|
WHAT
DOES IT “REALLY” COST TO DELIVER A
GALLON
OF LUBRICANT?
Compoundings
Magazine, May 2001
By
Thomas F. Glenn
Petroleum
Trends International, Inc.
Although
it may seem like an easy question, it is not.
Some actually know what it costs to deliver a
gallon of lubricant, many think they do, and others have
no clue. This article is written to shed light on the
“real” costs associated with delivering lubricants and
to underscore the importance of accounting for these
costs.
Accounting
for the costs to deliver lubricant is most challenging for
those independent lubricant manufacturers with company
owned and operated package and bulk trucks. Lubricant
manufactures in this category are challenged to get a true
handle on deliver costs for several reasons. First, the
cost of operating trucks is a combination of fixed and
variable costs and many of these are “hidden.”
Secondly, tracking all the fixed and variable costs can be
a real challenge for those unfamiliar with accounting
procedures and/or some accounting packages in use by independent lubricant
manufacturers.
Whether
you have two or 200 trucks, the costs to deliver lubricant
will comprise both fixed and variable costs. Fixed costs
are those that remain constant regardless of the volume of
lubricants sold. These costs typically include such costs
as leases or loans to pay for the vehicles, insurance,
registration, and safety inspections. Another cost
typically included in fixed cost is direct labor. A base
load of labor is required to own and operate a fleet of
delivery vehicles. An
independent lubricant manufacturer will often find that a
minimum of two warehouse people are required to load and
unload vehicles and some may even include a mechanic in
the direct labor expense mix. In addition, indirect labor
is also required to buy/lease vehicles, register vehicles,
handle insurance, and other administrative tasks.
Although
by definition, fixed costs remain constant regardless of
the volume sold, it is very import to consider that fixed
cost per unit changes as the number of gallons sold
changes. This is due to the fact that the fixed cost is
allocated across the total volume of lubricants sold.
Consequently, the fixed costs of delivering lubricants on
a unit basis will rise and fall with sales volume.
Most independent lubricant manufacturers are aware
of this and will typically accommodate the fluctuations by
scaling transportation costs to volume tiers. These tiers,
or discounts on delivery charges will often be seen in
increments of roughly $0.02 a gallon for volume windows
spanning a number of tiers.
Although tiered pricing is an excellent way to
leverage economies of scale, the frequency and basis for
updating can be a challenge. In addition to the influence
of costs and expenses and competitive forces, price tiers
should be based on historical sales data and adjusted
frequently enough to reflect the fixed costs per unit
volume based on the most current sales data or forecasts.
If the relevance of volume discounts are not revisited
frequently enough, an independent can be spin its wheels
on cash every time its trucks hit the road because its per
unit delivery costs have been inching up as sales volume
was inching down. Conversely, the competition across the
street could very well be making money with the same
delivery price and similar sales volume because they know
true transportation costs and leverage economies of scale
by operating with fewer trucks and employing the services
of common carriers to handle surges in business.
Another
fixed cost challenge for independents lubricant
manufactures in determining the costs to deliver a gallon
of lubricant is that many of the cost are “hidden” or
incorrectly allocated to “other” categories in the
general ledger. Labor is an area where one can typically
find a number of unallocated fixed transportation costs
hiding. These sometimes hidden costs include driver
training/education programs, drug testing, the clerical
time required to keep track of driver records, union
negotiations, supervision, recruiting, uniforms, lockers.
Yes, even driver safety awards add to the cost of labor.
Collectively, these fixed costs can quickly run up well
over tens of thousands of dollars a year for an
independent lubricant manufacturer. Taken together they
may add another several cents a gallon to the deliver
costs.
Fixed
costs can also hide under your trucks. Even if you own the
property and paid it off years ago, the real estate where
your trucks are parked has alternative value and an
“opportunity cost.” Opportunity cost in this case, is
what you sacrifice when choosing to use your real estate
as a parking lot over the highest valued alternative. The
highest valued alternative might be to sell off some
depreciable assets (trucks) and rent the space to an
independent trucker at $8.00 a square foot, or barter for
delivery services in exchange for the use of space. The
value of the property where your trucks are parked can
increase considerable if your trucks like to park under a
roof or behind a high fence with security cameras.
