Strengthening your supply chain one link at a time.
Once a network solution is agreed upon and recommended, it is essential to run a few test scenarios to see how sensitive the result is to factors such as growth rates, production changes and fuel increases. A fuel sensitivity is typically one of the scenarios I will construct to analyze the impact to the proposed network solution. Geopolitical events always spark this question and have become increasingly important over the past few years.
The first step to perform this analysis is understanding the impact oil prices have on transportation rates, more specifically the price of diesel fuel. The U.S. Energy Information Administration provides various data points, but the most useful that I’ve found over my years in network modeling is the graphic below. From this we can see that crude oil accounts for 45% of the price of diesel fuel as of February 2024. This percentage varies so I try to get the most current snapshot of this data point.
Additionally, for this analysis you would need the current price of oil per barrel. West Texas Intermediate (WTI) is the benchmark used for oil prices in the US so that is what I use vs Brent Crude which would be more useful as a benchmark in Europe for example. Currently the price of WTI is approximately $85/barrel. Finally, the price of diesel fuel per gallon is required and that stands at $4.48 (national average).
With these three datapoints you can adjust the transportation rates in your network model to construct the fuel sensitivity. Depending upon the current price of oil there are various levels you could test – $50/barrel, $100/barrel, $200/barrel. Sensitivity analysis can become limitless so I usually test a level that seems possible in the next five years given current prices. Given the current price of $85/barrel I will illustrate the impact to transportation using an assumed oil price of $150/barrel – an increase of 76%.
Both TL and LTL rates have a fuel surcharge component (FSC) which I would adjust for this analysis. FSC is based on diesel prices published by the U.S. Department of Energy and can vary by carrier with respect to the levels set and the update frequency. With respect to TL, assume the FSC is $0.67 at $4.48 diesel price/gallon. I would apply the 76% increase in oil to 45% of the current diesel price to get a revised diesel price of $6.01. The TL FSC typically increases $0.01 per a $.05 change in diesel price, therefore, the new FSC is $0.98 ((6.01-4.48)/.05). Fuel surcharges for LTL rates are typically a percentage of the base rate, which in my example was 33%. The increase in the LTL FSC correlates to the increase in the TL FSC which implies a new LTL FSC of 48.5% (.98/.67 * 33% rounded to the nearest 0.5%).
With new fuel surcharges calculated I can update the network model rates to see the impact. The ratio of TL to LTL shipments to customers and the density of those shipments plays an important role in locating the warehouses so the fuel sensitivity doesn’t necessarily change warehouse locations. It does place a greater emphasis on transportation costs vs facility costs so an additional warehouse may be justified if transportation savings (at these elevated levels) surpass the fixed cost of adding that warehouse.
Note that other modes such as parcel (FSC typically quoted as a % of base similar to LTL) and ocean (I’ve seen data suggesting 50% of the ocean rate quoted relates to the price of fuel) were not illustrated in this example, but could play an important role in the network you’re evaluating. Ideally the fuel sensitivity doesn’t change the proposed network drastically to minimize the impact on network strategy decision making.
—Dan Gunter, St. Onge Company
