Managing Charges In Times of Great Change - Engine Builder Magazine

Managing Charges In Times of Great Change

What do you do when nothing seems familiar anymore? When every
challenge appears different and somehow inconsistent with anything
you’ve ever seen before?

It’s easy to say “Improvise. Adapt. Overcome.” But, this isn’t the
Marine Corps. And, if that’s all you are 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 from emerging nations for
both 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 is 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 were 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 are suggesting may not be as elegant or as simple. Instead of
raising the cost of all products to reflect increases in the cost of
fuel as has been done in the past, they are 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 then 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 a 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 just one or two suppliers and I don’t
buy every day.

As a direct result of the fuel surcharges we have been discussing, I
make it a point not to purchase oil or lubricants unless or 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

There are a number of reasons. First, despite the fact that I see
surcharges on some invoices and recognize they are 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, 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 are 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.
You and I understand that, or at least we should. 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 so inclined, they will
find someone else who is willing or able to hide that charge, someone
clever enough to “fold” it into the invoice so it is 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 are likely to continue doing them in the future.

Handling increased fuel costs the way we have 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.

Mitch Schneider co-owns and operates Schneider’s Automotive Service in Simi Valley, CA. Readers can contact him at [email protected].

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