the FCArate. Again, Day and Ross came under the benchmark. Benchmark: LTL 0.93, TL 0.82FIGURE 6A: DAY AND ROSS TL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010) 70% 60% 50% 40% 30% Day & Ross TL Rate FCA TL Rate 20% 10% 0% 04/01/2008 04/03/2008 04/05/2008 04/07/2008 04/09/2008 04/11/2008 04/01/2009 04/03/2009 04/05/2009 04/07/2009 04/09/2009 04/11/2009 04/01/2010 04/03/2010 04/05/2010 04/07/2010 04/09/2010Day and Ross’s LTL fuel surcharge rates closely followed the FCA benchmark rates. Mountain Equipment Co-op – Directed Studies 2011
    • 18CLARKEDuring the period of the study, Clarke was used primarily forinbound intermodal to DC Canadian freight. Clarke was therecipient of just under 3 percent of MEC’s logistics expense Carrier Type: Intermodalwith $390 thousand dollars spent on their service. DomesticThis study looked at 117 invoices from within the study Account size: $ 390 Thousandperiod, all of which were based on a flat rate which didn’tchange for TL shipments (all but 6 invoices were for cargo less Relationship strength andthan 10,000 lbs.). predictability of Fuel Surcharge Movement: 0.93When looking at the relationship of movement and response Clarke vs. LTL FCA Benchmark:time to changing fuel prices, it was found that Clarke scored 1.56an R square of .930 when adjusting fuel surcharge rates.When comparing Clarke to the FCA LTL benchmark it wasfound that MEC was charged 1.559 times the benchmark rate.Clarke came in above the benchmark.FIGURE 7A: CLARKE LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010) 40% 35% 30% 25% 20% Clarke FSC 15% FCA LTL Benchmark 10% 5% 0% Clarke’s fuel surcharge rates were the farthest above the FCA benchmark for any of MEC’s studiedcarriers. Mountain Equipment Co-op – Directed Studies 2011
    • 19NATIONAL FAST FREIGHTDuring the period of the study, National Fast Freight was usedprimarily for inbound intermodal to DC freight from vendersacross Canada. This company was the recipient of just over 4percent of MEC’s logistics expense with $575 thousand dollarsspent on their service.This study looked at 154 invoices from within the study period, Carrier Type: Intermodalall of which were based on a flat rate which didn’t change for TL Domesticshipments (all but 17 invoices were for cargo less than 10,000 Account size: $ 575 Thousandlbs.). Relationship strength andWhen looking at the relationship of movement and response predictability of Fuel Surchargetime to changing fuel prices it was found that National Fast Movement: 0.860Freight scored an R square of .860 when adjusting fuel surcharge National Fast Freight vs. LTL FCArates. Benchmark: 1.15When comparing National Fast Freight to the FCA LTLbenchmark it was found that MEC was charged 1.15 times thebenchmark rate. National Fast Freight came in above thebenchmark.FIGURE 8A: NATIONAL FAST FREIGHT LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH2010) 30% 25% 20% 15% NFF FSC Rate 10% FCA Benchmark 5% 0% 04/01/2008 04/03/2008 04/05/2008 04/07/2008 04/09/2008 04/11/2008 04/01/2009 04/03/2009 04/05/2009 04/07/2009 04/09/2009 04/11/2009 04/01/2010 04/03/2010 04/05/2010 04/07/2010 04/09/2010 04/11/2010National Fast Freight charged moderately higher rates than the FCA benchmark though their ratesdid intersect at a few points. Mountain Equipment Co-op – Directed Studies 2011
    • 20COMOX PACIFIC EXPRESSComox Pacific is used by MEC outbound to its Victoria retailstore. This carrier started with MEC in March of 2009, and as soit has a reduced time period. During the period of the studyclose to $148 thousand dollars were allocated to Comox Pacific’sservices. Carrier Type: Domestic (Victoria)This study looked at a total of 90 invoices that were charged to Account size: $ 148 ThousandMEC by this company. Of these invoices, 35 were LTL and 55were TL. Consequently, Comox Pacific was measured against Relationship strength andboth the LTL and TL FCA indices separately. predictability of Fuel Surcharge Movement: LTL 0.91, TL 0.746Comox Pacific LTL Comox Pacific vs. the FCAWhen looking at the relationship of movement and response Benchmark: LTL 1.27, TL 0.64time to changing fuel prices it was found that Comox Pacificscored an R square of .914when adjusting fuel surcharge rates.When comparing Comox Pacific to the FCA LTL benchmark itwas found that MEC was charged 1.27 times the benchmark rate.Comox Pacific came above the benchmark.FIGURE 9A: COMOX PACIFIC LTL HISTORY WITH MEC VS. FCA LTL BENCHMARK (2009 THROUGH 2010) 25% 20% 15% 10% Comox Pacific FSC FCA LTL Benchmark 5% 0% 05/05/2009 05/06/2009 05/07/2009 05/08/2009 05/09/2009 05/10/2009 05/11/2009 05/12/2009 05/01/2010 05/02/2010 05/03/2010 05/04/2010 05/05/2010 05/06/2010 05/07/2010 05/08/2010 05/09/2010 05/10/2010 05/11/2010Comox Pacific’s LTL history is shorter that most carriers beginning in 2009. They consistentlycharged higher that CFA benchmark rates. Mountain Equipment Co-op – Directed Studies 2011
