by Mike Buck
“U.S. Economy Picks Up Steam.” That was the headline recently in the Wall Street Journal. Many other economic indicators are pointing towards positive trends. In reality after several months of progressive movement transportation stocks have been flat the past several weeks. Freight tonnage is at the 13-year high but in spite of all the financial growth seasoned economists are still at odds whether or not we will experience a second dip. Why the concern with all these positive trends?
Just like every cloud has a silver lining, positive trends have their pitfalls as well. Let’s reflect on what has transpired as of late. During the last year fuel prices have escalated to the point of re-enactment of fuel surcharges. This adds work as well as risk to the profit margins within any industry. Additionally, tire costs have also increased in excess of 32% adding another peril to the equation. Without good procurement processes/ controls in place one (1) tire can cost in excess of $500.00. Many companies are attempting to correct their extended lifecycle situations due to the recent economic downturn by making capital investments on new equipment all which have arrived at a significantly higher cost. In an effort to control maintenance cost some companies will lease equipment with a fixed maintenance cost. This is somewhat making it a fixed cost but it comes at an additional expense because the leasee must make a profit while at the same time protecting the value of their asset. In short, every expense driver has experienced a significant increase. How can we best keep a handle on these price increases?
The transportation industry is a leading not a lagging indicator in regards to the economic cycles and fluctuations whether positive or negative immediately impact the industry. Moreover, with the taste of the recession still lingering as well as the economic struggles, leaders are still seeking cost-cutting initiatives. Cash flow is the leading cause of business failures and leaders need to have a plan in place to proactively make adjustments to variable costs in an industry where margins are as thin as ice. The current economic conditions have shifted control away from the suppliers back into the hands of the buyer (transportation industry) when they are the busiest they’ve been in a long time. In short, one of the cost-cutting measures should consist of some contractual housekeeping which should include reviewing all procurement contracts and service agreements such as fuel, tires, parts, and vendor services. There is no time like the present when the opportunity is in your corner. In short, transportation companies can’t afford not to review all their respective key cost-drivers. What are some of the other areas where costs can be effectively reduced?
Controlling fixed and variable cost is an extremely difficult task without the proper controls (metrics) in place. There are five (5) ways to cut costs and you’re not going to like four (4) of them. Costs can be effectively reduced by cutting staff, wages, benefits, and services to customers. However, the most effective cost-cutting strategy is to improve productively with defined processes or the use of technology. To accomplish this, the organization must engage employees to develop rigorous processes and implement them within all facets of the business. This will capture the buy-in needed to ensure the success of the initiative as well as create loyal & fulfilled workforce who are eager to ensure a long-term solution through the business cycles regardless of the economic conditions. Above and beyond popular belief low maintenance cost and high asset utilization are not mutually exclusive. Actually it is quite the contrary and processes of this nature if completed properly will directly increase the bottom-line. The unfortunate reality is when profit margins get thin for whatever reason one of the first methods to cut costs is to defer maintenance and this will always eventually equate to higher costs and CSA scores. Time is the essence starting the year off with a plan to further control costs and improve the bottom line will demonstrate solid leadership organizational as well as financial management. What is the foundation that will enable effective processes?
With tax time behind us, the information to develop industry leading cost controls is available at finger tips as well as fresh in minds of senior leadership. With some quick analysis and consensus by the leadership team the low-hanging fruit should be readily evident with a few simple questions:
• What are the high cost drivers?
• What controls or emphasis could be put in place to reduce this cost driver?
• Do we have the right team in place managing this cost driver?
• What controls and metrics are in place to proactively monitor and control this cost driver?
• What are the expiration dates on the contracts or service agreements impacting this cost driver?
• Can and should they be negotiated prematurely?
• Do we have an experienced individual qualified to fairly negotiate the contracts or service agreements impacting this cost driver?
Equipped with this information you can easily assemble a team to develop a plan and well as a process for gaining control of the respective cost drivers that are impeding your bottom line. Here are a few tips and well as common mistakes made with implementing this type of initiative:
• Start off slowly by casually mentioning the upcoming initiative in passing and closely watch to determine who will rise above the throng.
• Determine if those who would not make good team players should even be a part of the organization. Are they consciously or sub-consciously running covert actions that are impeding the success of the leader or the organization? Do they sense the need to remain profitable? Do they embrace the culture of the organization?
• Go slow to go fast at first.
• People don’t handle rapid change very well positive or negative.
• Even if the solution is evident to senior leadership, facilitate the team to the solution by asking probing question no matter how long it takes.
• Have the team develop the method and metrics to monitor the progress.
• Use non-biased unintimidating facilitator.
• If necessary, use a third –party.
The most obvious result of cross-functional teams of this nature is their immediate impact on the profitability. However, the underlining benefit is a positive impact on camaraderie and morale of the organization. This in itself will reduce stress and improve productively which equates to a non-quantifiable positive improvement on the bottom-line as well as increase in customer satisfaction.
Several months of comfortable profit margins can and will create a false sense of security. The implicit message is that what goes up will come down and invariably it’s just a matter of time before the economy takes another dip. Conversely, if the economy continues to grow, the demand for fuel will increase as will the price. The success of the organization will be predicated on the strategy of how to control the variable costs and the execution of the plan. Small companies must be faster, smarter, more nimble as well as what the foresight to learn from their competitors and little things will soon add up to something big. Additionally, understanding and implementing these principles will enable them to level the playing field and achieve fiscal responsibility for their employees, their families, the stockholders, and the community they serve.