As shippers in the oil and gas industry seek supply chain optimization, current conditions may provide a rare chance to negotiate better prices and reduce trucking costs. The cost of oil, and corresponding diesel prices, are at levels not seen in recent history. Combined with the growing use – and coming federally mandated installation – of electronic on-board recorders (EOBRs), as well as the impact of other technology to help calculate shipping costs, shippers could enjoy the upper hand in carrier negotiations.
The drop in oil prices has affected a broad swath of the oil and gas sector. One affect has been a flip in supply and demand. With lower prices, oil companies are drilling fewer wells, which has translated – for the moment – to fewer loads of well pipe being trucked to well fields. Fracking has been less affected, with only slightly fewer loads of sand and tankers of water being hauled. With trucks in ample supply, customers could gain some negotiating leverage.
Notwithstanding a 30% drop in diesel costs from $4 to $2.75 a gallon, greater supply of available trucks and even the increasing use of EOBRs, shippers haven’t enjoyed price reductions. Why? Many companies aren’t savvy in rate and relationship management, tactics and strategies that are core competencies of lead logistics and 3PL providers. Where customers may send a letter to a carrier requesting rate cuts, aggressive rate management negotiations can produce more favorable returns.
Early 2015 might present a rare chance to demand better rates. As a shipper, what should you ask?
- Incorporate a fuel scale mechanism into your carrier contracts. These sliding indices apply a surcharge to the linehaul charge that adjusts as fuel costs rise or fall. These often adjust weekly, based on the national average. This is common practice in other industries; oil and gas customers have been slow to embrace the practice. If your trucking rates have not declined significantly in the past 3 months, then you are missing an opportunity for significant savings.
- Demand the use of electronic on-board recorders. EOBRs and related software allow customers to analyze vehicle tracking data and better optimize their shipping. Some large energy companies already require their carriers to use EOBRs. Guesswork will no longer be an option by 2017, when the Federal Motor Carrier Safety Administration (FMCSA) will require electronic logging devices and EOBRs in every truck. The same devices FMCSA will require to log hours of service, customers can use to demand rate-changing data.
- Expect even more data. With the correct integration, devices like the PeopleNet onboard computer will provide a host of data that will lead to more accurate billing from carriers. For example, customers currently are paying tens of millions of dollars in detention. With the right technology onboard, one customer saved $100,000 in detention in the first week just by going by the clock. While some have balked at the management fees associated with engaging a 3PL to capture and analyze the data, the cost savings can far surpass the fees charged.
With lower fuel costs, more trucks available and current and coming improved reporting capabilities, shippers can start driving rates down. To be sure, there will be a mixed bag of results. Bigger carriers will resist. Some smaller carriers will claim costs will prevent adoption of new technology until it’s required.
Rarely, though, has the chance to negotiate potentially significant rate changes presented itself. Whether by themselves or with their 3PL partner, shippers should seize the chance now so favorable agreements are in place when the market once again turns in carriers’ favor.
Written by Will Taylor
Will Taylor is Senior Director of Engineering in the Oil & Gas Solutions group at Ryder. Having worked in the transportation for 21 years, Taylor views the industry as a puzzle where the right solution can help customers realize value in safety, service and savings.
