Consultation document Complementary provisions to Euro 5/6 and Euro VI Greater Than s response report

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1 Drive more energy efficiently - LeanDriving Consultation document Complementary provisions to Euro 5/6 and Euro VI Greater Than s response report Introduction Greater Than is a Belgo-Swedish based company that specialises in Driver Fuel Efficiency. We measure driver fuel efficiency and compare it to Good Practice performance, which can be compared to standard EcoDriving. The IT support application we have developed, LeanHaulage, 1 ensures that vehicles are driven to EcoDriving practices at all times. Stakeholders in road freight transport are concerned with the technology of fuel efficiency but not the process related performance. Other industries combine hardware with process performance to optimise output. By applying traditional process control methodologies measuring Driver Fuel Efficiency, practices such as EcoDriving can be maintained and could lead to a proven reduction of fuel consumption of 15-20%. Greater Than s response Due to the way in which today s haulage sector operates, the CO 2 footprint of the industry is becoming larger. This trend demonstrates how the market has failed to deliver both rational economic (reduced fuel costs) and environmental (reduced CO 2 emissions) outcomes. Our response to this issue lies in so-called EcoDriving as outlined in the first paragraph of the second section of the consultation document and quoted below: The potential to reduce fuel consumption, and therefore pollutant and greenhouse gas emissions, through efficient driving behaviour, so-called eco-driving, is insufficiently exploited. This is mainly due to a lack of information/awareness of drivers about how to drive efficiently. Devices supporting EcoDriving, such as fuel consumption meters (FCM) and gear shift indicators (GSI), are available on the market and GSI are already mandatory in new passenger cars (category M1). However, studies show that the potential of EcoDriving can be better exploited when using FCM at the same time. The latter could be installed at very small costs for the vehicle manufacturer but currently (if available) are frequently sold as costly options, which impedes their widespread use. In addition, other vehicles like light commercial vehicles, trucks and buses currently have no support for EcoDriving at all. Our response is outlined below: It is not due to a lack of driver awareness that trucks continue to be driven in such a manner that causes 15-20% higher than necessary fuel consumption; it is due to current business models. Transport markets operate within business models and buying conditions that not only create resistance to fuel savings but actually de-incentivise them. Firstly: Hauliers have no incentive to save fuel as most operate with a Fuel Adjustment Clause (FAC). FAC is a mechanism that permits fuel to be regularly adjusted to reflect fluctuation within the market. The original purpose of the FAC was to protect price fluctuations as a result of the unstable global oil market in the 1970s. Researchers in the USA have concluded that FACs allow perverse market practices that lead suppliers to disregard fuel savings investments. o Fuel recovery clauses within contracts make fuel a source of profit rather than a cost, as it is passed on directly to the consumers. Mr. Ken Costello stated in his report How Should 1 Greater Than clients currently include Alfredsson Transport AB, CCE Benelux, Nybro Transport AB, Woodall Transport Group. Greater Than is currently endorsed by: Sveriges Akeriforetag (Swedish Road Haulage Association), Transport Gruppen (Transport Group trade association), and Q3 (Quality in Road transport procurement). For more information on Greater Than please visit lick here. DriverFuelEfficiency a measure of fuel efficient driving manner

