Running On Empty
By Nick Bragg
The price of a gallon of gasoline has put a tight squeeze on jan/san distributors’ pocketbooks. In fact, the highest recorded average for regular gasoline in the United States — $4.114 — came on July 17 of this year according to motorist advocacy group AAA. That same day, diesel fuel also hit its highest peak — $4.845.
“This fuel business is absolutely affecting us like nothing’s ever done before,” says Hank Josephs, president of Garwood, N.J.-based Spruce Industries Inc., who at one time this year was paying more than $5 for a gallon of diesel to fuel his company’s four delivery trucks. “Its been dramatic and traumatic for us at the same time. I’ve been in business for close to 35 years and I’ve never seen the effects of this kind.”
Because of the steady rise of fuel costs over the last year, distributors, whose fleets are heavily dependant on diesel fuel, have seen fuel budgets double — or in some cases triple in certain areas of the country. Most disheartening, however is the fact that distributors have also seen their profit margins erode.
As the price at the pump continues to soar, so goes with it the cost of everything else. And because of diesel fuel’s heavy use in transporting goods, it is in turn driving up the prices of in-bound freight coming into distribution warehouses from jan/san manufacturers.
Besides worrying about how they are going to offset the high costs to make their own deliveries, distributors must also take strategic positions to offset additional costs passed down from other areas directly brought on by the country’s oil crisis.
Taking A Hit
Besides the high cost of fueling their fleets, distributors have also been blindsided by manufacturer price increases and freight rates.
It has affected Facility Supply Systems, West Chicago, Ill., “from soups to nuts,” says Dan Ott, the company’s co-owner. “At every level, the price of gas, oil and petroleum has affected us in a lot of ways. Especially being in the jan/san industry and dealing with paper products and trash can liners, those are all pegged towards the cost of fuel.”
For most distributors offsetting the price increases they’ve received from manufacturers has been very difficult. Especially, because distributors have been bombarded with so many in such a short amount of time.
“It used to be you’d see one, maybe two price increases if it was a bad year, but there have been cases where we’ve seen increases every month,” says Ott.
On top of price increases, manufacturers are also raising minimums on delivery policies. These factors have forced distributors to revamp their outlook on purchasing in-bound freight.
“We’re now having to deal with extraordinarily high freight rates coming in — double, triple, quadruple freight rates in products coming in,” says Josephs. “We’ve had to re-evaluate how we handle in-bound freight because it affects our profitability on the cost side of things.”
The steady flow of price increases from manufacturers are also having an affect on distributors from a sales standpoint.
“Whenever you try to do a price increase to a customer, that’s a shopping signal for them,” says Ott. “And so they go shopping around. It’s caused some real repercussions with us in trying to maintain our profit margins.”
In terms of logistics, everything that comes into a distributor’s business has been complemented by a fuel surcharge handed down by manufacturers who are also trying to compensate for the high price of fuel. So, that leaves distributors with a rather large and important decision to make — either eat the added costs or hand them down to their customers.
Eat It Or Pass It On?
Because of the high price of fuel and distribution’s heavy reliability on transportation, jan/san distributors have been pushed to explore several “new” avenues to keep their profit margins in check. One way they are doing so is by implementing fuel surcharges on out-bound deliveries.
Traditionally, distributors have absorbed delivery costs, but as gasoline prices continue to remain at about $.99 higher than a year ago, distributors have little choice but to pass some of these costs on to customers.
In today’s tough economic situation, distributors cannot afford to make non-profitable deliveries anymore. Thus, distributors are adding additional fees to delivery invoices for compensation relief. However, tacking on a small fuel surcharge onto each invoice doesn’t fully recoup everything, says Bill Nourse, president of Brookmeade Hardware and Supply, Nashville, Tenn.
Nourse, who has a fleet of eight delivery trucks that averages a total of 140 deliveries a day, has seen his monthly fuel bill jump from $4,000 to over $8,000 a month within the last year. After absorbing as much costs as it could, Brookmeade implemented a fuel surcharge of $3 per customer delivery at the end of May, says Nourse.
“It’s not a huge amount of money but over a course of a month it generates a fair amount of money,” he says. “It probably returns to us 40 percent of our gas bill for the month.”
Most importantly, by implementing a fuel surcharge, Brookmeade has been able to withhold charging customers a basic delivery fee, which many distributors are now doing.
Spruce Industries was also forced to add a fuel surcharge to its deliveries this year, much to the chagrin of its customers.
“They’re not happy, but neither are we,” says Josephs. “They understand that when they go to the gas pump themselves, they know it costs more money. They have an understanding of what it costs to run a truck today, so they’re somewhat understanding. They understand the necessity of a fuel surcharge, they see it in other parts of their own businesses, but they’re not happy about it.”
But because distributors fear losing business over fuel surcharges and order minimums, some distributors are absorbing more costs than ever.
