Rising Fuels Costs - What to do?
Let’s talk a little about rising fuel costs and what, if anything can be done about it. This post was going to be about a power shift to distributors but after reading Harry’s newsletter regarding the impact of rising fuel costs and his overwhelming wholesaler response… and reading some perhaps foolish moves people are making… today we will take a side trip and talk about fuel costs.
Yes, energy costs are high and very likely will go higher. Oil is trading at over $100 per barrel and some forecasts call for $200 per barrel in the relatively near future. A stronger dollar would help this situation considerably but that’s a rant for another day. Since energy costs are imbedded in absolutely every product made, this has an impact on everyone and everything… but when you are in the distribution business the impact is obviously going to be much greater.
But before we get too crazy, let’s look at the landscape. In another of Harry’s newsletters (03/03/08) he talks to Joe Thompson about deals and consolidation. To quote Joe, “many distributors are in the “no pressure, no profits, no problem” mode.” Yes these increased fuel costs are coming out of your hide but most of you are still driving a substantial amount to the bottom-line. I’m not one to just willingly accept that my company is going to make less money so I too would be looking for ways to re-coup and/or reduce these increased costs… but in the same article Joe notes “distributors major in minors. They’ll step over dollars to get to nickels”. Please send all angry replies to Joe and Harry ;-)
Don’t be penny wise and pound foolish in your attempts to minimize your fuel costs. As regular readers of my blog know, I hate to offend ;-) but let’s get real… in many cases the increases in fuel costs don’t come close to some of the other ways a distributor might spend money. I have no problems with this… it is one of the perks of having a private business, but you need to examine expenses from a total organization perspective, not just a single line item in isolation. If you take steps to save fuel costs but in the process add even just one or two additional delivery routes, you are going to net out A LOT less money than if you had done nothing at all.
You need to look at your company as an integrated system, and analyze all possible changes from that system-wide perspective.
Some of you are considering going to 4 day per week delivery to cut down on fuel costs. I wrote about this way back in September 2006 and you can find it here but let’s go over some of it again.
Here is a mathematical certainty… all things being equal; going to 4 days per week delivery will force you to increase your delivery fleet and drivers by 20%. That is a mathematical reality.
All other things being equal, either you have to add additional drivers and vehicles – since you are taking 20% of your delivery capacity (one day out of five) and giving it away. Or if you don’t add drivers and trucks, then each day, each driver has to make 25% more stops and put off 25% more cases. I don’t think in most situations this additional stop or case capacity is available.
If you have that much flexibility in your delivery operations that you can simply add 25% - every single day on every single route - just by hitting a switch, then I think you have bigger problems (or opportunities) than whether you deliver 4 or 5 days per week.
The last couple of places I consulted the drivers worked on average 55 to 60 hour weeks, delivering five days per week. Those are 11 to 12 hour days. So to go to four day per week delivery (to save fuel), all things being equal, these same drivers will now have to work 14 to 15 hour days! But wait, is this even possible? Will retailers even allow us to work their stores at the hours this would imply? Yeah, those on-premise and c-store folks love getting their deliveries during their busiest times! ;-) Heck, EVERYONE loves getting deliveries when it is their busiest times. ;-) And drivers LOVE being out later at night.
Oh, but wait again (using these same two distributors as an example), on pretty much every day… on pretty much every route, the trucks are going out FULLY LOADED. They couldn’t make any more stops or put on any more cases if they tried. So you will have to add routes. Just one Class A delivery driver and vehicle with full expenses for both can run up to $150K per year. Tell me again, how much are your fuel costs going up? How does this make sense?
And of course there is that sad reality that cutting a day of delivery doesn’t save 100% of that day’s fuel costs. You still have to physically get to each one of those retailers. You will save a little on fuel by not running a day, but the range is much more like 20% - 50% - for that day only... remember you still have got to roll to each one of those accounts.
For those wholesalers who did go to 4 day per week delivery and didn’t add any routes, I’d guess you did two things.
1. Adjusted service levels (therefore all things aren’t equal)
2. Went to 4 day per week service.
Doing the first was wise, the second not so much. For those who have already gone to 4 day per week delivery… if you really want to find some substantial savings – well into the hundred’s of thousands per year, go back to 5 day per week delivery. You’ll probably have to share some of these savings with your drivers, but so what? I want to have the highest paid drivers. You will still drive a lot of additional money to the bottom line, far more than the price increase in fuel is costing you.
