business

Max Heine

The reality of ‘passing costs to customers’

| January 29, 2014

A recent study got me thinking: To what extent can an industry really avoid passing rising costs to customers?

The topic came up in the “Hours of Service (HOS)” report from the University of Tennessee’s Global Supply Chain Institute. It concluded that productivity losses from the new hours of service rule will result in hiring more drivers. That, combined with CSA and the aging driver pool, will lead to more turnover and higher costs for carriers and shippers.

Ignore cost-cutting for too long, and you’ll end up as roadkill.

Ignore cost-cutting for too long, and you’ll end up as roadkill.

No news there. However, the study’s other focus was whether shippers and, to a lesser extent, carriers would pass those costs to customers. Or if not, how they would tighten their belts.

The study’s 417 responding companies, mostly manufacturers, were asked to check any of 22 strategies being considered in lieu of passing on costs. The study highlighted the top four, led by extending lead time for some customers, then shipment consolidation.

Perhaps there are important gains to be made in those areas. Or perhaps this was a case of respondents simply ranking ideas just to be done with the survey and maintain their relationship with the institute.

Regardless, is there any reason to think that shippers live in a world where competition is so soft that they’ve not bothered to closely examine lead time and the like? Carriers, at least since deregulation, have had more than enough incentive to cut costs in an extremely cutthroat industry.

Which is not to say any business ever achieves perfect efficiency. Nothing is static, so those who ignore cost-cutting too long end up as roadkill. What seems to be naïve – or simply the wrong question – is asking whether costs will be passed on to customers. Of course they will, at least indirectly. Shippers and carriers are for-profit entities.

The challenge to the shipper and carrier, whether it’s a solo operation or Walmart or Schneider National, is not to wait for the turbulence of changing costs and then respond, but to be constantly examining costs, learning more about trends in your niche and how to respond in a way that maximizes what you have to offer.

Independent Steven Heglmeier, commenting on <I>Overdrive</I>’s website report on the study, put it well: “Want to add $ to your bottom line? Know the market, and post your truck, then let them call you. Know what your real cost per mile is, add a fair profit, and don’t waiver. They will call you back! They can’t move the load without a truck.”

Productivity losses coming from the new hours rule will not hit every application equally, but they will be industry-wide. Consider them passed to the customer or not, but in the end, “Supply and demand determine rates,” wrote another commenter, owner-operator Jeff Clark. Costs are only part of that dynamic.

 

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