Impact of Skyrocketing Fuel Costs: Distributors Tap Wide Variety of Strategies to Stem Margin Erosio

One distributorship instructs its drivers to turn off the trucks' ignitions.
There is good news to report and challenges as usual. The news from the Department of Energy, revealed on May 24, indicated that the average price of diesel fuel dropped again, making it the fourth straight week of decreasing diesel fuel prices. Compared with the all time high record of $2.32 per gallon on April 11, the reported price of $2.16 per gallon gives some relief to today's foodservice community.

However-as the ID Access panel noted during its discussion at the NRA Show a couple of weeks ago, these fuel cost dips and spikes are becoming part of management's terrain with no guidelines to hang one's hat on.

In preparation for the NRA workshop, ID Access interviewed eight foodservice distributors to obtain their takes on the situation and learn what they were doing to cope with the red ink these ongoing fuel increases are causing. The questions posed by ID are designed to reveal the tactics that these organizations are employing to address the rising cost of fuel through fleet management as well as highlight tactics used to address the rising costs associated with DSR drive time.

In a nutshell, all companies that participated in the interviews stated their desire for some answers and highlighted the energy spent addressing this latest management challenge.

The first company interviewed resides in the Northeast. It is using a variety of tactics to attempt to control their diesel fuel costs. The most basic tactic employed is a policy to have their drivers shut off their ignitions whenever possible.

On a more sophisticated level, it has invested in an automated routing system, Route Net, to tighten routes. This technology allows the company to plan routes that are more concentrated and consolidate drops.

Another tactic that it is having some success with focuses on communication. All of their drivers have Nextel phones. The company found that its drivers are saving fuel and time by phoning their dispatcher whenever they are presented with a route-related problem, whether lost or caught in traffic. The drivers have no need to waste time and fuel to set themselves straight.

With regard to surcharges, this company reports many of its suppliers are adding fuel surcharges to their invoices and, in turn, it has added fuel surcharges to the invoices of its customers. Knowing it "has to be to be careful not to alienate its independents...or they will go elsewhere," a flat rate of $5 has been added to each customer invoice. It is estimated that 60% of the firm's independent customers are paying the surcharge. The fallout from this tactic is stated to be an accounts receivable nightmare. However, for the time being, the surcharge will remain as a standard operating procedure that DSRs try to explain.

The company's chain business has fuel surcharges that are tied to the case and has had them for a couple of years. These charges are assessed per their contractual agreements.

A company reports many of its suppliers are adding fuel surcharges to their invoices and, in turn, it has added fuel surcharges to the invoices of its customers.
As for fuel, the company has two fuel vendors that are called daily for rack pricing. After comparing the quote of the day, the one that offers a lower price gets their business. It is believed this system is working. It is also believed that the prices will not come down, as its exec noted, "we are at a plateau and we will mentally adjust to the plateau until we have to adjust to the next plateau."

The company's DSRs are not provided with a gasoline allowance. They encourage their salespeople to make better use of their time, stating, "If they usually go to a customer two times a week, we suggest that they should plan to go once." That is not to say they are to relax their pace of bringing in new business. DSRs are incented to up-sell the current customers and go after new accounts.

An interview with a Southeastern foodservice distributor, which ranks in the upper quadrant of the 2005 ID Top 50, reveals that another strategy that is being employed is to sit tight. Management is dealing with the increasing fuel cost as -just one other cost-the cost of doing business.

This company has used an automated routing system for some time; therefore, it has not experienced any incremental fuel saving this time around. It is not considering buying fuel futures because it was burned in the past and believes it is better off taking one day at a time.

The distributorship decided not to impose a fuel surcharge at this time, fearing that if it takes that route, it will bite them. Its competition is such that the distributor believes this tactic would backfire. In addition, this lack of action helps it avoid an accounts receivable nightmare.

This company intends on adjusting some prices, but its plan is to hang tight and operate as efficiently as possible.

Three Midwestern distributors also shared their experiences and tactics. The first interviewee is also in the upper quadrant of the 2005 ID Top 50.

It uses on-board computers and routing software. Its driver guidelines are clearly spelled out and followed. They specify speed parameters, monitor idling time and engine performance. Since employing this technology, the company has experienced a "sizable" savings.

Due to last year's fuel prices, a decision was made to hedge its exposure by locking in fuel prices for 2005. Being large enough to have in-ground fuel tanks has been an advantage; buying futures has helped it ride the pricing wave. The company acknowledges it is very hard to predict the future, but it is presently looking into repeating this tactic for 2006. The company is appreciative of the control and cost-stability this decision has provided.

The second-Midwest foodservice distributor-has a fleet that travels 2 million miles a year. Its first statement regarding fuel cost containment tactics notes, "one of the best things that it did this year was to try to arrest its sky-rocketing fuel expenditures by addressing truck speed."

At its request, its lease company set the ECM on their engines to allow their drivers to travel at a rate of 68 miles per hour when using cruise control and a rate of 65 mph when they are on the pedal. This feature on the newer engines has definitely provided the company with a bit of savings.

Another company intends on adjusting some prices, but its plan is to hang tight and operate as efficiently as possible.
The company also looked at fuel pricing. To date it is not buying fuel futures. It has an agreement with a mobile fueling service that fuels the trucks on site. It is investigating options, assessing both fuel futures and fuel contracts. Nevertheless, for now, it is staying with this mobile fueling service for fuel purchases.

