The average cost of a gallon of diesel hovers around $3 per gallon, up 33 percent from last year. While the West Coast has endured the highest fuel costs, prices in the Rocky Mountain region and the Midwest have risen the fastest at 35 percent since last year.
The impact of rising fuel costs on distributors varies. In a recent survey of electrical distributors by Channel Marketing Group, Raleigh, N.C., and Modern Distribution Management newsletter, Boulder, Colo., nearly two-thirds of respondents reported fuel costs have impacted their company's profitability to some degree. More than 50 percent of respondents say they are simply absorbing the increased costs. Some are reluctant to institute fuel surcharges before their competition does so. (See chart on page 41.)
One electrical distributor's costs have gone up $3,000 a month; another said his company's costs are up 37 percent in first-quarter 2006 compared with first-quarter 2005. Another distributor said the impact of rising fuel costs is felt in his cost per delivery — up 10 percent year-over-year. But he says a more important number to consider is delivery cost as a percentage of profit dollars delivered, which is up approximately 5 percent for his company.
As long as fuel prices stay up — and they will in the near future — electrical distributors will have to deal with surcharges passed down by suppliers and logistics providers. Tripp Dunman, fuel surcharge director for commodity risk-management firm FCStone, Des Moines, Iowa, says shipping companies have seen a 20 percent to 40 percent escalation in the fuel portion of their freight bills in the past two to three years. What's more, diesel prices have risen at least 16 percent since January.
“They have to recover the cost of fuel,” Dunman says. “It's probably not something going away anytime soon.”
Holding the Line
Distributors are tackling rising costs by controlling other costs or charging surcharges per order, per delivery or by adding slightly to gross margins. Distributors are also differentiating prices based on pickup versus delivery, or using pricing as an incentive to achieve minimum-order sizes. Other supply houses are negotiating fuel prices with local gasoline stations, changing delivery schedules or reducing the number of deliveries. Distributors in the Channel Marketing Group/MDM survey offered examples of several strategies they are using to manage rising costs. (See chart on page 40.)
Delivery charges
“We really haven't applied surcharges because this implies it's temporary,” said one distributor. “We've increased delivery charges — one for out of town and one for ‘city’ delivery.”
Some distributors are encountering resistance to this idea: “While I'm certain most or all of our customers would balk at a delivery charge from us, none seem to have a problem paying UPS, courier or LTL (less than load) charges,” one respondent said. “This stems from the industry's practice of bundling in free delivery.”
One example of a fuel surcharge based on order size is charging $8 for orders less than $500. One distributor who runs a fleet of 10 trucks said, “We instituted a $1 surcharge per invoice to recoup some of the high fuel costs. Most customers are accepting this charge as a cost of doing business.”
Although 22.8 percent of respondents have implemented a $5 per delivery surcharge, 58 percent are not adding a fuel surcharge to orders or deliveries and are absorbing the increased cost. Other respondents add surcharges between $1 and $10 per order.
Sales team's role
Salespeople should consider the size of an order before making a commitment to deliver it. At one company, this means making smaller customers wait for their orders until it's economically feasible to deliver them. The distributor may ask larger customers to increase their order size, while marginal customers may be asked to pick their orders up at the will-call desk.
“This approach has always met with mixed results,” one distributor said. “But with fuel costs on everybody's minds, it has become easier to increase minimum delivery order size because both the salesperson and the customer truly understand costs have risen significantly.”
Other ideas for mitigating fuel cost hikes include the following strategies:
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Roughly two-thirds of survey respondents are using UPS/FedEx/DHL or a local courier/delivery service more often. Some distributors have chosen to pass on those costs to the customer, and others have not.
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Some companies are integrating the rising costs into the price of products. One distributor raised prices 1 percent across the board. Another did the same and said customers didn't notice the change.
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Consolidating delivery runs/smarter routing is a popular strategy, and some distributors are considering buying truck-routing software. Overall, 37.1 percent of distributors have changed their delivery schedule. One distributor is limiting special runs. “All deliveries must be on a standard route,” he said.
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Consider restricting delivery by order size and increasing minimum-order.
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Ask drivers to watch the speed limit.
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Consider purchasing more fuel-efficient vehicles.
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Stick to a regular maintenance schedule for company vehicles.
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Use the rebates many fuel companies offer through their credit cards as a savings tool.
Managing Transportation Costs
“Those companies that keep transportation costs low will have a price advantage over those companies with higher costs,” says Dan Miklovic, managing vice president for manufacturing and industries advisory services at Gartner Consulting, Stamford, Conn. “Either those companies must absorb the costs to match the more efficient company's process or have a higher price point.”
Transportation optimization technology analyzes and determines the most cost efficient ways to distribute products. The method balances less-than-truckload, truckload, rail, container, air and ocean freight to get the best solution based on source, destination and time constraints.
Although a full transportation optimization package might cost big bucks, smaller distributors who are not ready to shell out that cash can still analyze their transportation networks to determine whether more cost-effective ways exist to deliver product and fulfill orders. Routing software, such as that offered by RouteView Technologies, Manassas, Va., could represent significant savings. Approximately 13.3 percent of the survey's respondents said they use some type of truck-routing software.
Rising fuel costs are also impacting delivery costs from manufacturers to distributors. To help mitigate these costs, distributors should consider several factors. Just-in-time inventory replenishment requires more frequent and smaller deliveries, which requires the use of LTL. This has higher costs because trucks have to travel more complex routes, Miklovic said.
Electrical distributors may want to consider fewer but larger shipments to allow for full-truck rates, based on point-to-point, least-distance rates. They can also direct orders to branches instead of a central facility to avoid compounding costs with internal transfers. A downside to this strategy is that it may represent challenges in the areas of inventory and staffing.
In addition to looking at their transportation networks, distributors should analyze replenishment cycles and minimum-order quantities to decide whether potential inventory increases are justified based on current fuel and transportation expenses on a per-unit basis.
“The bottom line is there are many supply-chain related things any company can do,” Miklovic said. “Some will have minimal impact (on costs), but every little bit helps. All the evidence says energy costs will continue to rise and that while there will be short-term decreases, the long-term global economic forecasts support a period of continued high energy costs.”
By minimizing the supply-side impact and effectively managing the selling side through increasing minimum orders, adding a “smidgen” to the gross margin and effective fleet management, distributors can minimize the impact on their profits while still providing quality service to their customers — and potentially differentiating themselves in their local market.
David Gordon is a principal of Channel Marketing Group. Channel Marketing Group develops growth strategies for manufacturers and distributors. He can be reached at (919) 488-8635 or [email protected]. Register for Channel Marketing Group's monthly newsletter at www.channelmkt.com.
Lindsay Young is editor of Modern Distribution Management, www.mdm.com, a subscription newsletter covering independent wholesale distribution channels. She can be reached at [email protected].