2 Drive more energy efficiently - LeanDriving Regulators View Cost Trackers? that the problem with fuel clauses is that they are perverse or weak incentives for cost control. (National Regulatory Research Institute:2009) Secondly: Third party logistics providers (3PLs) also operate with FACs and this has become a vital and strategic part in creating profit margins. In such cases, the 3PL take a commission on the haulier s turnover. 3PL also have a strong incentive to avoid demanding fuel savings that would damage their own profit margins. o Richard E. Morgan warns in his report How fuel clauses undermine energy efficiency that fuel clauses may give a perverse incentive to avoid making fuel savings investments. (United States Environmental Protection Agency:2002) Thirdly: Buyers (large retailers or supermarkets) pay for the fuel but do not demand a measurable and efficient process in return. Traditionally, buyers request drivers to undertake yearly EcoDriving lessons. Unfortunately, despite EcoDriving being part of many solutions it is not a measure of efficiency. It is important to understand that EcoDriving and other fuel saving mechanisms, such as fuel consumption meters (FCM) and gear shift indicators (GSI), are in fact only part of the solution to a systemic problem. Unfortunately, as long as Driver Fuel Efficiency is not properly monitored, results will be lacking. Measuring a driver s performance on gross fuel consumption is neither appropriate nor proportionate. Hauliers can only influence some factors, such as aerodynamics, tyre choice and pressure including driver performance. Overall fuel consumption is influenced by many factors, out of the hauliers control such as load weight, traffic, road conditions, weather, etc. The driver s performance only influences up to 30% of the entire fuel consumption. To measure the driver s performance entirely on fuel consumption will, at best, create a stressful and poor working environment, and, at worst, lead to an increase in accident rates. The reason EcoDriving is insufficiently exploited is not through a lack of driver awareness, but lack of company incentives (as described above). Drivers are generally very interested in skills training, as it provides a career and development opportunity. Managers do not share the same enthusiasm, often leaving drivers unsupported and mismanaged. This view is shared by many EcoDriving training providers. Trucks are driven in a manner that leads to 15% - 20% higher than necessary fuel consumption, despite recent technological advances (including Euro 5). There is an evident performance gap as the process of Driver Fuel Efficiency is not adequately controlled at present, which is in contrast to efforts made by other industries in Europe which are trying to improve energy efficiency. This situation is due to current business models within the road freight transport sector that completely de-incentivise fuel savings. To address this, transport companies must be incentivised to focus on controlling their key business process drive truck. The foundation of all improvements is to measure the results. Measuring Driver Fuel Efficiency will curb this worrying trend and will provide measureable improvements. Case Study We have included a report that was developed by Greater Than in May The report presents the major findings and establishes the current market conditions, and incorporates the responses from a short questionnaire answered by 1,112 road haulage and third party logistics (3PLs) companies from 17 European countries. Only 8.1% participants considered fuel savings a priority. The report has been shared with several key stakeholders within the European Commission and European Parliament. Conclusion The issues highlighted in Greater Than s response demonstrate the key challenges within the haulage logistics sector that currently undermine the push towards improved fuel efficiency and CO 2 emissions reductions. Providing a solution, such as EcoDriving, without understanding the problem leads to two negative situations: DriverFuelEfficiency a measure of fuel efficient driving manner

3 Drive more energy efficiently - LeanDriving 1. It de-incentivises investments in other solutions and methodologies as the market relies on a more streamlined solution. 2. If hauliers are forced to participate in EcoDriving lessons without requiring to demonstrate measurable and sustained improvements, Driver Fuel Efficiency cannot be expected. Other industry sectors (e.g. automotive) chase 0.2% efficiency gains for enhanced performance, whereas the haulage sector ignores the low hanging opportunities of 15-20% efficiency. The expertise, systems and tools exist to target those gains with little to no-investment start up, as a result of the prevailing perverse road freight transport sector business model. Greater Than believes that in order to meet the CO 2 challenge for the haulage sector, the European Commission should require that: 1. Transport buyers address and demand that Driver Fuel Efficiency is measured, but allow hauliers the flexibility to decide appropriate solutions in order to improve performance. 2. Ban fuel recovery clauses from haulage industry contracts. Fixed price contracts are provided by all major oil suppliers, which are likely to cause higher fuel prices for transport. Nevertheless it would highlight the importance of savings from both buyers and providers. 3. Ban commissions on fuel cost. The UK Financial Services Authority recently banned commission on financial products, a measure which will enter into force in 2012, as it distorts the best interests of the customer. This ban can be applied to fuel costs as it too distorts the best interest of the customer, the economy, and the environment. DriverFuelEfficiency a measure of fuel efficient driving manner