Fixed
costs can also prove challenging to tie back to the cost
of delivering a gallon of lubricant due to the term
“fixed costs” itself. There is a certain comfort level
one gets when they hear the term “fixed cost.” It
implies that you know what the costs are, they don’t
change, and one can plan around them. Although this is
generally true, it is very easy to be blindsided. The best
example of this is the sky rocking increases in generally
liability insurance. Increases in generally liability
insurance as high as 40% are reported by some ILMA members
already this year. It’s unlikely many anticipated this
level of increase, let alone adjust delivery prices to
absorb part of it.
Variable
costs represent the next challenge for independent
lubricant manufacturers in determining what it costs to
deliver a gallon of lubricant. Variable costs are expenses
that rise and fall directly with the volume of lubricant
sold. Most of the variable costs in delivering lubricants
start when the trucks start. They include direct labor,
fuel, oil, tires, tolls, tank cleaning, line flushing,
truck washes, and other costs directly linked to
delivering a gallon of lubricant.
Variable
costs are typically the most threatening to the
profitability of an independent lubricant manufacturer
because they are extremely difficult to control, hard to
anticipate, and they like to hide from accounting. The
challenge of controlling variable costs and its impact on
profitability can be readily appreciated when one looks at
the run up in fuel prices over the last three years. The
average price for diesel fuel in the US in May of 1999 was
$1.07 a gallon. The price today is $1.47. If your
delivering lubricant on the west coast, your cost for
diesel fuel averaged $1.16 a gallon in May of 1999 and
could top $1.65 a gallon in May of this year. This means
that a manufacturer delivering 250 gal of lubricant to an
account 20 miles away, (given the fuel economy of a
typical bulk truck and round trip fuel consumption), is
paying close to $0.01 a gal more for the fuel to service
that account in 2001 than they were in 1999.
Are you adding a fuel surcharge to your delivery
prices? The
common carrier bringing you basestock and additives is
likely adding a fuel surcharge to your invoice. Fuel
surcharges on inbound raw material together with the added
cost of fuel on outbound transportation can add as much as
several cents a gallon to the cost of finished lubricants.
In
addition to the challenge of controlling variable costs,
the variable cost area is one of the best placed to look
for delivery costs hiding or masquerading as (repairs and
maintenance or general and administrative costs, or
“others.” As shown in
Figure 1, the “other” category for a typical fleet of
trucks delivering lubricant can easily reach 8 % to 10% of
the total outbound transportation costs. Repair and
maintenance can add another 10% to 15% to the total. There
can be wide swings in these costs, and consequently
profitability, due to accounting practices, operational
efficiencies, and luck. Variables costs to deliver
a gallon of lubricant do include the mirror that got
knocked off when a driver rounded a corner too fast while
trying to make up two hours he spent drinking coffee with
his “friend.” By the way, the cost of the driver’s
idle time and probably even the coffee is also part of the
cost to deliver a gallon of lubricant.
Variable
costs also included the tow truck fees incurred when the
roof was “can opened” when the truck “looked like it
would make it under the viaduct.” Although insurance
will pay for the damage, and maybe even the tow truck fee,
better take a look at the general liability insurance cost
when the policy comes up for renewal.
And yes, repair and maintenance is a variable
expense, but how many actually considered the expense of
the two clutches burned out by the new driver who quit in
frustration? Or the overtime you paid your other drivers
to cover while another driver was hired and trained? This
too is a direct labor cost that contributes to the cost to
deliver a gallon a lubricant.
Through
no fault of their own, even the best trained and most
diligent drivers are also adding costs to delivery
lubricants by increasing idle time, burning more fuel per
mile, and increase per mile maintenance costs. This is
occurring as a result of increased traffic on the roads.
According to recent findings by the Texas Transportation
Institute after studying traffic congestion in 68 urban
areas, the average person spends 36 hours a year sitting
in traffic. The average in Los Angeles is 56 hours. The
report notes that nationwide this is up from 11 hours a
year in 1982. The nation’s cost of waiting in traffic
this year will approach $80 billion in time and burned
fuel. The escalating cost of waiting is included in what
it costs you to deliver a gallon of lubricant.
