Des Moines Business Record
12-08-07
Cost Crunch
BY JOE GARDYASZ
Richard "Dutch" Koch Jr. is stocking his company's warehouses a bit more fully
these days. And he's encouraging his customers to buy in bigger quantities, too.
It's one of the strategies his Des Moines office equipment and supply company,
Koch Bros. Inc., is using to try to mitigate the impact of record-high diesel fuel
costs on freight charges.
With the average price of diesel nearing $3.50 per gallon, the cost of freight
transportation is at the top of many business owners' minds, whether they're a
business-to-business supplier, a retailer or a nationwide hauler of goods.
For businesses like Koch's that operate in the middle of the distribution chain,
volume has become a bigger deal.
"What's happened is that factories have increased the minimum orders for paid
freight," he said. "Other factories have instituted a freight surcharge. So in order
to keep end users' costs down, we bump up our quantities, and we encourage
our customers to order larger quantities. Instead of ordering a two-week supply,
maybe order a month's supply. Customers who are able to stock a little bit will
achieve a better price in an environment like this."
Delivery strategies
Matt Tofanelli, owner of Advance Delivery, said soaring fuel costs have also led
him to reward higher-volume customers. The Des Moines business, which
operates a fleet of about two dozen vehicles, has imposed a fuel surcharge
based on the price of gasoline for the past four years.
"We have had a couple of customers who have generated fairly large bills with us
over the past month, and we actually waived the fuel surcharge for them to cut
them some slack," he said. For out-of-town deliveries, his company also tries to
coordinate trips so that it can reduce charges whenever possible.
Tofanelli said most of his customers have been understanding about higher
prices, though one client recently canceled his service and said he would begin
having an employee handle deliveries.
For most companies with skilled workers, Tofanelli said, a delivery service is still
a money-saver over having an employee run for parts or handle other errands.
"I'd say it would cost a third of what it would cost to pull your man off the job," he
said.
More planning
From one manufacturer's perspective, transportation costs are having the
greatest impact on distributing finished products, said John Smit, president of
Windsor Window Co. With plants in Iowa, Alabama, North Carolina and Texas,
the West Des Moines-based business employs about 1,000 workers and
distributes its products nationwide.
"We're trying to do a lot better planning in terms of our loads incoming as well as
outgoing," Smit said. "Otherwise we don't have much of a choice, and we absorb
[higher transportation charges] and try to offset costs in other areas that we have
discretion over."
Higher fuel surcharges imposed by private carriers with which the company
contracts have probably added between 1 and 1.5 percent to the cost of
Windsor's finished products, he said. "That's the surcharge only," Smit said, "not
the base freight." Carriers seem to be trying their best to hold the line on annual
base rate increases, "because they know many manufacturers are already
absorbing the increase," he said. Additionally, the cost of many petroleum-based
components is also increasing as the price of oil goes up.
What about some of the largest haulers in the business, such as Des Moinesbased Ruan Transport Corp.?
"It's a question I get asked all the time," said John Ruan III, the company's
chairman. "How do you guys handle all these fuel costs?"
The short answer is, they pass them along to their customers in the form of
surcharges, Ruan said.
`"Fuel prices are always a concern, particularly when they go through the roof,"
he said. "But for the most part, I think most trucking companies are in one way or
another hedged against those increases. Ultimately, it's really the customers and
the consumer who bear the brunt of the cost of fuel."
Cost recovery
Yoshi Suzuki, an Iowa State University professor of logistics and supply
chain management who works closely with haulers on efficiency issues, said
fuel surcharges don't entirely protect the trucking companies.
"What I'm hearing is that typically trucking companies recover only 60 to 70
percent of the cost of fuel, because some shippers will negotiate and play games
with the carriers," Suzuki said. "If you're a big shipper like Wal-Mart, it's really
hard for carriers to pass on the entire costs to them, or they'll say, 'We'll go with
another carrier.'"
Ruan said because his company is a dedicated carrier for an exclusive customer
base, "we have a cost pass-through where the customer absorbs (the fuel cost
increase) 100 percent. Where we would absorb it on the bottom line is where the
fuel needs to go up or down to a certain level before the next surcharge kicks in.
Correspondingly, if the rate comes down but doesn't come down enough, the
customer absorbs that."
However, the company has also taken a number of steps to manage fuel costs,
from training drivers to operate their rigs more efficiently to using its nationwide
bulk-fuel network as much as possible, Ruan said.
"We buy our own bulk fuel, and it's generally cheaper than what's available at
truck stops," he said. "We put extra fuel capacity on these long-haul trucks so
they can carry as much fuel from the bulk-fuel facilities at our terminals as
possible. They can generally travel 1,500 to 1,600 miles without refueling. And
we'll try to refuel them with bulk fuel."
For its long-haul trucks that idle overnight at truck stops, the company has also
begun mounting auxiliary power units on the tractors. Those units require only
about one-eighth as much diesel fuel as a trucker would otherwise use to keep
the electrical system operating while parked. The majority of the Ruan fleet,
however, serves shorter routes and wouldn't benefit from such systems, Ruan
said.
Over the long haul, Suzuki said, sustained high fuel prices would create further
consolidation in the trucking industry and a greater shift toward intermodal
transportation that employs both rail and trucks.
"In fact, some trucking companies are even promoting that they use intermodal
because it's greener. So as the price goes up, I would expect more shift to
intermodal transportation."
Looking at the issue with an entrepreneur's eye, Koch pointed out that
businesses like his that offer complementary product lines may benefit by selling
customers on the advantages of consolidating from several suppliers to one. It's
worked well for his company as he has reduced his list of wholesale suppliers, he
said.
"So a company consolidating their sources could save money," Koch said. "And
each of these categories is experiencing the same (cost increases). So there are
efficiencies to be had."