    • 21 Comox Pacific continued…Comox Pacific TLWhen looking at the relationship of movement and responsetime to changing fuel prices it was found that Comox Pacificscored a R square of .746 when adjusting fuel surcharge rates. Carrier Type: Domestic (Victoria)This relationship is quite weak where movements in fuel pricesare not reflected in timely adjustments to fuel surcharge rates. Account size: $ 148 Thousand Relationship strength and predictability of Fuel Surcharge Movement: LTL 0.91, TL 0.746 Comox Pacific vs. the FCAWhen comparing Comox Pacific to the FCA TL benchmark it was Benchmark: LTL 1.27, TL 0.64found that MEC was charged 0.644 times the benchmark rate.Comox Pacific comes in under the benchmark.FIGURE 10A: COMOX PACIFIC TL HISTORY WITH MEC VS. FCA TL BENCHMARK (2009 THROUGH 2010) 40% 35% 30% 25% 20% 15% Comox Pacific FSC FCA TL Benchmark 10% 5% 0% 05/05/2009 05/06/2009 05/07/2009 05/08/2009 05/09/2009 05/10/2009 05/11/2009 05/12/2009 05/01/2010 05/02/2010 05/03/2010 05/04/2010 05/05/2010 05/06/2010 05/07/2010 05/08/2010 05/09/2010 05/10/2010 05/11/2010Comox Pacific consistently charged lower than FCA TL benchmark rates as seen in Figure 10Aabove. Mountain Equipment Co-op – Directed Studies 2011
    • 22QUICK XQuick X was used by MEC as a TL carrier in most cases withvery little freight being sent LTL with them. This companystands out because of the 25% fuel surcharge discount that itoffers on 53 foot intermodal shipments compared to theirregular road fuel surcharge rates. Quick X was the recipient Carrier Type: Intermodal Domesticof just over 23 percent of MEC’s logistics expense with close Account size: $3.2 Millionto 3.2 million dollars spent on their service. Relationship strength andThis study looked at 111 invoices from within the study predictability of Fuel Surchargeperiod. There were 4 LTL: 47 with the 25% discount of the Movement: 0.85 (*with discountfuel surcharge, and 60 at their regular fuel surcharge rate. removed.)With the discount used for intermodal shipments, the National Fast Freight vs. TL FCArelationship between fuel price movement and the Benchmark: 0.80 without discount,movement in fuel surcharge rates is not conclusive with an R .71 with discount.square score of .351. When discounts are removed from thedata, Quick X scores an R square of .846.When comparing Quick X to the FCA TL benchmark it wasfound that MEC was charged 0.713 times the benchmark rate including the intermodal discount,and they were charged .800 when the discounts are removed from the data. Quick X comes in underFIGURE 11A: QUICK X’S TL HISTORY WITHOUT DISCOUNT WITH MEC VS. FCA TL BENCHMARK (2009 THROUGH2010) 45% 40% 35% 30% 25% 20% QUICK X TL Rate 15% FCA TL Benchmark 10% 5% 0% 08/06/2009 08/07/2009 08/08/2009 08/09/2009 08/10/2009 08/11/2009 08/12/2009 08/01/2010 08/02/2010 08/03/2010 08/04/2010 08/05/2010 08/06/2010 08/07/2010 08/08/2010 08/09/2010 08/10/2010 08/11/2010 08/12/2010the benchmark in both cases.Quick X’s TL rate history falls below the FCA benchmark as shown in figure 11A. This figure doesnot include the discount applied to intermodal shipments with this carrier. When the discount rateis included the Quick X trend line is very jagged. Mountain Equipment Co-op – Directed Studies 2011
    • 23INDUSTRY DOMESTIC CARRIERSThis report looked at comparable domestic carriers as to establish MEC’s position in regards toindustry fuel surcharge rates. It was found that only three carriers met the requirements needed tobe compared to MEC’s carriers. Additional companies contacted were unwilling to shareinformation, or were unresponsive to requests for their rate history. Because of this, websites werethe only resource available to gather historical information for these companies. Only MaritimeOntario, Manitoulin, and CCT Trucking post history as far back as 2008 and 2009, so they wereselected to represent the industry. As with the cross border carriers it was necessary that thecarriers be C-TPAT/FAST approved and in this case carry East West.Maritime OntarioMaritime Ontario meets the requirements mentioned above. They post their rate history on theirwebsite going back to 2008. Their posted fuel surcharge rates for LTL and TL are identical to therates posted by the FCA for both types of shipment. As so, they reinforce the FCA standard as thebenchmark. Their relationship between movements of the fuel surcharge and movements in thecost of fuel was perfect, with an R square of 1.00. (Maritime-Ontario, 2011)Manitoulin TransportManitoulin Transport meets the requirements mentioned above. They post their rate history ontheir website going back to 2008. Their posted fuel surcharge rates for LTL and TL are identical tothe rates posted by the FCA for both types of shipment. As so, they reinforce the FCA standard asthe benchmark. Their relationship between movements of the fuel surcharge and movements in thecost of fuel was perfect with an R square of 1.00. (Manatoulin, 2011)CCT Canada TruckingCCT meets the requirements mentioned above. They post their rate history on their website goingback to late 2009. Their posted fuel surcharge rates for LTL and TL are slightly higher than the ratesposted by the FCA for both types of shipment. The LTL over the period was 1.106 times thebenchmark and the TL was 1.047 times the benchmark. The relationship between movements inthe fuel surcharge and the cost of fuel was an R square of .909 for LTL and .913 for TL. (CCT, 2011) Mountain Equipment Co-op – Directed Studies 2011