“There’s not much more we can do,” says Randy Lemasters, purchasing agent for Harter Supply, Elkhart, Ind. “You don’t want to lose a customer over a $2.50 fuel charge, so you just suck it up and keep going.”
Absorbing the costs of doing business today is forcing distributors to re-examine their operations and take financial responsible steps where necessary.
The high price of fueling their transportation fleets to make deliveries has forced distributors to look at ways to protect what is left of their already spread thin profit margins.
One way distributors are trying to protect their margins is by reworking the logistics side of their operations. Long considered a revenue-saving practice, the jump in gas prices has forced distributors to pay close attention to getting the most out of their delivery routes.
“We’re aggressively tighter on our routes so we don’t waste gas going from different areas,” says Josephs. “So our routes are tighter and closer. And we hesitate to go back, so we try to fill our orders 100 percent so we don’t have to make an extra trip to deliver any back orders.”
Most distributors have also applied the brakes on making special or emergency deliveries and are asking customers to hold back their orders for up to four days or more to help save on delivery costs. Some distributors have gone as far as discouraging their salespeople to make special trips to deliver small orders because of the price of gasoline — something unheard of before this year.
“We can’t have our guys using their gas to go out and run stuff out to customers,” Ott says. “It’s just not fiscally responsible anymore because you’re just burning up so much fuel in going back and forth.”
Like most distributors, Facility Supply Systems has also taken a hard look at their delivery routes and brought its customers into the equation on how to make smarter deliveries.
“One of the things we’ve talked to our customers about is how we can deliver smarter to them,” says Ott. “Are there more things that you can combine? Instead of ordering twice from us a month, can you order from us once a month? Can we increase the lead time from when you place the order to when we deliver it so that we can bundle more things into that delivery on our truck so that we’re being more efficient? Rather than getting something next day, is it possible for you to wait three or four more days with proper inventory management?”
Servicing the stop-and-go Chicago-metro area, Facility Supply Systems has also given some serious consideration in acquiring Global Positioning Systems (GPS) for each delivery truck to avoid any unnecessary driving.
The gas price hike is also affecting distributors’ sales visits with customers. More distributors have cut back on face-to-face dealings with customers, but when they do make sales calls they now are maximizing each visit and scheduling appointments with multiple customers on the same day.
Gasoline expenditures are altering the way distributors are purchasing as well. Distributors are not stocking as much inventory and are spending more time searching for manufacturers that will give them the best bang for the buck.
“Things are a lot tighter,” says Lemasters. “Our purchasing has changed quite a bit. We’re trying to get as much for our money. And inventory-wise, we’re not stocking as much, we’re letting our suppliers stock it for us and we pull it as we need it.”
The high costs of doing business has also crept inside
distributors’ operations as they are monitoring their spending very closely. For example, most distributors are cutting back on travel to trade shows as airline flights have more than doubled in price. They are also cutting back on charitable expenditures. However, distributors say when cutting back, it’s essential that it doesn’t impact the customer in any way.
“We’re cutting things that don’t touch the customer,” says Nourse. “We try to eliminate any situation where the customer can point and say there’s been changes.”
Despite the disadvantages the oil crisis has brought upon the jan/san industry, there are some jan/san distributors who are actually flourishing.
“Surprisingly, for some distributors it’s been kind of a positive because it has made more customers look local than they have in a long time,” says Ryan Myers, vice president of Little Rock, Ark.-based Myers Supply and Chemical. “People who were buying cheap from out of state and things of that nature are now more focused on buying local just because of other distributors’ large fuel surcharges.”
A lot of distributors from out of state that were routinely delivering once a week or once every couple of weeks are now restricted to only running once a month. Small and local distributors can capitalize on this by being able to deliver daily in close proximity of customers, says Myers.
Distributors must also understand that they’re not the only ones in the jan/san industry affected by the oil crisis. Customers are also hurting in their own operations. So, when out-of-state distributors raise delivery costs, it usually leads to customers, who are on tight budgets, to go out and search for the best bargain.
Some distributors have even been able to increase their sales in today’s rough economic environment, however gross profits have not matched those sales. That’s because collecting payments from customers has been equally taxing on distributors as budgeting for gas usage has been.
“Customers are really stretching terms,” Ott says. “Customers who you could count on to pay within 30 to 45 days, all of a sudden they’re bumping it back to 60 to 75 days. The credit crunch is affecting things up and down the line and there are repercussions traveling up and down the supply line. And that’s the same way with the fuel costs. It’s not just getting to A and B. But it’s everything involved with getting from A to B. And it echoes throughout your entire organization, not just only at the pump.”
As in every downturn, the key for distributors is to search for the silver lining that enables them to succeed on an individual basis.
“I think the answer is the same as it’s always been and that is to get more aggressive,” says Nourse. “Suck up the slack, eliminate bad habits, see more people and call more people. Distributors need to be thinking creatively and positively instead of negatively. There’s a way around it. Merchants always survive, study history.”