The good, bad and ugly: Buyers voice frustration with fuel surcharges
By David Hannon, Managing Editor -- Purchasing, 1/12/2006
When buyers look back on 2005, it may well be remembered as the "year of the surcharge." Buyers reported increases in the level and number of surcharges paid, but most notably in fuel. Anything that had to be shipped, trucked or transported saw a fuel surcharge attached to it in 2005. In fact, the trend has progressed beyond materials today—buyers report fuel surcharges from any type of service provider that uses fuel (limousines, couriers, bakeries, you name it). Buyers are concerned that such fees will be sticking around long after fuel prices come back to earth.
The actual definition and formulas for calculating a fuel surcharge vary greatly, depending on who’s implementing it. For example, in a recent informal survey of buyers, surcharges were reportedly coming from both material suppliers as well as transportation providers (in some cases both, providing a "double whammy" effect).
In addition to the economic impact of such charges, the lack of consistency and standard in calculating has many buyers scratching their heads. "These are based on fuzzy calculations," says a buyer at a healthcare services company. "Generally there is an assumption that the difference between contract and ship charges were made on a fuel-rate assumption and the current fuel cost is greater than the profit. A fuel surcharge is then estimated to be that difference to protect profit."Fuzzy indeed. Corey Timm, a purchasing agent at Milltronics Manufacturing in Minnesota says his surcharges are typically a straight percentage. "For example, one raw steel supplier of ours charges 2-12% but another has tried to sneak it into the material cost, which for quoting reasons is a mistake." Another buyer says a flat charge based on a sliding scale has pushed prices for materials such as glass up to astronomical levels.Some buyers have a clear view of what it will take for surcharges to abate or disappear, while others do not. "For us, diesel has to drop below $2.20 per gallon for the fuel surcharges to disappear," says one purchasing director. "The fuel surcharges will be taken away when the index we’re tied to approaches neutral compared to the contract effective date," says another supply chain professional. Timm tells Purchasing, "It really depends on the greed of the supplier."
Are fuel surcharges negotiable? That depends on who you’re asking. Several survey participants responded with: "We were told these were non-negotiable." But other buyers have tried to negotiate the fuel surcharges from suppliers or transportation providers with mixed results.
"We saw favorable results by negotiating using a formula based on BLS average price data for automotive diesel fuel," says the buyer at the healthcare services supplier. "We have simply refused to pay a few of the surcharges, notably the ones that were based on 'winter heating costs' from suppliers," says another buyer. "Some have given in, but many tell us these are real costs that they have to pass on to keep supplying us," says a purchasing manager for a Canadian company. Buyers report that their own companies are taking different strategies in passing on surcharges. Most tell Purchasing they are not trying to pass on the surcharges. One buyer at a building products maker says her company supplies a major home products retailer and they will not accept passed-on costs. "If you can’t pass them on, then you’re the real financier of the surcharges," Timm says. When asked if the "year of the surcharge" has changed the way they approach their suppliers, buyers issued a wide swath of responses, from "there’s nothing we can do," to "we’re going to contract with more suppliers going forward," to "only that we’ve made some choice comments to a few of our suppliers."
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