    • 24DOMESTIC COMPARISON KEY FINDINGSBy conducting research and comparing the individual data of each carrier the following findingswere identified:  The East West carriers that record their past rate history online closely follow, or are identical to the FCA published rates.  The fuel surcharge rate used by Quick X was lower than both Day and Ross’s and the FCA benchmark. This is significant because they are the largest carrier by volume in the study.  The relationship between fuel surcharge adjustments and movements in fuel prices was strongest for Day & Ross in the TL market, and for YRC Reimer in the LTL market. The relationship was found to be lowest for Comox Pacific in the TL market and lowest for National Fast Freight in the LTL market.  When comparing domestic LTL rates it was found that Clarke uses a US style matrix based on the US Energy Information Administration’s weekly average diesel prices to establish their fuel surcharge rates for Canada.Figure 12A compares the fuel surcharge rates paid by MEC to domestic carriers that provided theirhistory for this study. The red line indicates the FCA benchmark. The carriers to the right of Quick Xare the carriers that represent the industry as East West carriers. Fuel surcharge rates are clearlycomparable.FIGURE 12A: MEASURING MEC’S CARRIERS AGAINST EAST WEST CARRIERS’ FUEL SURCHARGE RATES 1.8 1.6 1.4 1.2 1 LTL 0.8 TL 0.6 0.4 0.2 0 Clarke Comox Day and National Quick X CCT Maritime Manitoulin Pacific Ross Fast freight OntarioMEC’s fuel surcharge performance is spit by the FCA benchmark and the domestic carriers’ rates. Mountain Equipment Co-op – Directed Studies 2011
    • 25INTERNAL ANALYSISThis section of the report focuses solely on the information that was gathered from MEC’s invoices.It compares the characteristics that were separated in the analysis of each of MEC’s carriers as todetermine how they compare to each other, and how they compare to the FCA benchmark. Thissection looks at two major findings. First, the overall R square findings are presented. Second, theweighted average of all of the fuel surcharge rate information is presented.RELATIONSHIP AND PREDICTABILITY OF MEC’S CARRIERSThe following figure shows the relationship between the movements in fuel prices and the relativetimely movement of fuel surcharges for each of the carriers by both LTL and TL movement types.Figure 13 A is a comparison of all of the R squares of MEC’s carriers. A higher bar indicates that thecompany is more likely to raise or lower fuel surcharges based on fuel price movements.In periods of rapid upward movements in fuel prices it would be more probable that the lower barcarriers wouldn’t adjust rates as quickly. Additionally, companies with higher bars are also morelikely to use a formula. This information will allow MEC to anticipate fuel surcharge movements inthe short run, and on a company by company basis. MEC will be able to make decisions abouttiming of shipments as to take advantage of quicker or slower reaction time.FIGURE 13A: R-SQUARE COMPARISON BY CARRIERS’ RELATIONSHIP BETWEEN THEIR FUEL SURCHARGEMOVEMENTS AND MOVEMENTS IN CANADIAN WEEKLY AVERAGE DIESEL FUEL PRICES. 1.20 1.00 0.80 0.70 0.60 LTL TL 0.40 0.20 0.00 Clarke Comox Pacific Day & Ross Hercules Nat ff QuickX YRC Reim(The red dashed line at 0.70 indicates the minimum value for accurate prediction) Mountain Equipment Co-op – Directed Studies 2011
    • 26WEIGHTED FINDINGSTo more accurately rate MEC’s performance over the period of the study, all of the LTL and TL FCAscores of the carriers were combined and weighted by using the total percentage of freight costsallocated to each carrier (see appendix (1)). When calculating the weighted averages, Canada Postdata was removed.The weighted average of fuel surcharge rates paid compared to the FCA formula creates anindicator that MEC can use to measure its performance in the future. It also gives MEC a clearpicture of which companies influence their average the most and in turn where to focusnegotiations (see appendix (2)).It was found that the weighted average amount of fuel surcharges paid by MEC for LTL shipmentswas 1.25 times the FCA benchmark rate. Additionally, it was found that the weighted average of theTL shipments was 0.73 times the FCA benchmark.To find the overall weighted average the data needed to be broken down further. First, thepercentage of invoices found to be LTL or TL that were identified while taking the surcharge ratesample history for each carrier was assumed to be accurate. Next, the total expense for each carrierwas divided by percentages found in the sample invoices, and the total sum of LTL and TL expensesfor the carriers in the study were summed. Finally, the LTL and TL totals were summed todetermine the total expense for each shipment type. The TL and LTL total sums were divided by thetotal expense to identify their influence. When using the weights of LTL (49.5) to TL (50.5) MEC’soverall weighted score versus the FCA benchmark is 0.99. This score indicates that MEC’s globalperformance when looking at the seven carriers in the study from 2008 through 2010 is .01below the combined average of LTL and TL fuel surcharge rates published by the FreightCarriers Association of Canada.FIGURE 14A: MEC’S WEIGHTED AVERAGE SCORES 1.8 1.6 1.4 1.25 1.2 LTL 1 TL 0.8 .73 0.6 0.4 0.2 0 Clarke Comox Day & Ross Hercules Nat ff QuickX YRC Reim Pacific Mountain Equipment Co-op – Directed Studies 2011