4 A Greater Than Report Döbelnsgatan Stockholm Sweden Analysis of the European Road Freight Market Business Models and Driving Forces Influencing its Carbon Footprint The haulage industry operates with slim profit margins. Could this be why it does not prioritise fuel savings? This is perhaps a somewhat paradoxical question but upon closer analysis, the market is more complex than anticipated. However the solution is simple. - Sten Forseke, Founder May 2011

5 Table of Contents Abstract 2 Summary 2 Introduction 3 Why profit margins are low 3 Why 92% fail to prioritise fuel savings 4 Environmental consequences 5 Conclusion 5 Abstract Trucks are driven in a manner that leads to 15% - 20% higher than necessary fuel consumption, despite recent technological advances. Therefore, the sector s CO 2 emissions continue to grow. An evident performance gap exists as the process of Driver Fuel Efficiency is not currently being adequately controlled, in contrast to efforts to improve energy efficiency in other industries in Europe. This situation is due to current business models within the road freight transport sector that completely deincentivise fuel savings. Fuel is a major cost item but, in reality, a minor business concern to transport providers (hauliers) and third party logistics providers (3PLs). Current business models place fuel responsibility on transport buyers (such as retailers). Following current business models, transport buyers assume responsibility for the cost of fuel, thus they should also ensure that transport providers and 3PLs maintain a process that delivers the best in fuel efficiency. Summary The challenge of meeting the objective of increasing fuel efficiency by 15-20% in the haulage sector is particularly great, since only 8% of the market presently considers fuel savings a priority. In addition, buyers sourcing requirements are at best neutral and at worst counterproductive to their intentions to reduce consumption and by extension CO 2 emissions. Some transport markets operate with business models and buying conditions that not only create resistance to fuel savings but actually deincentivise them. This causes unnecessarily higher fuel consumption, which further damages the environment. As transport buyers assume the responsibility of fuel cost, they should also ensure that transport providers maintain a process that delivers the best in fuel efficiency. The process Driver Fuel Efficiency can easily be addressed by obliging transport

6 providers to answer the simple question: What is your current fuel consumption and how does it benchmark against the standard Good Practice driver performance? in doing so this worrying trend in fuel inefficiency can be curbed, immediately contributing to the drive towards a low carbon economy. Introduction Road freight transport is one of the few sectors in Europe that continues to increase its CO 2 emissions. The industry operates on slim profit margins despite the fact that freight represents a relatively small proportion of the cost of goods sold. Low profit margins should normally lead to a greater focus on costs, particularly on fuel, which represents a large proportion of total transport costs. It is clear that transport providers pay very close attention to fuel efficiency when investing in new trucks. The technology behind engine performance and fuel consumption is a very important criterion for the purchase of a new fleet. Similarly transport buyers pay very close attention to a haulier s fleet engine performance, fuel consumption and euro class engine when selecting a supplier. Both transport buyers and transport providers are concerned with the technology of fuel efficiency but not the process performance. In this analysis we would like to explore the mechanisms and business models that govern the road haulage industry and ultimately challenge this logic. We have sought to understand: 1. Why profit margin is low despite the fact that: a) Transport providers place a large emphasis on price? b) The cost of freight is a relatively small proportion of the total cost of the goods sold for the transport buyers? 2. Why only 8% of the haulage and 3PL companies prioritise fuel reductions, meaning that 92% do not? Over the last 18 months we have visited 1,112 road haulage and third party logistics (3PLs) companies from 17 European countries. Each visit concluded with a short questionnaire, which has helped us to establish a clear picture of current market conditions. The following report presents a detailed analysis aimed at understanding current haulage business models. The report is broken down into four sections: 1. Why profit margins are low? : Examining current causes and influencing factors for low profit margins in the road freight sector. 2. Why 92% fail to priorities fuel savings? : Establishing the reasons why fuel is a low business priority. 3. Environmental consequences: Explaining the link between fuel efficiency and CO2 emissions impact. 4. Conclusion Why profit margins are low The reason why profit margins in the road freight transport sector remain low is influenced by several factors. The first influencing factor is that 89% of all road haulage companies operate without any financial goals. The industry competes on price and simultaneously works without financial goals, which leads to minimised resistance to price reductions. Without the guidance of