It
would be easy to get to this point in the article and feel
that you need to increase deliver charges, or that
operating you own fleet is a nightmare and should be
avoided, or worse yet, that the author has only told one
side of the story and has made things more complicated
than they need to be. This is not the intent. The intent
of this article is to underscore the importance of keeping
an eye on transportation costs and to consider the true
costs of delivering a gallon of lubricant. Although many
of the issues of variable and fixed transportation costs
are well know to professional fleet managers, and
independent lubricant manufacturers, they can easily be
forgotten, not visited frequently enough, or completely
overlooked during the heat of battle to grow ones
business.
Clearly
there are advantages to owning your own trucks to deliver
packaged and bulk lubricants. First, the trucks and their
operation are under your control. The units can look the
way you want, be ready to roll at the drop of a dime, and
proudly wear your company’s logo and project your brand
identity and image. In
addition, you can train your drivers to present an image
consistent with your company’s interests and have them
potential assist in selling. In fact, some of the best
lubricant sales representatives got their start as
drivers. Drivers are on the front line talking with
customers everyday. In fact, sometimes a driver will have
a two-hour cup of coffee with a “friend” who also
happens to be a good customer (although unlikely, that
broken mirror and cup coffee may have been money well
spent). A good driver can be the highly prized back door
sales person and will often see a competitive product
working its way into a shop before the sales rep does.
Good drivers, together with clean, well maintained trucks
that make deliveries on time, every time, can say more
about your company than thousands of dollars on
advertising. Operating company owned delivery trucks is a
genuine competitive advantage for many independent
lubricant manufacturers.
What
does it “really” cost to deliver a gallon on
lubricant? - One answer does not fit all
There
is no one answer to what it “really” costs to deliver
a gallon of lubricant to a customer with company owned
vehicles. The answer will be different for each
independent lubricant manufacture in the marketplace and
the answer is dynamic. Sometimes the cost will change
quickly and be easy to recognize, as is the case with a
25% increase in fuel cost or a 40% increase in insurance
rates. These obvious changes in cost come up quickly on
the radar and are relatively easy to adjust to and explain
to customers. Other
changes, however, are imperceptible slow and diffuse. They
can collectively add a significant burden to cost and are
typically very difficult to explain to customers when
there is a price increase. These are the dangerous ones.
They manifest themselves as “cost creep.” Cost creep
is quite and frequently goes unnoticed for extended
periods of time. Depending on how rigorous the cost
accounting processes is, (e.g. weekly, monthly, quarterly
recap reports) an independent lubricant manufacture may
not see the impact of cost creep until the books are
closed. Or worse yet, may not “discover” it until it
has already been gnawing away at profits for many years.
And
at the end of the day, one could conclude that although
operating a fleet of package and bulk tank trucks made
economic sense when the company was started, “cost
creep” has made it a financial drain on the company in
today’s economy. Once the true costs of delivering a
gallon of lubricant have been determined, the value of
owning and operating trucks can be objectively assessed
and compared with other options. The other option being
outsourcing.
Outsourcing
As
an alternative to operating a fleet of delivery vehicles,
independents can outsource delivery of lubricants to
common carriers and/or independent trucking companies.
From an accounting perspective, this enables one to
roll up virtually all of the fixed and variable costs
associated with delivering a gallon of lubricant into an
expense. The expense to deliver a gallon of lubricant is then directly
tied to the number of gallons sold; most of the overhead
goes away.
Outsourcing
provides the most direct path to determining what it costs
to deliver a gallon of lubricant. Either the supplier or
the customer will receive and invoice for delivery
charges. The invoice will clearly state, for example that
400 gallons of bulk oil was deliver and the cost for the
delivery can be calculated at $0.25 a gallon. And if the
volume increases to 1,000 gal you will see a drop of $0.02
a gallon, as another example.
Sounds
simple and it is. But it too has its share of issues.
Common carriers and independent truckers make profit by
delivering product. They work very hard to be efficient,
and typically know their costs down to a fraction of a
cent. These costs will be passed on to either you or you
customer. They can include demurrage charges, fuel
surcharges, pump charges, tank cleaning charges, and
potentially others. They are rarely hidden and can require
a very different mindset for both you and your customers.
In
addition, there is loss of control when outsourcing
delivery and brand identity can be diluted. These and
other issues associated with outsourcing delivery are
examined in Part II of this article.
Copyright © Petroleum Trends International, Inc. 2002
|