    • 27NEGOTIATING FUEL SURCHARGESJUSTIFICATIONThe case for the fuel surcharge is that as fuel prices rise, companies don’t have time to adjust theirfreight rates which equates to an unexpected loss of revenue. Customers understand this reasoningand in good faith hand over the price differential to the carriers in the form of a fuel surcharge. Inprinciple, the fuel surcharge is a perfect hedging strategy.The case against the current use of the fuel surcharge is threefold: carriers are secretive about theactual cost of the fuel used per trip; carriers are secretive about their fuel to operational cost ratio;and carriers are secretive about the actual fuel efficiency experienced by their fleets. Whenconducting this study, all of the carriers that were contacted stated that the fuel consumption dataused in fuel surcharge formulas was “proprietary.” Instead of using the revenue as a perfect hedgeagainst variation, carriers are using it as a bargaining tool where they mix the rate with their overallfreight rate creating a vague costing structure. This charge was designed to keep pace with risingfuel costs, not to provide an additional source of revenue. The application of this fuel surchargeshould ideally be transparent.MEC’S BARGAINING POSITIONThe ability of MEC to affect a carrier’s fuel surcharge rates is based on the importance of the MECaccount in the eyes of the carrier. This importance can be found by looking at the total revenue orvolume a carrier receives from MEC and dividing it by the carrier’s total overall revenue or volume.Without information about the specific size of a company it is not possible to accurately measureMEC`s bargaining position. The carriers that are examined in this study are large organizations withthe exception of Comox Pacific Express. Outside of company policies that carriers may have in placethat allow for flexibility, MEC’s bargaining position is low to medium. As a result, financial gains infuel surcharge negotiation can be expected to be small to medium.DISCLOSUREThe controversial element of the fuel surcharge formula is the operational cost percentage that isused to calculate surcharge rates. This element, derived from fuel consumption, is in fact anopportunity for MEC to express its concern outside of the purely economic realm. MEC has built apublic image as a leader in terms of environmental awareness, environmental reporting andsustainability. This well-known position allows for MEC to rationally express their goal of furtherreducing their carbon footprint to carriers. By not disclosing actual fuel consumption data, carriersare able to pass on their economic and environmental inefficiencies to MEC, which increases MEC’scarbon footprint, and creates additional expenditures. If a carrier were to disclose informationbased on environmental reporting requirements, MEC would not use this information to reduce fuelsurcharge rates, but instead would use the information to better track MEC’s actual carbonfootprint. This stated, the actual probability that carriers will disclose this information is currentlylow. MEC can look at other methods of assuring that carriers are making an effort to reduce theiremissions. Mountain Equipment Co-op – Directed Studies 2011
    • 28 IMPROVING EFFICIENCY Measuring the effect of transportation on the environment is an important step to understanding an organization’s social and environmental impact. The transportation industry as a whole in North America is aware of the expectations that society has of them to make changes where possible to lessen their impact in these areas. With the existence of changing technology, and programs to reduce fuel consumption and contamination, it falls to the individual carriers to make decisions to innovate or to enrol in programs as part of making an effort to improve operations. It falls on customers of these carriers to insist that they improve their operations. Making carriers more fuel efficient will in the long run equate to lower fuel surcharge rates. An example of a carrier making an effort to reduce fuel consumption, or being aware of their environmental impact is by enrolment in the SmartWay Transport Partnership. This program provides information“All SmartWay about how transportation companies can reduce fuel consumption andtransportation improve emissions. This program also provides financial assistance toprograms result in companies that are looking to upgrade to more environmentallysignificant, measurable friendly equipment. They also provide technical expertise whenair quality and/or considering equipment and practices that companies can use to reducegreenhouse gas fuel consumption. Though this is a US government program close toimprovements while 200 Canadian companies are currently partners (EPA, 2010). Of themaintaining or carriers studied Clarke, Day and Ross, National Fast Freight, and Quickimproving current X are already SmartWay partners. According to economic theory,levels of other reductions in cost experienced by carriers should result in loweremissions and/or operational costs which in turn will lower fuel surcharge rates beingpollutants.” charged in the future.