Fasten Your Seat Belts

Fluctuating gas prices take distributors for a ride.

Like many distributors, Larry McDowell, president and owner of Empire Forklift (Bloomingburg, NY), is facing an increase in the cost of transporting materials due to the increase in the cost of fuel.

“Every freight bill we get has a surcharge on it,” McDowell says. “A manufacturer tells us that it costs $450 to deliver the truck, and when we get it, there is a $130 surcharge on it. All of a sudden the total cost is $580, not $450.”

Higher prices at the gas pumps are costing distributors more money to get materials from manufacturers and more money to deliver them to customers. The bills need to be paid, but how? Implement surcharges for customer delivery? Increase product cost? In an industry where deliveries, sales and service calls are essential to survival, MHEDA members are dealing with questions on how to handle the increase in fuel costs. Here is what some have decided to do.

“By the time we decide to raise the rates, we're already behind the curve on the increases.” Larry McDowell, President Empire Forklift “We're not in the freight business. We just pass along the cost at a small markup above our cost.” Russell Caldwell, President Memphis Material Handling “We have a problem, but we have to keep going. To stop and cry about it will not take us anywhere.” Jacob Werba, President Pallet Truck Kingdom “We collect freight quotes for the customer and the customer ends up paying the freight cost.” Eric Davidson, President Santana Equipment Trading Company “When deliveries come in, we settle on a number and don't pay fuel charges.” Mike Sibulkin, Vice President Continental Lift Truck

Option 1: Pass It On
“We charge $6 per work order,” says Shirley Perreira, general service manager at Watts Equipment Company (Manteca, CA). Perreira implemented a surcharge a year ago when the price of fuel first went up and has increased it accordingly. Although she doesn't like passing the charge on, Perreira doesn't see any other choice. “One way or another, I have to cover that cost and I don't want to raise my labor rates to cover them.” Perreira plans to keep increasing the surcharge, as fuel costs continue to rise. “If gas hits the $3.50 mark, I will have to increase the surcharge again.”

Perreira is not alone in her increases, or her hesitations. Russell Caldwell, president of Memphis Material Handling (Memphis, TN), has had a fuel surcharge for the past few years. Four years ago, the charge was two percent to four percent of the total cost of freight being transported. Today the charge is 25 percent to 28 percent. “If we haul a load of freight that is $1,000, that's another $200,” Caldwell says. Naturally, the extra charges have caused a few complaints from customers. “I have had to explain that we're a distributor, we're not in the freight business. We are just passing the charge along at a small markup above our cost,” he says. Like Perreira, Caldwell doesn't like passing the charge to his customers. “I'm trying to get away from it.”

As Caldwell tries to get away from surcharging, some distributors are having a difficult time developing a consistent way of implementing a charge. With fuel rates changing so quickly, the appropriate charge for the transportation of materials at the time of the placement of the order may not cover very much fuel at the actual time of delivery. “If we order something, we don't get it for three to four months,” says Empire Forklift's McDowell. To handle the inevitable changes, McDowell resorts to old-fashioned communication and honesty with his customers. “We tell the customer that the rate at the time of delivery is subject to change.”

Option 2: Increase Efficiency
Costs are not the only things changing for distributors when it comes to dealing with fuel price increases. Some distributors are changing their previous lackadaisical approaches to fuel use and are becoming more efficient fuel consumers and business owners. Steve O'Leary, president of Northland Industrial Truck Company (Wilmington, MA), began taking full advantage of the global positioning system (GPS) present in all company vehicles to determine what mechanic is assigned to service calls depending on where their vehicle is available. The on-board GPS tells O'Leary where the vehicles are located in real time. O'Leary plans to fine-tune his use of the system to make his business as efficient as possible. “It is foolish to send a technician an extra hour to run a preventive maintenance check,” O'Leary says. “It's better to get someone who is 15 minutes from the particular account. We are trying to better dispatch mechanics.” Over the last year, O'Leary's energy costs have risen about $150,000, averaging about a $12,500 monthly increase. He increased his transportation cost to customers by 10 percent, and is trying to make more internal changes to his business to offset the costs. O'Leary encourages employees to be more efficient in their work processes and to increase their speed of doing jobs to save costs. “We charge $90 for a preventive maintenance check and the mechanic is taking two-and-a-half hours to do it. We need him to do it in two hours. We have to pick up our efficiency.”

