Fuelling the argument

For many of us, the New Year celebrations were followed by a headache. For the UK freight industry, the year began with a hefty £95 million headache thanks to the 1 January increase in fuel duty. The Freight Transport Association (FTA) says the rise - the third since April 2010 - has pushed diesel prices to within 4p per litre of the all-time highs of July 2008, just prior to the recession, when oil prices hit $145 per barrel. Diesel accounts for more than one third of the running cost for a typical truck. The bulk diesel price has fluctuated dramatically in the past 18 months: in July 2008, it was 107p per litre (excluding VAT); by the end of October 2008, it was 88p. Just last month, it was back up to 104p - and it is still rising. The FTA's chief economist Simon Chapman accuses the government of exploitation: "The chancellor is treating the road freight sector as a bottomless well from which cash can be drawn to bolster the public finances... For the UK to trade its way out of recession, its supply chains needs to be cost competitive and its roads must provide reliable routes to market. Neither is achieved by a tax base spiralling well above inflation and a transport network starved of investment." As he points out, diesel is not an optional extra for industry. He says it already costs £3,800 more per year to run an articulated truck and the latest fuel duty increase will add a further £1,200 to that bill. Chapman says government often uses environmental reasons to justify tax rises, but says the increases only really affect the behaviour of private motorists since lorries are a necessity if we all want our shelves stocked. "Ironically, raising fuel tax simply reduces the amount of cash the industry has to invest in eco-driver training and newer, cleaner engines. Fuel duty is not a lever that can be pulled to reduce the logistics sector's carbon emissions." Suggesting otherwise, he adds, is simply "greenwash". Rising fuel prices, however galling, are nothing new. It's for this reason that the third party logistics sector has had a fuel price escalator mechanism built into contracts for many years now, says Phil Shaw, business unit director for Norbert Dentressangle Logistics UK (NDL). "It's a mature mechanism and fairly universal," he says. "It's the industry norm; at least 95% of contract distribution arrangements have a fuel price adjustment element built into them." Adjustments are made against a benchmark, usually a recognised model such as that supplied by EnergyQuote/John Hall Associates. Shaw says the adjustment frequency varies according to the terms of the contract; it could be monthly, but most are reviewed weekly. The key for NDL's manufacturing customers is that, as with shares, prices can go down as well as up: "It does work both ways. When the prices dip, that is taken into account." When the recession kicked in, late in 2008, and fuel prices dropped steeply, that benefit was passed to customers - as it was last year, says Shaw, when fuel prices dipped briefly again. Manufacturers with their own trucks may find it harder to seize any benefits of fuel price reductions, however fleeting (pardon the pun) they may be. So is it easier for third party logistics providers to cushion their manufacturing customers to some extent against fuel price fluctuation? "There is better buying power, undoubtedly," says Shaw. "There are lots of ways to buy fuel in a sophisticated way to mitigate risk [of price fluctuations] and that becomes easier if you're buying more volume. If you run three or four vehicles, you may have a tank in your yard and that tank lasts you a month. When you need to refill the tank, the price may have risen dramatically. But however long the period between tank refills, many businesses will also use fuel cards at the forecourt, so they are exposed to price changes on a day to day basis." FTA's Simon Chapman backs this up: "Larger 3PLs may be better placed to purchase their fuel in bulk than smaller companies and as they will be able to take a broader view of business, their ability to link up the supply chain of customers into a more efficient delivery regime is also considerable." Shaw spent several years as a logistics consultant in industry before joining NDL and he has some interesting observations about the cost to serve model here in the UK. He points out that the British consumer has expectations which are, for the most part, unequalled anywhere on the continent in terms of availability of supply. "We all want - and, indeed, expect - every product to be on every shelf when we want it. That level of availability calls for premium delivery arrangements to satisfy the demand." And, using the grocery example, the demand from the major supermarkets for constant supply translates back up the chain to the manufacturer, who has to balance that demand with the need to make economically viable batch quantities. Customer demand and expectation drives cost into the supply chain because everyone expects everything to be available around the clock. Since it costs our northern European counterparts several thousand pounds less to fill up their trucks each year, surely rail should be a viable alternative for distribution? It should, agrees Shaw, but argues that network capacity prevents greater take-up. "Rail is undoubtedly very good at reducing the carbon footprint for transportation of goods. And carbon footprint is linked inextricably with fuel cost. But the capacity of rail in this country is very limited," he says. Look at the South East, for example, where the tracks are already congested. Compare that with France and Germany, both of which use rail very well because they typically move goods over longer distances. "Here in the UK, many rail lines are congested because they run between towns of high populations which are relatively close to each other," Shaw points out. Rail, too, is less flexible than road freight, requiring in many cases onward distribution by road to the final destination. The ability of a truck to move directly from point to point makes it the ultimate flexible tool for distribution. Goods moved by rail are typically high volume and low value - and, generally speaking, their arrival is not time critical. The likes of Lafarge, Hanson and others move millions of tonnes of aggregates by rail as it would be uneconomical for them - not to mention environmentally unsound - to move it by road. Large amounts of steel, stone, coal and bulk materials are moved around the UK by rail, confirms Maggie Simpson, policy manager at the Rail Freight Group - but that's by no means the only product. The automotive sector is another that has made good use of rail, she says, as has food and retail. "Over the last 12-18 months, we've seen intermodal rail freight increase to be the largest commodity on rail, overtaking coal and aggregates by volume moved. Major ports such as Felixstowe are reporting record years for rail volume and in total the sector has grown by 60% over the last seven years, despite the recession." The growth has been helped by investment in the network, Simpson points out, which has made rail freight operations more reliable and more efficient. In many sectors, rail can never replace road freight but it does offer an alternative mode for some parts of their logistics operations, she adds. The advantages of rail are numerous: "Reliability is an important benefit, and some of the retail flows are achieving greater than 95% on time. Also, since rail transport produces 70% less carbon than the equivalent journey by road, the environmental benefits are significant." Rail can also be cheaper, she says, for certain products and supply chains - though it is certainly not suitable for all. Simpson agrees that it tends to work very well for larger consignments and points out that manufacturers may need to alter their supply chains to introduce rail into the mix. You could approach a rail operator directly for information, or ask your existing 3PL to work with you to include rail in your distribution operation, she adds. Scottish manufacturer A G Barr - producer of Scotland's iconic drink Irn Bru - signed up to a three-year warehousing and distribution deal with Stobart last year, which includes deliveries by rail. The £18m deal includes transportation of product from Barr's largest UK factory at Cumbernauld to the Grangemouth rail freight terminal 20 miles away, then on to Stobart's central distribution centre in Crick, Northamptonshire. From there, Stobart trucks will deliver the goods to retailers around the country. Graeme Kay, head of logistics at A G Barr, said the £200m business chose Stobart because of its "networked" solution: "The one-stop solution covering both transport and warehouse operations, coupled with further collaboration opportunities, supports our strategy to develop a first-class logistics solution to support our business growth." Andrew Tinkler, Stobart Group CEO, said the contract offered an important opportunity for Stobart to expand its multimodal services from Scotland and added: "As well as delivering day-to-day efficiency benefits for AG Barr through our distribution system, the multimodal offering will also bring carbon reduction improvements." Other manufacturers already making use of rail include Jaguar - which opened a £10m rail facility at Castle Bromwich in 2003 - BMW, Nestle and Diageo. Given that just one freight train is reckoned to remove 50 lorries from the road, it's likely that other manufacturers will follow suit and look at distributing part of their supply chain - inbound or outbound - by a combination of rail and road.