(EPA, 2010) Reductions in fuel consumption that carriers can demonstrate to MEC through disclosure can be looked at as improvements in the fuel surcharge rate. These improvements can be measured and used to directly offset fuel surcharge costs from MEC’s perspective. For example, if a carrier were charging a TL rate of 25% and they were able to reduce fuel consumption by 25%, MEC would consider their fuel surcharge to be 20% when comparing it against other carriers. (For examples of SmartWay findings, see appendix (4)) Mountain Equipment Co-op – Directed Studies 2011
    • 29UPDATING THE BASE RATEAnother approach to minimize fuel surcharges is to ask that carriers update their base rates as tobetter reflect current market conditions. For example, the base rate currently being used by the FCAis based on a 1998 fuel price of 39 cents per litre. This rate could be updated to double that, wherethe differential is transferred on to the freight rate. This would allow for more of the fuel surchargethat is currently being charged to pass over to the freight rate where it can be better measuredagainst competitors and reduce the percentage value of the surcharge. An important question to askis how often a carrier updates their base fuel rate. Additionally the FCA suggests that “Rolling thecurrent fuel surcharge percentages into the rates” as a recommended form of ending fuelsurcharges. (Sirgay, 2011) It should be noted that base rates should remain below any probablefuture fuel price as to avoid having a trucking company simply up their profitability if the price offuel drops below the base rate.CHANGING CULTURECompanies in the TL market are moving towards fuller disclosure, such as using the FCA formula orpracticing full disclosure. As an example, the path that DCT Chambers is taking for fuel surchargedisclosure for its TL shipments will be explained. DCT Chambers specializes in hauling TL bulkproducts such as woodchips and mine tailings throughout B.C. and Northern Alberta. This companypractices surcharge disclosure where approximately 95% of DCT’s customers have their fuelsurcharge disclosed. It was indicated that “about 70%” of the other companies in DCT’s market arealso changing the way that they charge the fuel surcharge. It was also reported that it isn’t difficultfor companies to identify the true cost of fuel that a haul incurs. Therefore, calculating the actualvariation in fuel costs to customers is a simple operation. (See appendix (3))SUMMARYThis report has established a full understanding of the origins, composition, application, andindustry standards around the fuel surcharge issue. These sections were included to provide thereader with a solid understanding of the fuel surcharge.The report then provides the reader with a comparison of MEC’s seven selected carriers, with eightcomparable carriers from the industry. The report went on to establish a score on a benchmark forMEC, where MEC can gauge future performance. It also provided a method grading carriers scoringcarriers based on their R-Squared score. MEC will be able to use these methods to better measuretheir carriers performance in the area of fuel surcharges.The information that was provided in the negotiation section will allow the MEC logistics team totake new approaches to negotiating fuel surcharges with carriers. This will result in morefavourable outcomes. The approaches look at alternative solutions, where gains from negotiationcan be measured in cost reduction, fuel efficiency, and disclosure. All of which will lead to lower fuelsurcharges in the future.When all sections of this report are combined the user will acquire an overall understanding ofMEC’s fuel surcharge position, and be prepared for prospective negotiations. Mountain Equipment Co-op – Directed Studies 2011
    • 30RECOMMENDATIONSThere are two areas of recommendation that can be made through the findings in this section of thereport.Fuel Surcharge Information ManagementIt is recommended that MEC continuously monitor its fuel surcharge rate percentages as tomeasure their performance against the FCA benchmark. This should be done by creating a databasewhere fuel surcharge information can be stored, sorted, and analysed. The information that isneeded to establish performance levels are as follows: date of cartage, name of carrier, type ofshipment (LTL or TL), the carrier’s fuel surcharge rate, total freight charge, the Canadian averagefuel cost, and the corresponding FCA benchmark rate. Additionally, it is recommended thatelectronic invoicing be requested from all carriers to reduce or eliminate input time. Moreover, it isrecommended that the reporting period be on an annual basis.Benefits include:  The ability to measure MEC’s overall performance in the area of fuel surcharge.  The ability to gauge future carrier’s fuel surcharge rates, thereby qualifying them against MEC’s performance level.  