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Rising Diesel Prices Mean Warehouse and Distribution Managers Need to Negotiate Hard with Carriers

Oil prices are rising sharply, and that unwelcome trend will affect how much warehouse and distribution center operators will pay for shipping. An article from Distribution Center Management newsletter offers seven strategies for keeping costs under control.

(Boonton, NJ, February 3, 2011) — Most observers expect fuel prices to continue to rise as the worldwide economy recovers. As diesel prices soar, beware of carriers who try to pass on more than their fair share of the increase.

Depending on how they're structured, fuel surcharges can be fair or they can be a costly gimmick, says Ron Grossman, principal of Argee Logistics.

In the February issue of industry newsletter, Distribution Center Management, Grossman notes that if you make the wrong call, you could find yourself paying your carrier hundreds of dollars in surcharges for each bill of lading.

Grossman says you should be especially wary of any surcharge that's calculated as a percentage rather than on a per-mile basis.

"If it's a percentage, there's no logic to it," Grossman says.

George Yarusavage, principal at Fortress Consulting LLC, explains the percentage pitfall this way: Say you're paying a carrier $1,500 to move a truckload 500 miles, and the base price for diesel in your agreement is $2. If diesel rises 10 percent to $2.20, and you've agreed to pay your carrier a surcharge of half the increase, you pay an extra $75 for the truckload.

But look at the carrier's true cost: If the tractor-trailer gets 5 mpg, the carrier's cost for 100 gallons of fuel went up by only $20.

"You paid him a lot more than $20," Yarusavage says. "That's a trap a lot of people can fall into."

Grossman and Yarusavage provide additional strategies for mitigating the effects of rising petrol prices in the February issue of Distribution Center Management.

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For more than 40 years, Distribution Group publications have helped distribution center and warehouse managers increase productivity, cut costs, and meet increasing customer demands. Distribution Group publishes Distribution Center Management newsletter, books and reports, and a free e-newsletter.

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