Chris, Jude, Duke, Jimmy, Tom… you can send my check for this wisdom… I think a 25% cut is reasonable – which will save you collectively over $3M a year (probably more), to my office address ;-)…. Well, mark them off the list of potential clients! ;-0 See what trouble you’ve started Molly! I’m blaming this on you.
Will this cause all of you who go back some pain? Oh yeah. Don’t blame me for past decisions. I can’t change the past, but clear rational analysis can always provide a clear pathway for the future.
One good thing about these high fuel prices is that it forces one to examine your entire company in a quest to re-coup these increased costs. If fuel costs go up 100% versus a few years ago, it is highly unlikely you will be able to “find” offsets to these increased costs solely in your fleet - route management. Not to beat a dead horse… but you must look at your entire company as an integrated system, not a collection of separate departments.
Type of delivery is an option. Bulk, bulk, bulk everywhere you can. Carts are expensive upfront, take a fair amount of space, and drive some increased costs in the warehouse but in most markets they make a lot of sense. But not all. They don’t roll real well in a foot of snow or through 4 inches of mud. Load your side-loaders by the order rather than the day, this can save at least 1 hour per truck per day for the driver... but will again drive some increased costs in the warehouse.
For those folks still running driver-sell… switching to pre-sell and tel-sell will:
· Increase your sales impact and merchandising effectiveness
· In almost all cases, REDUCE your overall costs - no, I’m not talking to you Gary ;-)
· Let’s see, better sales execution and lower costs… why not?
· Don’t believe me? In a week I can show you how.
If we look at your entire company as a machine, the most efficient use of that machine is to run it as near capacity as is physically possible – every single day. High peaks and valleys cause inefficiencies. You have to over-build your machine to handle the high capacity times. Obviously the marketplace determines many of these peaks and valleys – but to whatever degree we can, we should attempt to level operations so that each and every day is about the same. For those wholesalers who just can’t seem to level their delivery operations (or get decent volume on Mondays), the very real costs are enormous.
You may want to fight a little harder to achieve more balanced delivery. Use the fuel costs as cover to “force” retailers to take delivery on the days which work best for you and strive to balance your machine, every day of the week. Every other freaking supplier to these stores generally tells the retailer when they will be getting their deliveries (alright, not all chain grocery), why can’t the beer distributor do the same? You can. You just have to do it.
For areas with high seasonality, perhaps run two sets of routing – a high season and low season. You’ll save a little on fuel this way, and some vehicle wear and tear. Unless you have a pretty readily available labor pool, probably not a lot of other savings… but there could be, it depends.
In the past few years some have gone in the direction of too much specialization in delivery. If you have a great deal of delivery specialization, there are some significant savings just waiting to be had here. If you’re sending four different delivery vehicles into the same parking lot, you’ve got a lot of savings staring you in the face.
And of course you should look at both frequency and method of service. Most of you have probably already squeezed this as much as is possible but it is still an area to investigate. But before we discuss frequency of service and method of service delivery let us first define what service is and isn’t. Service is not defined by how many times your truck is parked in front of the account. Quality service is not defined by being the best firefighter in town – if you run out (or need anything) just give us a call and we’ll be there today! Providing quality retail service means that the retailer never has to call because there never was a problem in the first place. Quality service is pro-active, not re-active. Quality service is doing it right the first time and empowering employees to deal with problems on the spot.
Now may also be an excellent time to expand your use of tel-sell. Tel-sell is a very effective and efficient method to service many types of accounts. But remember, tel-sell is a SALES function, not a glorified administrative position.
But don’t get carried away in these processes. There are certain market realities that you cannot change. And if you try to cut too deep, you may find your competitor happily eating your lunch each and every day. You are in the service game… never forget it. There ultimately is a cost of doing business and you can’t change these realities. If you’ve cut as deep as you can and it still doesn’t work… you should seriously consider exiting the industry. In fact… regardless of why, if you are remotely considering selling “in the next few years”, now is the time to go. Don’t shoot the dang messenger… this is sound advice.
You can put all of your sales reps and merchandisers in the smallest car made but is this really wise? All to save a few bucks on fuel?! Ensure the vehicle matches the requirements of the job. Penny wise and pound foolish is not a good business strategy.
For most of you, the reality is simply the only way to find substantial operating savings is by building a more efficient merchandising, sales, and delivery structure.
