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KSA Foodservice Distribution Update

June 2008

The Issue on Every Foodservice Distributor’s Mind: The Price of Fuel

By Bill Beattie

With oil approaching $140 a barrel and diesel fuel likely to exceed the $5 mark, foodservice distributors - like everyone else - are feeling the squeeze. But many distributors are stymied, unsure of how to tackle this issue that’s just not going away.

Consider this example: A $35 million distributor that runs 10 trucks averaging 50,000 miles a year consumes about 91,000 gallons of diesel annually based on 5.5 miles per gallon. Diesel costs this week are $1.90 more per gallon than the same week last year. When you do the math, this equates to a $172,900 hit to the company’s bottom line. At $5.00 per gallon, this $35 million dollar distributor is faced with an annual fuel cost increase of $200,000!

To keep your bottom line intact in a fuel-crazy environment, consider these two choices: you can increase your gross profit to help cover the additional fuel expense, or you can decrease other components of your transportation costs. Most owners and transportation managers have already put a medley of initiatives in play. This article includes several ideas for you to consider as you move forward:

Increasing Gross Profit

  1. Fuel/Delivery Surcharge – Many distributors have already implemented surcharges; others prefer to increase prices instead. While operators dislike surcharges, most understand today’s economic reality. There are many versions of surcharges: flat fee per stop, variable fee per stop, fee based on the order weight, and so on. If you haven’t already put one in place – you should consider doing it now. If you have one in place, it’s not a one-time fix; surcharges need to be managed. Review business regularly to see where they affect customer retention, and examine and revise the surcharge structure repeatedly as fuel costs increase. Remember, too, that your competitors may call surcharges by different names – some bury it as a line item and call it a delivery fee so that it stands out less. Find out what your competition is doing before implementing your surcharge structure.
  2. Examine All Inbound Costs Closely – Make sure your buyers are up to date on ALL vendor price changes and ALL inbound fuel surcharges. Here’s an example: the old laid-in cost was $20 and your selling price was $25. With price increases and inbound fuel surcharges, the new price is $22 and the new sell price should be $27.50. With $2.50/case at risk in this example, it’s important to act right away. The price changes have been coming so quickly that many distributors haven’t been able to stay current. It’s been particularly challenging to stay up to date on the grains (wheat, soy, and corn products) and meat items. Plastics are also a major issue. Even a week’s delay in this market can cost you significant gross profit.

Decreasing Transportation Costs

  1. Truck Routing – This can be the black hole of many operations. How recently have you updated your routes? While many customers like to see the same drivers, and many drivers prefer the same routine – those days may be over. Cube maximization, reduced miles driven and fewer trucks out on slower days can have an immediate positive impact. Customers serviced outside of your normal delivery lanes can be very costly and should be analyzed on a P&L basis regularly.
  2. Review All Delivery Windows – Most distributor routes are developed around hitting delivery windows that can be very tight. This can result in extra miles and extra gallons. Customers are keenly aware of the fuel issue and may welcome crunching the numbers with you to see how expanding their current delivery window can maintain or lower their current cost structure. Sales reps should be trained to present options, to help them show empathy for operator economic issues and help distributors maintain their bottom line.
  3. Key Drop Deliveries at Night – Added to existing truck routes, night key drop deliveries can boost your cases per truck and help you reduce truck routes. This type of delivery is normally done with chain and Quick Serve operators. You can add 1 or 2 stops during the 3:00 am to 5:00 am timeframe, and then have drivers do their normal morning deliveries.  Night truck routes also save fuel and time due to traffic efficiencies.
  4. Preventive Maintenance – Studies consistently show that a well-maintained fleet averages better fuel economy and has less down time. Preventive maintenance is less expensive than on demand crisis maintenance.
  5. Fleet Issues – It may be time to reconsider your fleet specifications and configurations. You should be well aware of the current MPG information on each of your power units. Identify your worst performers and consider replacing those on a planned schedule. There also may be improvements available that could increase your MPG. Older fleets may have higher maintenance expense, less reliability and pollute the environment more than newer alternatives.
  6. Governors – Consider governors to hold down speed <a governor is a built-in microchip that allows a truck engine’s top speed to be pre-set>. Many fleet managers are looking at this issue right now. Drivers may resist adopting this technology; you will need to examine the comparative advantages in the areas of safety, fuel economy and performance.
  7. Improved Aerodynamics – Talk to your truck vendor and consider ideas that may save money and promote the “green” initiative:
    • Use streamlined devices such as roof fairing, cab extenders, and side fairings
    • Implement automatic tire inflation systems
    • Install wide-base tires
  8. Manage Refrigeration Units – Talk to your supplier today about ways to reduce the amount of fuel used by your refrigeration units. This is a profit leak that often goes uninvestigated. There are many add-on and retrofit alternatives available that can bring about significant fuel savings.

Change the Outlook of Your Drivers and Your DSRs

  1. Train Your Drivers – The EPA estimates that “driver training can reduce fuel consumption by 5 percent or more, saving more than $1,200 in fuel costs and eliminating about eight metric tons of greenhouse gas emissions per truck each year.” Teach your drivers how they can safely use fuel saving techniques including:
    • Proper use of cruise control - This isn’t always high on the training list. Talk to your truck supplier about how to make the most of this feature.
    • Speeding Up and Slowing Down - Smooth and gradual acceleration and deceleration techniques save fuel
    • Progressive shifting - Remind your drivers that the proper techniques (up shifting at the lowest RPM possible) saves fuel.
    • Idle reduction - This may require serious re-training since most drivers were taught that it’s better to leave their diesel engines running. That may have been a reasonable idea at $1/gallon but it’s not acceptable at $5/gallon.
    • Speed – Drivers can get conflicting signals from managers. Deliver quickly to make customers happy. Stay within the DOT hour constraints. Don’t waste fuel. Deliver a consistent message to your drivers that you want to run a safe, efficient transportation system that delivers customer satisfaction.
  2. Make Your DSRs Part of the Solution – Your DSRs will be a part of the problem or a part of the solution – it’s your choice. Help DSRs understand this issue, walk them through your increased cost estimates, and then ask for their help to:
    • Increase the number of cases per stop (Sell more!)
    • Reduce out-of-route mileage (Sell smarter!)
    • Cut the number of emergency deliveries (Think creatively, check your orders twice…)
    • Boost the number of cases per truck route (Think cooperatively!)

In closing, today’s fuel challenges are not going to go away any time soon. Surviving this crisis requires setting measurable company fuel objectives with training programs to support them, collaborating with suppliers and operators to gain fuel efficiency, and monitoring performance every step of the way. There are no silver bullets, but there are many small improvements that can add up to a big difference.

If I can be of assistance as you explore your options, please call me at 804-565-6018 or email me at bbeattie@ksadvisorsllc.com.

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