1. Risk Sharing in Contracts: The Use of Fuel Surcharge Programs
Author: Madhavi Kanteti and Jordan Levine
Advisor: Dr. Chris Caplice
MIT SCM Research Fest
May 24-25, 2011

2. Discussion Points:
We will be discussing fuel surcharges in the truckload (TL) industry.
Agenda
Introduction to the truckload industry
Research scope and methods
The benefits and limitations of an industry standard FSC
Main Points
The aggregate or “all-in” rate is the critical metric within the transportation industry.
Standardization of FSCs can benefit the industry.
Standardization can only be achieved with collaboration.
May 24-25, 2011
MIT SCM ResearchFest

3. The US Trucking Industry
$688 billion1: The U.S. Transportation Industry in 2009 (~5% of GDP)
87%2 of all goods delivered in the U.S.
84%2 of the nation’s freight bill
1: Wilson, R. (2010, June 9). 21st Annual State of Logistics report.
Presented by CSCMP and PENSKE, Slide 2.
2: Trego, T. (2008, December). An Analysis of the Operational Costs
of Trucking. The American Transportation Research Institute, (pp ).
May 24-25, 2011
MIT SCM ResearchFest

4. Invoice Between a Shipper and Carrier
Load Number Unique Identifier
Pick Up Date No later than date June 2nd, 2010
Pick City/State/Zip Origin of Lane Dallas, TX
Drop City/State/Zip Destination of Lane Baton Rouge, LA
Temp Dry-Van / “Reefer” Dry-Van
Mode Truckload (TL) / Less-than- TL Truckload(LTL)
Mileage Distance Miles
Line Haul Rate Fixed Component. Decided $ via a Bid Process (1-2 Years) or on the Spot Market
Fuel Surcharge Variable Component. $ Decided via the Bid Process.
May 24-25, 2011
MIT SCM ResearchFest

5. Research Scope
Fuel Surcharge (FSC) Schedule established as a risk sharing contract between carrier and a shipper
Addendum to the line-haul rate.
How effective is the current FSC structure?
Can the FSC structure be modified by either party with a profit motive?
Most commonly employed FSC method in the TL trucking industry:
May 24-25, 2011
MIT SCM ResearchFest

6. FSC Equation Efficiency is a proxy for truck efficiency.
It can be thought of as a “Scale”
or the Slope of FSC.
FSC is paid by the shipper when the
fuel price crosses the trigger point,
also called the peg.
American Trucking Association (2011). American Trucking Trends (pp. 63).
May 24-25, 2011
MIT SCM ResearchFest

7. NULL HYPOTHESIS Modifications to an FSC Structure are Revenue Neutral.
Line Haul Rate
$ $ $900
Fuel Surcharge
$ $ $90
Aggregate or “All-In” Rate
$ $ $990
May 24-25, 2011
MIT SCM ResearchFest

8. Methodology Carrier Interviews
Mathematical Analysis (Simplify and Quantify)
Shipper Interviews
Carrier Survey
800+ Targeted Invitations
122 Responses
85 Complete Responses
Carrier Interviews
May 24-25, 2011
MIT SCM ResearchFest

9. Null Hypothesis: Not Rejected Line-Haul Rates and FSCs Compensating
Conclusions Modification of an FSC for profit margin increase is not recommended. Modification of an FSC to an industry standard has significant advantages.
May 24-25, 2011
MIT SCM ResearchFest

10. Trigger Point = $0.00 Support: 52% of 89 Carriers. Opposition:
The positive impact made by the change does not out-weigh the one-time administrative cost of changing the system.
It will significantly influence their business in a negative way. (Owner-Operator carriers with limited drivers and capital equipment)
May 24-25, 2011
MIT SCM ResearchFest

11. Escalator Impact
Carriers are indifferent to a “Generous” FSC and an “average” FSC.
Carriers try to avoid a “Below Average” FSC.
May 24-25, 2011
MIT SCM ResearchFest

12. Industry Standard Escalator
A “Generous” escalator does not lead to higher service. Also, causes some carriers to reduce their line-haul which leaves them exposed to a drop in fuel price.
A “Below Average” escalator can lead to service failure.
Difficult to set a point standard. As such, a range might be more appropriate.
Further Research: Shippers with private fleets tend to have more generous/accurate FSC programs.
May 24-25, 2011
MIT SCM ResearchFest

13. Benefits of a Standard Avoidance of the Winner’s Curse.
Winner’s Curse: The winning bid exceeds the value of the auctioned asset.
Decoupling of Transportation Costs and Fuel Costs.
Note: Collaboration amongst the shipping community is required.
May 24-25, 2011
MIT SCM ResearchFest

14. Summary The aggregate or “all in rate” is the critical metric.
Risk sharing contracts should be simplified to the greatest extent possible.
Collaboration with trading partners/competitors to establish standards can increase efficiency.
Results could be applicable to the airline and LTL industries.
May 24-25, 2011
MIT SCM ResearchFest