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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 14, 2008 12:01 AM ET
DON'T BE FUELISH “It absolutely is a crisis,” says transportation industry veteran Steve O’Kane.
Crude oil prices have soared 16% so far this year, and that’s being reflected in at-the-pump prices for diesel of just over $4 a gallon nationwide, up 42% from the $2.83 seen in April of last year. “The run-up is just staggering,” said Steve O’Kane, a 20-year transportation industry veteran and president of A. Duie Pyle, a West Chester, Pa., trucking and logistics firm. “It absolutely is a crisis and not the same old business as usual. And barring a worldwide economic disruption, I don’t see pricing going down.” Consider the impact on United Parcel Service, the nation’s largest trucking and delivery firm. The company knocked roughly 10 cents a share off its first-quarter earnings outlook last Wednesday, citing weakening demand and higher fuel costs. Many shippers are quickly passing higher diesel costs on to customers through higher rates or fuel surcharges, even burying them in invoices when shipping freight on board. (UPS raised its ground rates by 4.9% at the start of this year, on top of a 4.9% increase last year; FedEx followed suit, hiking its rates 5.5%.) As a result, businesses have been opting for cheaper modes of transport—shifting, for example, from next-day air delivery to ground shipping or deferring deliveries a day or two and consolidating shipments to cut the number of trips. Gary Busch, director of purchasing at Shiloh Industries, a Valley City, Ohio, supplier of stamped metal parts to the auto industry, said it is a chaotic time for any manufacturer trying to manage fuel costs and other hikes in commodities prices. “Steel for us has almost doubled in price in the last month and a half, so we’re getting hit from all sides,” he said. “We lock in wherever we can [via contracts]. But a contract’s only good in a fairly stable market. In this kind of market, people break contracts pretty quickly to remain viable.” Mr. Busch said he’s heard of some companies with an open-ended fuel surcharge clause in their shipping contracts that has resulted in their rates rising by 15% to 30% this year. One way Shiloh is dealing with the situation is by using fixed-price contracts based on actual miles hauled. For example, it pays a flat rate for service on a route between a company plant about 25 miles south of Cleveland to a General Motors plant in Parma, Ohio. Mr. Busch said higher fuel costs have also made rail “a legitimate option,” especially for the steel coils the company ships from its mills in Ohio to plants in Mexico for finishing, and then ships back. All companies with higher transportation costs are passing them on to customers in one form or another, but especially those that sell consumer goods. Del Monte Foods has upped prices on 70% of its food products for both people and pets this year, including Meow Mix. In a recent filing, it cited “higher logistics costs, primarily related to diesel,” along with the higher cost of just about everything else that goes into its products. Even Simmons, the nation’s second-largest bedding manufacturer, is losing sleep over fuel costs. It said in its annual report on March 26 that higher prices for steel and petroleum-based products affect the cost of its foam, innerspring and foundation components, which prompted it to raise prices in November and again in March. Simmons also cited higher distribution costs associated with its just-in-time inventory technique, which includes manufacturing and shipping a mattress within five days of its order. So the diesel fuel crisis is forcing companies to re-evaluate the just-in-time inventory management practices long espoused by the nation’s business schools. “Just-in-time programs need to be revisited,” said Larry Lapide, a professor at the Massachusetts Institute of Technology’s Center for Transportation and Logistics. “For the last two decades, it was the right thing to do under cheap oil. Everybody was working on the premise of pushing inventory back to the suppliers and having them ‘send it when I need it,’ so the return on assets is higher. That tends to favor smaller, more frequent shipments to meet customers’ demands, which sometimes means unfilled trucks.” But lately, the benefits derived from maintaining a lean inventory are being more than offset by higher shipping costs. “CFOs,” Mr. Lapide said, “have to start trying to balance inventory costs with transportation costs—and in some cases, they’re going to have to carry more inventory themselves.” FW
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