Eric Davidson, president of Santana Equipment Trading Company (Gurnee, IL), has noticed that distributors are not alone in their conservation. Customers, too, are trying to be more efficient. “Customers may wait until they order a group of equipment, rather than just one item, to save on freight costs. They are looking to buy more in order to keep the freight cost lower and divide the cost over several items.” Davidson himself has tried to become more efficient with his personal fuel consumption. More often than not, he rides his motorcycle to work. However, that attempt to save on fuel won't last for much longer. “There's not a whole lot that we can do. I can't ride my motorcycle in the middle of winter, nor can I ride my bicycle to work; I live 20 miles from the office. I'd be in great shape, but that's all. I've got to fasten my seat belt. I'm going for a ride.”

Option 3: Be Aware of the Market
Although trips to the gas station are expensive, not all distributors are experiencing dramatic spikes in costs, changes to their bottom line or price increases for customers. However, witnessing others in the industry experience an increase in operating costs due to the rising cost of fuel has been enough for many to become conscious of inevitable trickle-down effects, causing slight changes in the way some businesses function.

Jerry McCullough, president of In-Control (Raleigh, NC), has not passed on to his customers the fuel surcharges he is getting from manufacturers, but he is more aware of the prices being charged by companies he does business with. “We get more quotes and don't assume a carrier that we have used often in the past is the best price,” McCullough says. “We might check two or three carriers to verify we are getting a good rate, even though it all seems high to us. It's just part of the game.”

A wholesaler like Mike Sibulkin, vice president of Continental Lift Truck Corporation (Jordan, MN), doesn't have many service vehicles on the road. Sibulkin has not been affected very much by the increase in fuel prices other than a few surcharges on the materials he receives. “We have not implemented a surcharge ourselves, but we are not running 20 or 30 service vans. If we were, we probably would have a charge,” Sibulkin says.

Some distributors, like Jacob Werba, president of Pallet Truck Kingdom (Miramar, FL), have not yet seen the impact of the increase in fuel prices on their businesses. However, Werba is aware of the impact they potentially could have. “I expect the price increase,” Werba says. But to him, increases in fuel prices are a minor setback in the world of business. “We have a problem, we have to fix it and keep going. To stop and cry doesn't take us in any direction.”

Option 4: Investigate Other Solutions
To many companies feeling the pressure of skyrocketing fuel prices, the only good thing is the hope of other options to conserve and make the most out of fuel. Quality Forklift Sales and Service (Shakopee, MN) has taken steps toward fuel efficiency by converting to vehicles that burn diesel. President Todd Doege has 15 service vehicles, including company cars, and has made financial efforts in the past couple of years to cover the increase in fuel costs. He increased the company's fuel surcharge from $5.00 to $7.50 on every work order and implemented a $2 extra charge on preventive maintenance checks. Last year, he converted to a diesel engine. “We purchased a van with a diesel engine and tracked the fuel mileage. It's a $4,000 upgrade, but we increased our fuel mileage from 10 miles a gallon to 18 miles a gallon,” Doege says. “We get a couple hundred thousand miles out of the vehicles and we're almost doubling our fuel mileage.”

Watts Equipment Company's Perreira is also considering more fuel-efficient vehicles. “We've looked at going diesel. Some employees think it would be better. But if somebody came out with a van that was electric, I would demo it for sure.” Santana Equipment Trading Company's Davidson also says he would look at electric vehicles and more fuel-efficient, ethanol-powered vehicles for his on-the-road salespeople. “This is the first generation of these cars. I'm waiting for them to work out all the kinks.” And as distributors continue to work out the kinks of dealing with higher fuel costs, they deal with the uncertainty of future trends in business. “I just hope customers continue to buy,” says McCullough at In-Control. He is not alone in the worry that customers' current reservations will affect the bottom line. “Our customers don't want to spend money right now,” says Empire Forklift's McDowell.

Distributors grimly continue to face the gas pump, and customers grimly continue to face their distributors' bills. Fuel bills need to be paid. “We will just continue to build it into the cost of business and pass it on. That's all we can do,” says Caldwell of Memphis Material Handling. Todd Doege of Quality Forklift Sales and Service agrees. “We just charge,” he says. “Customers are going to pay it because we can't. After all, we can't just quit living.”

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The MHEDA Journal • Fourth Quarter 2006 • Volume 35, No. 4 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.