3 minute read
FINANCE
Rate Increase Reviews
One of the main similarities in Ireland’s most profitable transport and logistics companies is their ability to tender and negotiate high margin contracts, apply a quality service and keep personal and direct contact with their customers, but still pass on fair and realistic cost increases in a timely and efficient manner so that overall business margin is retained.
Most road transport operators find the job of seeking annual rate increases from customers both a high stress and tedious occupation. They would rather do any other task in their business other than the one that is crucial in ensuring long term business margin and value. Currently all logistics firms have a fuel surcharge mechanism in place which should pass on in a fair manner additional costs incurred in operation due to diesel cost increases, with all customers accepting the reason and logic behind it. Where the customer is a dominant player in the market and where the transport providers are small businesses and fragmented, there can be up to 15% nett margin difference in what the fuel surcharge should be. Obviously that is not sustainable for any haulier. Digging deeper can reveal that the customer is favouring a few chosen transport providers and running the others to the ground. Word to the wise, continuously monitor margin on all work and do not let the best customers be subsidising the worst.
With all other costs in transport increasing, it is vitally important a) that the business has a system list with all customers that an annual rate review is part of the agreement and b) that the business can lay out the reasons behind these increases in a visible and logical manner. A simple spreadsheet showing main costs, what percentage they have increased and what position they are of the overall costs, simply and clearly shows how the increase is calculated.
Normally with low wage inflation and stable interest and commodity costs, the margin for a year ahead is safeguarded. Now though, the massive cost increases in certain commodities (example tyres/ maintenance and AdBlue) means this is no longer the case. Below is an example of a rate increase template and a quick explanation of its workings.
The example below shows that this haulier runs an ageing fleet, and that the availability and cost of asset replacement precludes change and cost of asset finance increasing.
Line 1: Drivers’ wages make up 28% of total costs and to retain them, without asset replacement perk has resulted in a 9% wage increase which equates to a 2.52% rate increase alone. No insurance cost increase is fortunate as no claims and running a tight ship means maintenance, tyres and overheads are controlled, but the business cannot offset the 15% increase in these costs in the period. Bottom line the business needs an 8.72% increase, along with a fair diesel surcharge for its margin not to be eroded.
Many are under the illusion that drivers and all other staff will become more plentiful if an economic downturn occurs, but again the reality is that the wage paid for what is now an unattractive, unsociable, high risk occupation that is more and more difficult to enter, will continue to see above average wage increases to retain what staff remain in the industry. For sure, not one of those that lost their hi-tech jobs recently will turn to be a truck driver!
Another key development in the industry is the further amalgamation of Irish transport firms into larger European entities. As this happens, these larger firms have economies of scale plus they retain the quality of service, but they streamline methods of operation and the range of services provided so as to protect and improve margin.
Rate reviews on a regular basis are crucial and that’s the case whether an operation has five key customers or is in groupage and has a 1,000. In order to maintain a profitable margin, regular reviews will allow the haulier to be best placed to tackle this difficult task of obtaining necessary rate increases.
Text: Donal Dempsey – donal@fleet.ie
SUmmARy COST INCREASES JAN 22-DEC 22 Rate Increase Template % of Total Cost % Increase Rate Increase Required
Drivers Wages 28% 9% 2.520% Diesel 27% (not applicable fuel surcharge in place) Depreciation/Interest 20% 16% 3.20% Maintenance/Tyres 13% 15% 1.95% Insurance/Road Tax 5% 0 0 Overheads 7% 15% 1.05%