The ability to identify discrepancies in charges and recuperate lost revenue.Negotiating Fuel Surcharge RatesIt is recommended that MEC develop a system to identify their bargaining position relative to eachof their carriers. Depending on the position, tailor made strategies should be implemented with thegoal of increasing fuel surcharge disclosure, as this will result in fair rates being charged to MEC. It is recommended that all new fuel surcharge rates be monitored against the FCA benchmark rateestablished in this study by using the “Fuel Surcharge Analysis Tool” that is on the CD attached tothis report. This will indicate to the logistics team whether the rate will have a positive or negativeimpact on their overall performanceIt is recommended that improvements in fuel efficiency be a main topic in any future carriernegotiations. Reductions in fuel consumption should carry the same weight as a fuel surchargediscount allowing MEC to improve its triple bottom line.It is recommended that as part of their carrier selection policy, MEC require potential new carriersto be “SmartWay Transport Partners”, and that carriers provide an annual report showing theresults of steps that the company has taken and will take to reduce fuel consumption. Mountain Equipment Co-op – Directed Studies 2011
    • 31 BIBLIOGRAPHYFCA. (2011, March). Retrieved April 13, 2011, from The Freight Carriers Association of Canada: http://www.fca-natc.org/INFO/FLCDN11.htmFuel Surcharges. (2011, May). Retrieved April 25, 2011, from ABF Website: http://www.abfs.com/resource/fuelsurcharge.asp?NCHK=SPLMCCT. (2011, May). Fuel Surcharge. Retrieved April 25, 2011, from CCT Canada Website: http://www.cctcanada.ca/?q=fuel_surchargeCon-way. (2011). LTL Fuel Surcharge Table . Retrieved April 28, 2011, from Con-way Website : https://www.con-way.com/en/tools_pricing/freight/fuel_surcharge/fuel_surcharge_table/EPA. (2010, May 5). Bacic Information. Retrieved April 28, 2011, from Smartway Partnership: http://www.epa.gov/smartwaylogistics/basic-information/index.htmExpress, R. (2011, April 26). Ranger Express. Retrieved April 26, 2011, from Fuel surcharge Table: http://www.rangerexpress.com/resources/fuelsurcharge/Manatoulin. (2011, May). Mtl Fuel. Retrieved April 25, 2011, from Manatoulin Transport website: http://www.manitoulintransport.com/cgi-bin/db2www/mtlfuel.mac/DomesticMaritime-Ontario. (2011, May). Fuel Surcharge History. Retrieved May 5, 2011, from M O Website: http://www.m-o.com/fuelsurcharge/FuelSurchargeHistory.htmMidland. (2011, April). Fuel Surcharge Page. Retrieved April 27, 2011, from Midland Transport: https://www.midlandtransport.com/FuelPrompt.aspxRoadrunner. (2011, May). Fuel Surcharge. Retrieved April 25, 2011, from http://www.rrts.com/Tools/FuelSurcharge.aspxSirgay, D. J. (2011, March). Fuel Cost Increases Frequently Asked Questions . PowerPoint Presentation. Ontario, Canada: The Freight Carriers Association Of Canada.US Energy Information Administration. (n.d.). Retrieved April 6, 2011, from Weekly Gasoline and Diesel Prices: http://www.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm Mountain Equipment Co-op – Directed Studies 2011
    • 32APPENDENCESAPPENDIX (1) FREIGHT EXPENSES 2008 TO 2010Freight Expenses (2007 - 2010) 2010Vendor Name 2008 2009 2010 Grand Percen Total tQUIK X TRANSPORTATION INC 30% 517,324 1,321,212 1,352,114 3,190,650MAPLE FREIGHT 21%PARTNERSHIP 749,107 729,159 942,098 2,420,364DAY & ROSS INC. 9% 1,614,862 351,644 412,094 2,378,600YRC REIMER 9% 427,746 452,862 409,291 1,289,900PANALPINA 5% 537,903 263,123 238,177 1,039,203NATIONAL FAST FREIGHT 4% 191,262 185,689 198,269 575,220FEDERAL EXPRESS 3% 91,885 113,340 148,710 353,935CLARKE INC. 3% 130,284 137,057 122,017 389,358PUROLATOR COURIER LTD. 2% 102,460 90,643 92,649 285,752COMOX PACIFIC EXPRESS LTD. 2% 55,568 92,025 147,593GREENLIGHT COURIER LTD. 2% 78,721 69,821 79,720 228,263UNITED PARCEL SERVICE 2% 101,727 67,021 76,936 245,685HERCULES 1% 117,199 106,996 58,022 282,218 Mountain Equipment Co-op – Directed Studies 2011
    • 33APPENDIX (2) WEIGHTED AVERAGESWeighted Average Scores Vs. the FCA BenchmarkLTL % Score Weight SpendingDAY & ROSS INC. 9.3 0.96 32%YRC REIMER 9.2 1.46 32%NATIONAL FAST FREIGHT 4.5 1.15 15%CLARKE INC. 2.8 1.56 10%COMOX PACIFIC EXPRESS LTD. 2.1 1.27 7%HERCULES 1.3 1.38 4%Total 29.2Weighted Average LTL = 1.247TL % Score Weight SpendingQUIK X TRANSPORTATION INC 30 0.71 72.5%DAY & ROSS INC. 9.3 0.82 22.5%COMOX PACIFIC EXPRESS LTD. 2.1 0.64 5%Total 41.4Weighted Average TL = 0.7318APPENDIX (3) KEY INTERVIEWSDave Sirgey (President)Freight Carriers Association of CanadaThis interview took place on April 14th at approximately 1:30 pm. Mr. Sirgey provided informationas to the formula for the FCA’s weekly Canadian and Cross Border fuel surcharge rates. Mr. Sirgeyalso provided an explanation as to the FCA’s recommended negotiating policies around the fuelsurcharge issue. National Fast Freight, Quick X, and YRC Reimer are all members of this association.Greg Kolesniak (Policy Analyst, MPP)BC Trucking AssociationThis Interview took place on April 12th at approximately 3:00 pm. Mr. Kolesniak indicated that theassociation recommends a basic formula to calculate fuel surcharges to its members. He indicatedthat the association used to publish a rate table for its members though the table was abandonedbecause it was no longer relevant. Mr. Kolesniak also indicated that a new issue that the associationis promoting is the recovery of HST now applied to fuel. He stated that the industry intends to makethis an invoiced item and pass it on to customers. Mountain Equipment Co-op – Directed Studies 2011