7 financial goals, it becomes difficult to understand what the true price of haulage is and should be. This leads to competitors prices becoming the standard rather than attempts to understand the real haulage economy. A vicious circle is created and vital drivers towards price cuts are absent as a result. The second influencing factor is the 3PL s business model: a model usually based on commission or management fees. This means that turnover is more important than margin and cost. This again leads to competitors prices becoming the standard and little resistance to price cuts in a race to win contracts. These two factors have created a market almost without barriers and no resistance towards price cuts. However, when competitors cut prices, managers are forced to cut prices themselves in order to remain competitive. Competitive advantage at any cost has become more important than aiming to achieve a defined profit margin. FACTS BASED ON 1,112 QUESTIONNAIRES 89% operate without profitability targets 98% operate without cost saving targets 92% don t prioritise fuel savings Annex One has been included to present all the data collected from the 1,112 questionnaire. Why 92% fail to prioritise fuel savings Ambiguous ownership and the shared responsibility of fuel cost is the reason why the carbon footprint of the road haulage industry remains high compared to many other industries. The main reason why hauliers do not prioritise fuel reductions is due to current business models, where hauliers directly pass on the cost of fuel to the customer. Fuel consumption is calculated through experience and the price is based upon an index; a direct consequence of this is that the cost of fuel becomes a minor issue for hauliers. A further consequence of this ambiguous ownership of cost and process is the lack of clear incentives to reduce fuel cost. Current business models were developed in order to cope with various oil crises in Europe, where large fluctuations in fuel price could have potentially bankrupted the haulage sector. Prevailing business models in the haulage sector are by definition preventing improvements in fuel efficiency, demonstrating the failure of the shared fuel responsibility that currently characterises the haulage market. The haulage sector has three key actors: a) transport providers (hauliers), b) third party logistics providers (3PLs) and c) transport buyers (such as retailers). a) Transport providers pass on the cost of fuel to the buyer; hence they have limited incentive to reduce fuel consumption, which is supported by 92% of hauliers admitting to operating without any fuel saving targets. This is a consequence of not operating with financial goals and consequently decreases focus on cost reductions. The lack of financial goals creates a commonly held fatalistic view regarding cost and profitability problems, which are perceived to originate from low prices rather than efficiency in the control of cost. The main cost items such as fuel and wages are perceived as external and impossible to influence. Currently there are two main types of contractual agreement used between transport buyers and transport providers:

8 - Under open book contracts, transport buyers agree a fixed operational margin with transport providers, who have no incentive to reduce fuel costs as they are sheltered by the protected margin. - Under fixed price contracts, both parties agree on a fixed price per unit but the price is protected with fuel escalator clauses and resulting cost increases are passed on to the transport buyer. b) Third party logistics providers add a commission on top of the haulage cost, again resulting in limited incentive to reduce fuel consumption. As large logistics companies outsource the haulage part of the value chain and operate on a commission basis, this gives rise to the wrong incentives because the higher the overall cost to the transport buyer, the higher the commission for the 3PL. c) Transport buyers require fuel and CO 2 reduction efforts such as driver training; however limited attention is given to actual Driver Fuel Efficiency achievements beyond such training. Though these requirements are not wrong, no end results are demanded, thus these exercises keep hauliers busy with additional training rather than achieving meaningful improvements. Unfortunately, the means have become more important than the end result, and in many ways lead to an obstacle in actual CO 2 improvements. With the combination of these influencing factors, fuel saving has become a non-issue : 1) Divided responsibility between the fuel cost and the process. 2) A fatalistic attitude towards costs. 3) 3PL s commission and management fee based income. 4) Buyers not demanding that the Driver Fuel Efficiency related performance gap be closed. As a consequence, fuel consumption is excessive and CO 2 emissions remain higher than necessary. Environmental Consequences The actual consequences of road freight providers not prioritising fuel savings are hard to estimate. However, one established outcome is that trucks are driven to 15-20% higher than necessary fuel consumption in concrete terms, which signifies that, per year, an average long distance diesel truck produces 19 tonnes of unnecessary CO 2 emissions ( km and 35l/100km). Conclusion We are not condemning current business models. The aim of this report is to highlight how various market factors collaborate and lead to increasing environmental impact. Within a complex market such as haulage, it is vital that transport buyers and sellers understand how business models and other influencing factors work in order to better position themselves. This report has been pier reviewed by nine haulage companies, four 3PLs and six transport buyers. No errors in fact or content have been found. As transport buyers are responsible for the fuel cost, they should demand a process that delivers the best in fuel efficiency. A simple corrective measure would be for transport

