It’s easy to say “Improvise. Adapt. Overcome.” But, this isn’t the Marine Corps. And, if that’s all you’re doing, if everything you face is an exception to the rule because none of the rules seem to apply anymore, every day is an endless nightmare of crisis management, damage control and, if you’re lucky, failure analysis.
That isn’t supposed to be our experience. Our industry is considered “mature,” even “boring,” by most economists. It’s a stable industry, secure and allegedly immune to the stresses and pressures of newer, more volatile industries serving new markets and birthing new technologies. As a long-time “resident,” I can assure you the aftermarket is anything but!
Mature or not, no other industry has proven more essential to the lifestyle that has defined us as a nation. And yet, every sunrise brings with it a new series of challenges that forces each of us to re-examine and redefine the critically important role we play in a culture that could not survive without us.
The rising cost of crude oil and its impact on fuel, plastics, chemicals, synthetic fibers and just about anything else you can think of is just one such threat. The escalating cost of steel and other metals is another. While increases in demand for both from emerging nations is undeniably a third. All of this is amplified by a dollar that’s value is evaporating while you and I go to work each day with one singular and overriding purpose: to serve our customers, provide a safe environment for our employees and pay our suppliers. In other words, to make it through another day.
It would be safe to say that just about everyone in business is trying desperately to accomplish the same thing. That’s why I wasn’t surprised by two e-mails I received the other day. They were authored by two individuals I know and deeply respect.
It’s somewhat ironic that they both dropped into my inbox just as I was trying to determine the impact the Hazardous Material, Federal Excise Tax and Fuel Surcharges floating at the bottom of an oil jobber’s invoice I had just received was going to have on the cost of oil per quart. Their e-mails were about cost management as well.
They are both distribution professionals and their concern was evident in what they wrote. Warehouses and jobbers across the country are being eaten alive by the same skyrocketing fuel costs that are hurting your customers, driving the price of everything skyward, eroding your margins, weakening the dollar and quickly crippling our economy.
Both e-mails articulated the same concern. If you are in business, there are limits to the ways you can deal with expense. You can pass that expense on to the “ultimate consumer,” the person deriving the most benefit from whatever it is you supply in our case, the vehicle owner. You can “eat” those costs by absorbing them into your cost of doing business. Or, you can reach for an uncomfortable kind of balance by attempting to do a little of both.
Their argument was elegantly simple: other industries have been passing increased fuel costs on to their customers for some time, and oil suppliers were used as a specific example. I had to look no further than the invoice I had just signed, the bill for laundry service that appears on my desk every Thursday, or the invoice for courier service I received the other day to validate that argument. Fuel surcharges can be found on each, and why not, they are a legitimate cost of doing business, and, as such, can and should be dealt with in any one of the three ways articulated above.
What they’re suggesting may not be as elegant or as simple. Instead of raising the cost of all product to reflect increases in the cost of fuel as has been done in the past, they’re suggesting that fuel costs should be broken out separately, and then recovered through a fuel surcharge that would appear as a line item on every warehouse and jobber invoice; a charge that we, in turn, should pass on to our clients through a similar line item fuel surcharge that would appear on our invoices.
At first glance it makes perfect sense. There is one problem, however. As businessmen and women, we understand the fundamental principles of margin, cost, pass-throughs, profit and loss. And, one way or another, we can pass those costs through to our customer, the vehicle owner. In fact, we must pass those costs on or face a fairly significant penalty!
The vehicle owner is the “ultimate consumer” in our industry the last one to write a check, swipe a credit card or reach into his or her wallet for cash. And, as such, they have no one to pass that fuel surcharge on to and are generally loathe to be reminded of that!
There are a number of other problems inherent with line item fuel surcharges appearing this far down the supply chain and I’m not sure the example oil jobbers provide, or the tacit acceptance of such surcharges by the repair community, constitutes a parallel.
I don’t have eight to 15 oil suppliers deliver every day. I buy lots of oil and lubricant, but I buy from only one or two suppliers and I don’t buy every day.
As a direct result of the fuel surcharges we’ve been discussing, I make it a point not to purchase oil or lubricants until there is an order large enough to justify seeing a fuel surcharge on the invoice large enough to spread that surcharge across enough product to manage the cost (and, reduce the pain associated with it) as carefully as I can.