    • 34Ken Martin (Quality Assurance & Compliance Manager)Van-Kam FreightwaysThe Interview with Mr. Martin also took place on April 12th at 1pm. Mr. Martin was not permitted toshare information as to how his company calculated its fuel surcharge stating that the informationis “Proprietary”. He did however provide information as to the history of fuel surcharges as well asinformation about the now defunct Motor Carrier Commission’s (MCC) role in the development offuel surcharge policy. Mr. Martin also indicated that under the MCC’s guidelines that assessorialactivities that required power assistance from the motor of a vehicle such as the use of pumps orcranes could have a fuel surcharge attached to the cost of the activity.James Patterson (Marketing & Project Manager)DCT ChambersThis interview took place on April 12th at 10 am. DCT Chambers specializes in hauling TL bulkproducts such as woodchips and mine tailings throughout B.C. and Northern Alberta. Mr. Pattersonprovided information about how his company calculates its fuel surcharges. He also explained theirpractice of actual fuel cost and surcharge disclosure. He stated that 95 % of DCT’s customers havetheir fuel surcharge disclosed. He indicated that “about 70%” of the other companies in DCT’smarket are also changing the way that they charge the fuel surcharge. Mr. Patterson also indicatedthat it isn’t difficult for companies to identify the true cost of fuel that a haul incurs, and as sopassing on the actual variation in fuel costs to customers is simple operation.Other Parties contacted:  Concorde  Challenger Motor Freight  Speedy Transport  Bison TransportAPPENDIX (4) SMARTWAY TRANSPORT PARTNERSHIP: INNOVATIVE CARRIERSTRATEGIESTruck and rail transportation provides a cost-effective means to transport much of America’s freight.Truck and rail fleets can take simple actions to make ground freight more efficient and cleaner for theenvironment. The following technologies and strategies can help reduce fuel consumption andemissions from freight trucks.Idle ReductionSeveral technologies and practices can be used to assist drivers in reducing truck idling. Reducing oreliminating prolonged idling of long-haul trucks can save up to 1,000 gallons of fuel per truck eachyear, reduce pollution emissions, and lower engine maintenance costs. The use of one of several idle Mountain Equipment Co-op – Directed Studies 2011
    • 35control technologies such as auxiliary power units (APU) and truck stop electrification (TSE) thatprovides heat, air conditioning, and electrical power can minimize fuel consumption."A Glance Clean Freight Strategies: Idle Reduction”Improved AerodynamicsIn recent years, manufacturers have focused considerable attention on improving truck tractoraerodynamics and have therefore achieved significant gains in fuel efficiency. Using a streamlinedprofile tractor with aerodynamic devices (roof fairing, cab extenders, and side fairings) can reduce fuelconsumption up to 600 gallons and eliminate over five metric tons of greenhouse gas emissions peryear compared to a typical classic profile tractor. Trailers can be improved through aerodynamicssimply by reducing the tractor-trailer gap, securing loose tarpaulins, and on flatbed trailers, arrangingcargo to keep the outline of the total load as low and smooth as possible.Improved Freight LogisticsImproved freight logistics can optimize trucking operation efficiency, saving fuel and increasing profitsfor trucking companies. Logistics strategies include load matching, more efficient routing andscheduling of vehicles, and improved receiving policies. Better load matching, which ensures fulltrucks, improves the efficiency of trucking operations, allowing carriers to carry the same amount offreight with fewer vehicle miles of travel. Not only does this help profitability, but it reduces fuel useand emissions. Trucking companies can make use of routing and scheduling software to structuremore efficient truck routes. Changes to loading dock and receiving policies, such as allowing for earlytruck arrivals, lets trucking companies more productively utilize their vehicle fleets, thereby savingfuel and increasing profitability. For a long-haul carrier that operates 15 percent of miles without aload, reducing empty mileage by just one percent can over 100 gallons of fuel and eliminate over onemetric ton of greenhouse gas emissions per truck each year.Automatic Tire Inflation SystemsAutomatic tire inflation systems monitor and continually adjust the level of pressurized air to tires,maintaining proper tire pressure even when the truck is moving. Automatic tire inflation systems canextend tire life by 8 percent. Installing