This time last year, Pat Moffett looked at the world differently. As vice president of global logistics for electronics seller Audiovox, he moved goods from Asia by sea to West Coast ports, then by truck to East Coast distribution centers.
Now, given record fuel prices, those goods will move by sea all the way, via the Panama Canal. Moffett will wait four to five days longer to get them, but he'll save $1,500 per container on transportation costs, or about $100,000 a quarter. That's hardly chump change for a company whose latest quarterly profit was $4.7 million.
"It's a ton of money," Moffett says.
Audiovox's focus on transportation has always been intense as it, like other companies, seeks to minimize costs and boost profits. But with the unprecedented run-up in fuel costs, many companies are changing operations to soften the blow, especially if they can't pass increases on to customers.
Along with altering shipping routes, companies have slowed trucks to boost gas mileage, stepped up tire-pressure checks for the same reason, combined deliveries and deployed technology to improve routes — to the point of avoiding left turns because waiting for lights or for traffic to pass can consume more fuel than driving alternate routes.
Every efficiency is a brake on rapidly rising fuel costs, up 22% for gasoline since last year and up 46% for diesel.
For Waste Connections, a waste-hauling business with almost $1 billion in revenue last year, fuel costs now run 8% of revenue, up from 2.5% in 2005, says CEO Ronald Mittelstaedt.
Every efficiency is also a possible edge over rivals. "When costs increase for everybody, you get a huge competitive advantage if you do something just a little bit differently," says Z. John Zhang, professor of marketing at the Wharton School, University of Pennsylvania.
Truckers and airlines have been especially hard hit. Airlines have raised airfares 10 times since mid-December, often because of fuel costs. Last month, independent truckers nationwide slowed deliveries to protest gas prices.
Kerns Trucking of Kings Mountain, N.C., using computer chips that limit the top speed of trucks, recently cut the top speed for its long-haul trucks to 65 mph. That's down from 72 mph last year.
To win over drivers, Kerns Vice President Doug Prestwood amasses statistics, including one showing that a bump from 65 mph to 70 mph cuts fuel economy by 8.2%. "That's a lot of money per week," says Prestwood.
Delivery services FedEx and UPS said in recent earnings reports that they've successfully passed higher fuel costs on to customers. Others haven't.
Last month, Currier Trucking of Gorham, N.H. — unable to get higher prices from struggling paper mill customers — parked half of its 50 semi-trucks because the company was losing $1 a mile making deliveries, says fleet manager Jeff Webster.
He speculates that rivals who picked up the routes Currier dropped are sacrificing profits for market share. "We're not big enough to sustain losses like that," he says.
Increasing efficiency boosts savings
Big companies in the lead of the ground-freight-moving business, such as J.B. Hunt Transport Services, UPS and FedEx, have long focused on fuel costs and used such tools as sophisticated software and Global Positioning Systems to optimize routes.
Now even smaller companies — and those not specifically in the freight-moving business — are focusing more on fuel.
They're making changes by:
•Combining deliveries. The Truckee-Tahoe Lumber company in Truckee, Calif., has suffered a triple whammy: a drop-off in new home construction, record low lumber prices and record high fuel prices.
"I'm working on trying to understand how to remain profitable," says Steve Stevenson, vice president of the 68-employee company.
Truckee added new delivery charges this month that run $15 to $50 for some orders under $500. It's also asking customers, primarily home builders, to plan ahead so it delivers once a week, vs. two or three times. Some of Truckee-Tahoe's suppliers have also reduced delivery frequency, Stevenson says.
Audiovox sources most of its electronics in Asia. Sea containers that aren't full are being held more often now than in the past until they are full, Moffett says.
"If it's something we really need, I may say let it ride. If not, I say wait," he says. So far, delays haven't led to product shortages, he says.
Even flowers are being affected. Hoogasian Flowers in San Francisco now asks customers for two delivery dates instead of one so Hoogasian can, if possible, combine trips.
•Reconfiguring routes. Office Depot handles 24 million deliveries a year from warehouses to stores or customers.
Three years ago, the retailer deployed software from a division of UPS to design routes to maximize the number of deliveries on each while minimizing time and distance, says Yalmaz Siddiqui, director of environmental affairs. One trick: restrict left-hand turns.
The results? Office Depot now makes 180 to 200 deliveries per truck over 80-to-100-mile routes. That's up from 125 to 135 deliveries over the same distance, Siddiqui says.
Waste Connections, which services 1.5 million customers in 23 states, has likewise pumped up route efficiency. Over the past two years, it's reconfigured a fifth of its 2,700 daily routes, Mittelstaedt says.
Before, routes were often based on customers' preferred days for garbage pickup. New routing software helped Waste Connections devise more efficient routes. The company is also urging customers to change pickup days so that it travels less to the same regions.
"We've gone to customers and said, 'Either you switch your day, or your price is going to double,' " says Mittelstaedt. In some cases, customers got discounts for switching.
•Improving fleets. In the past three years, Office Depot has replaced 90% of its 600 box trucks with smaller vans that are 40% more fuel efficient, Siddiqui says.
FedEx has also optimized fleets so that more-fuel-efficient vehicles are on longer routes. So far this year, it has achieved an 8% gain in fuel efficiency over last year on FedEx Express routes, says Mitch Jackson, director of environmental affairs.
Little ways to save can add up fast
These days, no fuel-saving initiative is too small to try.
For 10 years, Waste Connections has checked tire pressure on trucks every two or three days to make sure they're inflated for the best gas mileage. Now, they're checked twice a day.
"When fuel was $1.50 a gallon, tire pressure was insignificant. At $4.50 a gallon, it's significant," says Prestwood of Kerns Trucking, which runs a fleet of 38 semi-trucks. Kerns has also increased tire-pressure checks.
Engine idling has been attacked, too, because an hour of idle can eat up a gallon of diesel fuel. Last year, Waste Connections added automatic shut-offs to about 75% of its 2,700 trucks so that drivers can't idle trucks for longer than a few minutes.
It also cut idle speeds in half so that engines turn half as fast.
Kerns Trucking bought battery-powered units for drivers to run air conditioners and heaters. Typically, they'd idle engines instead.
Last year, UPS tested technology that included sensors to track everything from vehicle speeds to idle times. The data helped UPS cut idle times by 24 minutes a day per vehicle by reminding drivers to idle less. UPS deployed the technology from 200 to 1,400 more drivers within three months — a faster rollout than normal because of rapidly escalating fuel costs, says automotive manager Mike Hance.
The ins and outs of conservation
Many of the changes require trade-offs.
Truck drivers like to stay in the flow of traffic. Limiting speeds makes that harder. When goods spend more time in transit, inventory costs rise.
Audiovox is waiting longer for goods from Asia not only because it's shipping more over water, but because it's also using more rail, which is at least three times more fuel-efficient than trucks, within the USA.
As fuel assumes a greater share of companies' expenses, fuel savings also produce bigger payoffs.
Waste Connections has cut fuel consumption by 8% to 10% over the past three years, Mittelstaedt says. That's about 2 million gallons a year. That helps to offset rising prices. The company has recouped about 75% of its higher fuel costs through price increases and surcharges, Mittelstaedt says.
Like many, he doesn't expect fuel prices to drop, given strong demand from huge, rapidly growing countries such as China and India. But he expects conservation efforts to pay off even more if they ever do.
"There can be a silver lining in time," he says.