Costs: To Pass Them On - or Not - On the Numbers
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Costs: To Pass Them On - or Not

By Garry Bartecki

Article Date: 07-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


That is the question. And if you don't, there are some alternatives.

Cost increases are what we are talking about, whether transportation costs, health care costs, equipment costs, or any other costs. It doesn't seem to make much difference these days which cost we talk about because every time you pick up a financial journal some cost or another is predicted to increase and you have to do something about it.On the other hand, this is not a good time to be telling customers you need to raise your prices because your costs have increased. Quite frankly, they don't care because they have their own problems. They understand your dilemma, but don't expect any sympathy from them. You, on the other hand, have to make the note payments and pay your employees, and since your industry runs on tight margins to begin with, you must make some tough decisions about pricing, surcharges or cost reduction.According to the reports generated by the Profit Planning Group and founder Al Bates, your most "profitable" solution is the price increase versus an increase in gross profit dollars or a reduction in operating expenses. When you think about it, it makes sense because a 1 percent increase in sales is 1 percent of the biggest number on your income statement. A 1 percent change in gross margin or a 1 percent reduction in operating expenses will help, but each decrease in terms of the impact they have on income and cash flow. Besides, who's going to notice a 1 percent price increase?So what it comes down to is, do you pass costs on, try to offset their impact by increasing prices and gross margin dollars, or do you decrease costs by making adjustments to your cost structure?A recent survey found that only 17 percent of distributors have decided to initiate a fuel surcharge, with the remainder taking a pass because they believe it will hurt business. It's hard to believe that your customers would bail on you because you added $25 to your pick-up or delivery charge. My thought is that if it were a variable fuel charge that will get adjusted as fuel cost increases or decreases, customers would not object and take their business elsewhere because of it. They, of course, would expect you to take all measures necessary to keep these charges to a minimum, and if you explain that you do I would expect very few defections.If you decide not to pass on your cost increase in the form of pricing or surcharges and you still hope to hit your profit goals, cost adjustment has to be the method used to achieve these results. Reduce cost-of-sales or reduce operating expenses. Most dealers have many options available to them to make these changes.As far as fuel costs go you all have heard how UPS plans to save millions by scheduling routes with right turns. Recently I discussed how dealers are using GPS or related services to track all sales, maintenance and delivery vehicles. They save time, they reduce fuel cost, and they maintain equipment better. There are many ways to reduce fuel costs if you think about it: adding a fuel fee, changing how transportation costs are charged, changing territories, or arranging rebates based on fuel purchases. I bet you could reduce your fuel cost by at least 20 percent if you think about it.If you wish to increase margins you should consider the 1 percent price increase on all sales. You should consider base prices for certain part sales. You should encourage the parts, service and rental department to look for additional revenue opportunities. You should look hard at how you account for tech time. Overtime should be reduced. Outsourcing of various office functions and services should be considered as long as customer satisfaction scores will not be affected.Last but not least, operating expenses have to get trimmed. Believe me, there is not one line item in your operating expenses that can't be trimmed. Cut services, ask for price reductions in exchange for loyalty, fine tune your insurance programs, pass on health care increases to employees, outsource certain procedures to reduce employee count, shop your interest rates, find ways to increase an employee's take home pay without providing pay increases, and so on.In the end, if you do not wish to pass on cost increases, whether for fuel alone or multiple cost increases, you do have options to offset these increases by changing the expense load, adding a very modest price increase or adjusting operating expense levels. If the concern is primarily fuel cost, dealers have numerous options to reduce driving time, routes, how they charge for travel and how they monitor driving habits to produce efficient transportation results.
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Article Categories:  Financial  »  Management