Finally, oil and lubricants are sold in fixed and equal increments (pints, quarts, ounces, gallons) and lend themselves more easily to parsing out increases in the cost of delivery per increment. I’m not sure the same can be said of water pumps, ball joints, spark plugs, multi-groove drive belts or gasket sets.
Nevertheless, factors like these will drive increases in the acquisition cost of parts in our industry from 12 to 28% or more, in the very near future. And, the question of how to handle those increases is a very real question for all of us.
Both authors suggested that when polled, their service dealer customers understood and accepted the reality of increased fuel costs. They also indicated that virtually every shop owner they asked wanted those increases hidden; “folded” into the overall cost of parts, and not listed as a line item on the invoice, so they in turn could hide them in the same manner.
But, what do you do if or when, as a result of all these increases, the cost of repair exceeds the vehicle owner’s ability to pay?
The answer is uncomfortable, but true: whether the cost is hidden or listed as a line item, both the cost and the result will be the same the price for service, maintenance and repair will increase and, as a result, there will be those who will be left behind or left to find a less attractive, less expensive alternative.
I was being asked to act as an advocate for listing fuel surcharges on our invoices. In fact, this column started out as a personal note to both authors explaining that while I understood the gravity of the problem and agree that we must find a solution that works for all of us, I didn’t think that I could suggest to you that which I would be unable or unwilling to do myself. You see, despite the fact that I understand the price of fuel has increased and that as a legitimate business cost, it must be recovered, I’m not convinced a surcharge is the best way to recover it, at least not this far down the supply chain.
There are a number of reasons. First, despite the fact that I see surcharges on some invoices and recognize they’re justified, they still make me uncomfortable.
I think they will make my customers uncomfortable, as well. In fact, I know they will. I know because I asked more than 50 of them over the past few days, and they told me almost unanimously they would rather have those increases “hidden” than see it itemized, probably for the same reasons I would.
You see, I have no way of knowing where that $6.38 fuel surcharge on the oil invoice I received today came from or how it was calculated. Is it a legitimate representation of the increase this supplier has incurred or is it a new profit center?
That $6.38 per delivery translates to 11 cents a gallon for the 56 gallons of product I ordered: just under 3 cents a quart. It would have been half that if I ordered twice as much oil and lubricant, and twice as much if I ordered half. But, how much more product than you need can you order?
How often do you order just one part? How often do multiple parts for the same vehicle ordered from different vendors appear on one invoice? How often are the deliveries for inventory and how often are they “hot shot?” How do we distribute that fuel surcharge fairly to our customers across all lines?
I have multiple suppliers, some of whom have more than one warehouse. I could order 10 parts for one job, have five of them delivered by one truck and five delivered individually. The number being thrown around is $1.30. That’s $7.80 in fuel charges for one job. What if there are multiple jobs that involve multiple deliveries from multiple vendors?
While uncomfortable, I believe these are all legitimate questions that must be answered before the repair community is asked to accept fuel surcharges from our vendors, questions we should be prepared to answer for our own customers before we consider itemizing fuel as a pass-through cost on our invoices.
The increases we’re all experiencing are brutal. No one can absorb them, and no one should have to. No one wants to continually have them thrown in their face either not you; not me; not our manufacturers, distributors or jobbers; and certainly, not our clients.
Fuel is one of the many costs of doing business that must be recovered. But there is a reason most shop owners are reluctant to itemize that surcharge on an invoice as a line item, and that reason is our customers are not likely to tolerate seeing it there without a challenge. If they’re so inclined, they’ll find someone else who is willing or able to hide that charge, someone clever enough to “fold” it into the invoice so it’s invisible, and yet is accounted for nevertheless.
Managing in times of great change is all about resiliency, flexibility and imagination the vision to see the future, the courage to create it. Success in times like these should be grounded in the realization that a lot of what you’ve been doing is working. It’s working because of the way you’ve done things in the past, and working because of the way you’re likely to continue doing them in the future.
Handling increased fuel costs the way we’ve managed similar cost increases in the past may prove to be best for us, for our suppliers, and perhaps most of all, for our customers. But, the key to managing in these times of great change may ultimately depend upon our ability to communicate our wants and needs up and down the supply chain, combined with a new willingness and sensitivity to the wants and needs of everyone else involved customers, vendors and manufacturers alike.