an automatic tire inflation system on the truck drive and traileraxles can save over $200 per year in tire replacement costs and tire pressure inspection time.Automatic tire inflation systems can reduce fuel consumption by over 100 gallons per year for a typicalcombination truck, resulting in annual cost savings of about $170 and the elimination of over onemetric ton of greenhouse gas emissions.Wide-base TiresWide-base tires on new production trucks can reduce rolling resistance, improve fuel economy, andoffer substantial fuel cost savings. Wide-base tires can improve fuel economy by 2 percent or morecompared to equivalent dual tires. By using wide-base tires, a typical long-haul truck could save over400 gallons of fuel per year, resulting in cost savings of over $600, and reduce greenhouse gasemissions by four or more metric tons annually. A single wide-base tire costs about the same as twoequivalent dual tires and a single wide-rim wheel costs less than two standard wheels. If wide-basetires and wheels are installed on a new truck, the initial cost savings can reach $1,000.Driver TrainingDriving practices can have a large impact on truck fuel economy. Even highly experiences drivers canenhance fuel economy using simple techniques like cruise control, coasting whenever possible, limitinguse of cab accessories, smooth and gradual acceleration, progressive shifting (up shifting at the lowestrpm possible), reducing maximum freeway speeds, and limiting truck idling and stops. Driver trainingcan reduce fuel consumption by 5 percent or more, saving more than $1,200 in fuel costs andeliminating about eight metric tons of greenhouse gas emissions per truck each year. For a typicallong-haul truck, the annual fuel cost savings could recover the initial cost of driver training within two Mountain Equipment Co-op – Directed Studies 2011
    • 36years.Low-Viscosity LubricantsLow-viscosity synthetic and semi-synthetic lubricants reduce friction losses in a truck’s drive train,transmission, and its engine, saving fuel and reducing emissions. Synthetic transmission and axlelubricants can improve fuel economy by at least 0.5 percent in the summer and two percent in thewinter. Replacing all conventional transmission lubricants with low-viscosity products saves fuel withlittle or no additional cost. The combined effect of low-viscosity synthetic engine oils and drive trainlubricants can improve fuel economy by about three percent, saving nearly 500 gallons of fuel andeliminating five metric tons of greenhouse gas emissions per year for a typical freight truck.Reducing Highway SpeedTruck fuel economy drops significantly as speeds rise above 55 mph. By limiting top highway speeds,trucks can save fuel, reduce emissions, and prolong engine life. For a typical long-haul truck, reducinghighway-driving speed from 70 mph to 65 mph could save nearly $1,500 in fuel costs and eliminatenearly ten metric tons of greenhouse gas emissions each year. Because engine life is directly relatedto the amount of fuel burned, reducing driving speed can save on engine repair costs. Maximum truckdriving speeds can be limited through electronic engine controls, driver-training programs, or incentiveprograms that reward drivers for staying within set limits. Nearly all new truck engines in use todayare electronically controlled and the cost of changing the maximum speed setting on these engines isnegligible.Weight ReductionUsing components made of aluminum or other lightweight materials can reduce the empty truckweight, known as the “tare weight,” thereby improving fuel efficiency. Truck tractors can reduceweight by using components such as cast aluminum alloy wheels and aluminum axle hubs. Thepotential for weight savings is even greater in the truck trailer, using lightweight components such asaluminum roof posts, upright posts, and floor joists. Light weight components can reduce truck weightby as much as 3,000 pounds. This weight reduction could save 200 - 500 gallons of fuel and reducesgreenhouse gas emissions by 2 to 5 metric tons per truck annually.Intermodal ShippingUsing intermodal ground freight transport makes it possible to combine the best characteristics oftrucked and railed freight, especially for shipments over 500 miles. Using innovative intermodaloptions like trailer on flat car (TOFC) and container on flat car (COFC) can improve efficiency and savemoney. For shipments over 1,000 miles, using intermodal transport can cut fuel use and greenhousegas emissions by about 65 percent, compared to a truck-only move.Hybrid Powertrain TechnologyHybrid vehicles have two propulsion power sources, making it possible to capture energy otherwiselost during braking and provide boost to the main engine. Hybrid vehicles can provide roughly $2,000in annual fuel savings when used in stop and go freight applications like parcel delivery service.ADDITIONAL RESOURCES FOUND ON ACCOMPANYING CD. 1. Excel information tables and workbook Mountain Equipment Co-op – Directed Studies 2011
    • 372. PowerPoint presentation provided by the Freight Carriers Association of Canada3. Fuel Surcharge Analysis Tool Mountain Equipment Co-op – Directed Studies 2011