Engine, fuel costs are top concerns
Logistics buyers are concerned about cost impacts of new EPA regulations.
David Hannon -- Purchasing, 11/17/2005 2:00:00 AM
The trucking industry and logistics buyers alike are readying for the next round of Environmental Protection Agency (EPA) antipollution rules that go into effect in 2007, requiring trucking providers to use new engines and fuel. But in today's market of tight logistics capacity and record-high fuel and freight costs, many freight buyers are concerned about the additional cost "going green" may add to their already record-high rates.
There are two major components to the 2007 regulations—one addresses the engines themselves and the other relates to the fuel used in the engines. The new rules require trucks to use new, more environmentally friendly engines and ultra-low-sulfur diesel fuel to achieve a major reduction in the amount of pollutants created by on-highway engines. According to EPA, the engines will cut harmful pollution by 95%. Engine manufacturers will have flexibility to meet the new standards through a phase-in approach between 2007 and 2010.
Sulfur in diesel fuel must be lowered to enable modern pollution-control technology to be effective on these trucks and buses. The agency will require a 97% reduction in the sulfur content of highway diesel fuel, cutting it from its current level of 500 parts per million to 15 parts per million. The fuel provision will go into effect in June 2006 and will be phased-in through 2009. The program also includes various flexible approaches, including additional time for some refiners and special provisions for small refiners.
Engines
Trucking companies will need to invest in new engine technology to comply with the regulation, just as they did when the last round of regulations went into effect in 2002. One of the major changes in the engine technology is the inclusion of a porcelain trapping mechanism that will catch a host of pollutants before they are released into the atmosphere. The new technology will increase maintenance costs, since the new trap may have a short life and produce a significant amount of engine heat as well. In fact, there is some concern that the increased level of heat may force shippers and carriers to alter their loading-dock setups and processes.
Trucking companies went through a similar engine upgrade in 2002. Because of their experience and success in that transition, they are less concerned about the possible impacts on service and reliability this time around. "When we went to the new engines in 2002, our fuel efficiency was impacted," says Doug Duncan, president and CEO of FedEx Freight in Memphis, Tenn. "But we worked with engineers to tweak gear ratio mixtures and otherwise improve the technology and we have stabilized them. I don't see this as a 'doomsday' cost issue. I think we can deal with it."
Randy Mullett, vice president of government relations for logistics firm CNF in San Mateo, Calif., says the upgraded engines in 2002 cost up to $10,000 more apiece. The new 2007 engines have not been released for testing yet, but the Con-Way division of CNF is expecting to get engines by the end of this year or early 2006 to begin testing.
Fueling concerns
Perhaps a bigger concern than the engines themselves is the fuel that will be used in the engines. To improve environmental impact, the engines will run on ultra-low-sulfur diesel fuel.
"That becomes problematic for two reasons," says Mullett. "First, our refining capacity especially in the wake of the recent hurricanes, is down significantly. And secondly, because the pipelines currently carry a variety of oil products, they may have trouble transferring the ultra-low-sulfur diesel through these pipelines cleanly. There is so much sediment on the walls of the pipelines that by the time it gets to the user, it no longer qualifies as ultra-low -sulfur diesel."
These two concerns create some uncertainty about the supply of the ultra-low-sulfur diesel required to run these engines. Bill Fowler, director of maintenance at Con-Way, points out that the new engines will not be able to run on existing diesel because it would be like "putting leaded gasoline into your car's unleaded engine. It will damage the engine significantly." The new fuel is also expected to be expensive, which will create more cost in the supply chain that may end up on shipper's bills in the form of surcharges.
But Duncan says the cost of such initiatives should not be an excuse for companies to avoid it. "Yes, the new diesel fuel costs will be higher and the engines will cost us more," Duncan says. "But I think people in the industry may be using the costs as an excuse hoping they won't have to do it. The fact is the environmental improvements are here to stay. We as a society are behind those and we all in business have to accept that fact and play our role for the greater good."
Shippers and freight buyers are mixed in their opinions as to how much impact the switch will have on logistics service levels and costs. Jeff Johnson, vice president of North American logistics and transportation at high-tech supplier Ingram Micro of Santa Ana, Calif., says he expects the switch to new engine and fuel to increase carriers' costs, which will translate into upward cost pressure in 2007. But he says he has not come across any concerns about capacity or service levels in discussions with carriers.
Chris Osen, vice president of supply chain at MeadWestvaco in Richmond, Va., says he hasn't heard as much buzz about the move to the 2007 engines as he did during the move to the 2002 engines. "But I think that may be because the fuel surcharge issue is overshadowing any other longer-term issues at hand," he says.
Chip Purcell, director of global purchasing and supply chain at Quaker Chemical in Conshohocken, Pa., echoes those thoughts, saying: "At this point we aren't expecting any impact from the switch to new engines, but it could simply be that the issue is outside the industry's event horizon right now."
John Gentle, global leader of transportation affairs and processes at Owens Corning, says his major concern is over the supply of ultra-low- sulfur diesel. "We expect no change in the level of service from carriers [after the switch]," he says. "But we expect fuel to increase both in cost and in distribution cost." Owens Corning is hedging its fuel buy and plans to continue that strategy through the transition.
Getting smart
The EPA has not simply left the logistics industry to itself on the issue of environmental improvements though. A collaborative partnership between the EPA and the freight industry called the SmartWay Transport Partnership was "designed to increase energy efficiency while significantly reducing greenhouse gases and air pollution." According to Suzanne Rudzinski, director of transportation and regulatory practices at the EPA, the program encourages shippers and carriers to commit to environmental improvements in their operations. Those that achieve their goals in these areas receive the right to use the SmartWay logo, advertising their participation in the program.
The program involves mostly trucking carriers (and seven class-one railroads) that commit to improving their fuel economy and reducing their greenhouse gas emissions. Duncan says FedEx Freight has been a participant and supporter of the program since its inception and has seen benefits in areas of anti-idling technologies and retrofitting engines to gain compliance with the 2002 regulations.
But there are also shippers in the program as well. Shippers must commit to ship a certain percentage of their product with SmartWay carriers. For example, furniture maker IKEA was a charter member. Since joining, the company is:
-
Using new flat packing and vehicle loading with patented technologies to ensure maximum load optimization and minimal waste.
-
Increasing intermodal shipping so that 20% of all freight is delivered by rail.
-
Shipping 90% of its ton-miles with 16 SmartWay partner carriers.
By 2012, the SmartWay Transport Partnership aims to save between 3.3 and 6.6 billion gallons of diesel fuel per year which translates to eliminating between 33-66 million metric tons of carbon dioxide emissions and up to 200,000 tons of nitrogen oxides emissions per year.
Go for the Surcharge, not Price Increase
04/03/2008Diesel fuel forecast revised
05/17/2006Buyers are balancing cost and risk
07/16/2008Examining True Costs
04/06/2005
Now Playing: 