Look at your use of technology, far too many wholesalers have invested a lot of money in technology but only use a small fraction of its capabilities, which is true throughout most industries. Be careful where you spend your technology dollars; they can eat up a lot of cash while often providing little value. I often hear about the incredible detail some of this technology provides, incredible granularity - how’s that for high-tech speak! ;-).
Because I’m kind of a nuts-and-bolts guy, I often note, that’s great that you have this level of information… now what exactly do you do with it? To which far too often the response is a confused stare. Just because you know something doesn’t immediately equate that this knowledge helps you do anything concrete in the very real, day-to-day world. It may, it may not. Don’t chase (and spend money on) knowledge just for its sake alone.
Examine your expenses. The reality is very few of your large expense items are controllable, that makes those that are controllable even more important. Run a “cheap,” or thrifty organization, as in we will gladly spend the money but only in those areas where we get the most bang for our buck – always have a return on investment mentality.
In addition look at breakage, shrinkage, and out-of-date product costs. To make the math easy, assume on average your organization has an average margin of $3.00 case. And assume that on average each case costs your organization $15.00. In this example, for every case lost in breakage, shrinkage or for being out-of-date, your organization must sell an ADDITIONAL 5 cases just to be back to where you would have been had the original case not been lost. Your employees need to be aware of the tremendous impact this can have. Every warehouse, sales, and delivery office should have a simple display visible which emphasizes this point.
If you are thinking about implementing fuel surcharges, think about the amount. I don’t think you will get beat up any more for a $3 - $5 charge than for a $1 charge so why not make 3 to 5 times the money for the same pain? And there will be pain. And once you get this in place, plan to NEVER take it away. Once you’ve “trained” them to pay it – and taken the pain of doing so – don’t just give it back for nothing. Looking forward then, perhaps don’t call it a fuel surcharge, call it some other more innocuous name that won’t raise hackles when fuel prices drop… but our extra charge doesn’t. ;-) My gosh this is good stuff!! If I do say so myself. This strategy alone could put a hundred thousand plus dollars in your pocket every year – do the math and you might be surprised ($3 X 20 routes X 20 invoices per day X 250 days = $300,000… $5 = $500,000 – if you’re going to do it, do it!). As noted above, please send checks to my office address. I don’t just want the Reyes’ money, I want everyone’s! ;-) I hope you’re happier now Molly.
And please, please, please… if your direct competitor is willing to be the spear catcher on implementing fuel surcharges, use your head and get right behind him. Whatever minimal gains you might get by beating him up on the street is FAR exceeded by the very real financial gains of standing right behind him. And as noted above, these gains can become a permanent and substantial source of income.
Look at instituting minimum orders. Perhaps fuel surcharges below some minimum order quantity? Look at pricing. You can often set price breaks so that they are in effect a minimum order or at least they push the retailer in that direction. Always attempt to increase average cases/stop and even better, average gross profit dollars/stop. Don’t drop your prices to do this. RAISE your prices from case one and then put your first price break (5 cases? 10?) so that it equals your present case one price. In this manner you don’t give up any margin and you push your smaller retailers to larger drops. Those that can’t or choose not to pay a little more.
Take a look at the managerial and supervisory positions in your organization. What is the ROI being generated by these positions? Is there a better way to allocate these resources? Are you paying managerial wages for worker-bee activities?
Look at every aspect of your business. Squeezing doesn’t mean accepting poorer performance in any area, it just means you’ll have to plan, execute, and coordinate better… a leaner organization demands this, but this either/or thinking is a false choice. Let me emphasize this again, a lean, high-performance organization REQUIRES better planning, coordination and execution from every player on the team. Plan for it.
And if you really want to re-coup these additional fuel costs, give me a call and let me work with you and your management team to design and implement the most efficient operation that is possible – the payback period for my services is generally measured in a couple of months. In any improvement process I can help build a more efficient AND stronger system. Any pinhead can cut costs over the short-term, but can they do it with the end result being an even stronger organization? How many businesses have you and your management team ever re-organized? Hopefully I’ve learned something in the last 25 years.
Some mistaken believe my job is to come in and tell them how to run their distributorship… this is very wrong. Think of me as a focused, experienced project manager who, working with you and your management team, quickly and expertly helps design and implement change. I don’t do your GM’s job… we have very different jobs but working together we can build superior organizations.
Next post I promise… a discussion of a power shift back to wholesalers