9 buyers to demand results to be achieved rather than specifying the methods to be used. If buyers demand concrete CO 2 reductions and allow the supplier to use suitable means, a positive effect will ensue. As a result of the above reasons, fuel savings cannot be forced via the pricing function. Buyers must demand concrete CO 2 reductions; otherwise the industry will most likely continue to lower prices, consequently creating ever-worsening conditions. Driver Fuel Efficiency What is your current fuel consumption and what is the difference between that and a standard Good Practice driver performance? This is a small but effective step to increase awareness and generate large CO 2 reductions.

10 Analysis of the European Road Freight Market Annex One - Data Collection Analysis - May 2011

11 Introduction Annex one presents the data collected from a questionnaire completed by 1,112 haulage and third party logistics (3PLs) companies between October 2009 and December 2010, which represent both small, medium size and large fleets and 3PLs firms from all over Europe. In order to capture and treat all the available information in a coherent and standardised manner, a code book was developed, structured by sections and parameters so that each company could be analysed and specific key data identified. The analysis examined: Country of origin; Breakdown of fleet sizes Total number trucks by fleet category; Fuel priority; Fuel priority by company and fleet breakdown High fuel priority by company and fleet breakdown Cost saving target

12 1. Analysis Country of origin Figure 1: Participating company location The graph shows the breakdown of the companies interviewed by county: 1,112 companies from 17 different countries.

13 Breakdown of fleet sizes Figure 2: Number of trucks per company Total number trucks by fleet category Figure 3: Total number of trucks per fleet category The charts above provide a breakdown of the fleet size of the companies interviewed. A total of 86,633 trucks are included in the analysis. Figure 2 indicates that 95.14% of the participating companies have fleet sizes between trucks.

14 Fuel priority Figure 4: Participating companies indicating fuel priority The pie chart demonstrates how the companies interviewed prioritise fuel savings. The no fuel priority category is the largest with 1,021 companies, indicating that 91.8% of participating companies do not view fuel as a business priority. Out of the 1,112 participating companies, only 25 admitted to having a high fuel priority, which corresponds to 2.2%.

15 Size of fleet Fuel priority by company and fleet breakdown <10 (1-9) 0 44 >9 (10-23) >24 (25-49) > > Number of companies Fuel saving priority Total number of companies Figure 5: Number of trucks per companies with fuel priority The chart provides a breakdown of the number of companies per fleet size where fuel savings are prioritised. For fleets between 1-9 trucks 0% of companies prioritise fuel; for fleets of trucks 3.1% of companies prioritise fuel; for fleets between trucks 8.4% of companies prioritise fuel, for fleets of trucks 12.8% of companies prioritise trucks and for fleets larger than 999 trucks 20% of companies prioritise fuel.

16 Size of fleet High fuel priority by company and fleet breakdown <10 (1-9) 0 44 >9 (10-23) >24 (25-49) > > Number of companies High fuel saving priority Total number of companies Figure 6: Number of trucks per company with high fuel priority The chart illustrates the breakdown of the total number of trucks per company that indicated fuel as a high priority. Only 25 companies admitted to having a high fuel priority.

17 Cost saving target Figure 7: Number of companies with cost saving targets This chart identifies the number of companies who operate with a cost saving target in place. Out of the 1,112 participating companies, only 23 indicated working with a cost saving target, while 1,089 do not. This further suggests that fuel is not given any priority within the haulage business model. Fuel consumption is monitored but process efficiency and other influencing factors are not.