As far as passing on the escalating fuel costs - where it is contractually able to do so, the company is adding on a fuel surcharge to customer orders. It is not implementing a surcharge with street business.

This company reports that fuel prices have had some impact on product prices. As a result, some product prices have been somewhat modestly increased but price hikes do not cover the hit that the firm is taking on fuel. Therefore, it is looking to identify additional efficient ways of conducting business to make up for its loss.

Right now, it is assessing routing software-in particular:
  • Roadnet
  • Roadshow and
  • ACR logistics

    The company intends to integrate this software with on-board computers. It is its hope to gain visibility regarding driver behavior and correct it, as well as optimize the routes taken.

    It is also implementing a driver-training program that will cover the basic blocking and tackling - like shifting, It focuses on driver behavior to squeeze out additional savings. This will complement an incentive program it has in place. The company believes in sharing savings and in getting its people actively involved in trying to keep costs down.

    The third Midwestern interviewee is trying to stem the impact of fuel costs by working with Truck Dispatching Innovations (TDI), which is a reseller of routing software and GPS as well as its coach.

    While raising prices on some products has helped, in reality these price hikes do not cover the hit a distributorship is taking on fuel.
    Basically, TDI identified inefficient routes, extra capacity and unnecessary down time. It is noted that the routing software coupled with the on-board computers has really had an impact on its ability to use fewer trucks to serve its customers and identify areas to target new customers.

    At first, the drivers were not happy with the organization's ability to know their every move, but this changed when their incentive program was tied into fuel savings. The company believes their use of technology has made the driver's job easier. The drivers no longer get lost and report fewer angry customers.

    The West Coast distributor interviewed on this issue also uses TDI to install routing software.

    In this case, the new routes eliminated a bad habit of going back and forth, covering the same area over a four-hour window to service customers. This behavior wasted fuel and drive time.

    To address this inefficiency, the company had their DSRs explain to customers their new schedule and routing. An emphasis was placed the following four points:

  • The company was trying to deal with the skyrocketing cost of fuel,

  • It made the decision that its customers would not face a fuel surcharge,

  • However, they were being asked to accept this new schedule - which for some meant a different delivery time, and

  • The company's drivers were being incented to provide efficient service that is on-time and accurate.

    The customers, for the most part, worked with the distributor accepting the changes. Some felt it was inconvenient in the beginning, but with improved service and no fuel related surcharges, the tactic appears to be working and paying off. The company reports a saving $800 per week in fuel due to fewer miles driven.

    The routing software also helped identify where the distributorship had extra capacity, which is being used by its salespeople to build their businesses with efficiency in mind.

    The only other means that they are using to control costs is by really sticking to its minimum policy. Customers who do not order a minimum of $150 are charged a $25 fee.

    Lastly, we spoke with a pair of Mid-Atlantic distributorships.

    The first - a small foodservice distributor whose fleet is composed of 10 trucks - spoke to the fact that his DSRs are on commission and were being hit hard by the high cost of fuel. His organization is providing his salespeople with an allowance of 15 cents per mile. There is an understanding that they will be rewarded with higher commissions by the size of their sale, the goal being fuller trucks and fewer drops.

    The company is not instituting a fuel surcharge. It's been its experience that having a fuel surcharge only creates a mess for the AR department, since the majority of its customers just cross it out and refuse to pay. However, product prices are being somewhat adjusted.

    Drivers were not happy with the organization's ability to know their every move, but this changed when their incentive program was tied into fuel savings.
    Through its bioterrorism awareness program, it is reducing idling time. Drivers have been instructed to turn the trucks off and put the keys in their pockets when making a delivery to eliminate truck theft. It is believed this tactic has afforded them a small amount of fuel savings.

    The company is participating in a fuel program, where it purchases fuel at a discounted rate. The fueling company provides a report each month, noting how much fuel is being consumed, miles driven, and the gallons sold by truck. The information is used if a driver appears to be getting out of line.

    The second Mid-Atlantic distributor notes that it has seen a 41% increase in fuel expenses this past year to support sales growth of 8%. Some 60% of that growth is from new accounts.

    To cope with the rising fuel costs the company added Cadec on-board computers to its fleet of 17 vehicles, mostly 28-ft. pup tractor-trailers. This company measures by truck, by driver, and by route the idle time, MPG, RPMs. The result is a 10% savings in fuel spent per mile.

    The company has built miles per gallon-miles per stop -and miles per truck into the performance measures for many of their mid-level managers. The result is a keen interest performance improvement.

    The company has upgraded its entire fleet over the past three years so it has newer engines, which are more fuel-efficient.

    Lastly, the company has bought into a fuel futures program with its local fueling company. Its executive noted: "Although it is hard to guess right, sometimes it has at least delayed their increases in fuel."

    To sum up our cross-country interviews it is apparent:
  • More companies are employing routing and on-board software to squeeze out as much inefficiency as possible,

  • Most companies are not implementing a customer fuel surcharge-unless a contract specifies that they may do so,

  • DSRs, for the most part, seem to be on their own coping with fuel costs and are being asked to encourage customers to increase their orders - consolidate drops - and work with them to be more efficient,

  • And, lastly, everyone believes that we are in for more of the same. The $1.75 fuel cost of 2004 is but a dim memory of our past as we wonder if we going to be nostalgic for our current price of $2.16 per gallon.

    Everyone is looking for answers.

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