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Fuel Surcharges: How Much Will Customers Pay?


10/15/2007
By Gary Goms

When the price of fuel rises, the cost of doing business rises too. If customers want a part delivered, no matter how near or far, chances are they’re going to have to pay a fuel surcharge. Just how much are they willing to pay?
 

Since the Arab oil embargo of the 1970s, sharp increases in fuel prices have become a fact of life for most Americans. Like it or not, rising fuel prices affect every sector of American business, including automotive parts distribution. Most of us who fix cars for a living understand that even a minor increase in the cost of oil diffuses throughout our economic structure and increases the cost of every function of modern society, from fueling our automobiles to manufacturing plastics used in shopping bags and other articles of everyday life. Of course, that doesn’t mean we’re happy about it.

That very fact was driven home a few months ago when a delivery driver handed an invoice from a dealership parts department that included a $1.25 fuel surcharge for delivering a $19.18 part. Was I surprised? Yes, because this was the first fuel surcharge that I’d ever seen included in a parts invoice. In addition, the surcharge increased the price of the part by nearly seven percent.
Was I angered? Not really, because unlike the dealer parts department, I can adjust my retail profit margins to absorb unexpected expenses like an occasional fuel surcharge from a dealership supplier. And, after all, this fuel surcharge is from an out-of-town dealership that delivers exemplary service from a city located 90 miles away. I certainly couldn’t drive 90 miles for $1.25, nor could I have the part delivered by parcel service for the same cost. Nevertheless, the $1.25 surcharge glared from the page like a flashing red beacon, warning of more serious things to come.

MARKET FORCES
The reason that most parts wholesalers must pass the added expense of fuel price increases on to their customers is because their profit margins simply cannot support double-digit inflation in fuel costs.

While most repair shops can absorb a small percentage increase in shipping and handling costs for resale parts, adding a fuel surcharge of, let’ s say, $1.25 for each delivery, would force most shops to increase their profit margins on parts or consider the surcharge as a pass-through cost to their customers.

For those of us old enough to recall the early 1970s, President Richard Nixon attempted to control spiraling inflation caused by sky-rocketing oil prices through the implementation of price controls on domestic goods and services. The net effect of this short-lived policy wasn’t good. It plunged the economy further into recession because the nation’s distribution systems couldn’t balance the increased cost of foreign oil with increased prices. In some extreme cases, distribution came to a standstill because over-the-road truckers parked their semis rather than operate at a loss.

OFF-BUDGET EXPENSES
In the example of a dealership charging a $1.25 fuel surcharge to deliver a $19.18 part, I’m assuming that the surcharge is for the portion of fuel that has exceeded their budgeted rate of inflation for auto parts. Certainly, gasoline and diesel fuel prices jumping from the mid two-dollar to the mid three-dollar range in a matter of months can’t be anticipated in any budget. On the other hand, if fuel costs are in step with inflation, the fuel cost becomes an anticipated expense that can easily be budgeted into the future cost of the part.

Another thought came to mind when I saw the $1.25 tacked on to the parts invoice. Was the additional fuel cost divided equally among the route customers that day or was it pro-rated according to the value of the day’s purchase? For example, delivering a complete engine assembly doesn’t require much more fuel than delivering a set of spark plugs. So, while the $1.25 amounts to peanuts on an expensive engine delivery, it does add up on spark plug deliveries.

THE NICKEL AND DIME FACTOR
We only need to look at our telephone bill to understand how we can be nickel and dimed to death by miscellaneous charges. I remember from years ago that some automotive shop management experts recommended adding a “shop supplies” charge to each repair order. Shop supplies were defined as miscellaneous grease rags, chemicals, solvents, oil dry, small tools and the like.

This recommendation attained some legitimacy when shops at that time tracked their shop supplies and discovered the true cost of shop supplies. In my case, those often ignored nuts, bolts, washers, solvents and sealants amounted to more than $2,000 in lost revenues per service bay per year.

During the years I added shop supplies to my repair orders, the only vocal complaint I had was from one of the local merchants who, because of his petulant and complaining nature, wasn’t welcomed in most of our town’s auto repair shops. But when automotive service went online and discussion groups like the International Automotive Technicians Network (iATN) began to appear, the question of adding surcharges like shop supplies and hazardous waste disposal became a focal point for discussion. The general consensus of iATN participants was that customers generally took a dim view of adding surcharges for items that would normally be included in the shop’s hourly labor rate.

Call it the nickel and dime factor but, as many iATN participants said, adding fees like waste disposal and shop supplies offends the customer who feels that he’s already paying a fair price for service. Over the years, I’ve found it much simpler to limit repair order items to easily understandable line items like parts, labor, sublet services and sales tax.

WHERE DOES IT STOP?
Because I spent eight years on the local school board working on multi-million dollar budgets, I understand what happens when fuel prices increase faster than the rate of inflation. If fuel prices increase, let’s say, 30 percent over the amount budgeted in the preceding year, then the extra expense must be deducted from discretionary budget items like instructional supplies. Unfortunately, parts suppliers don’t have many discretionary budget items that can compensate for increased fuel prices.

The real issue is how fuel surcharges are distributed among a parts supplier’s customers. Will the fuel surcharge be distributed according to the number of customers, the number of parts deliveries or the wholesale value of the parts themselves? I would object, for example, to the cost being evenly distributed among customers. Because a smaller shop’s purchases might amount to only 10 percent of a larger shop, the cost of doing business would increase if the small shop paid the same flat-rate amount as the larger shop. I would also object to being charged $1.25 for each of perhaps a half-dozen deliveries each day because, here again, my unit cost would be increased on each item delivered. Obviously, the playing field would be unalterably tilted in favor of high-volume shops if either of these practices were implemented.

Perhaps the fairest method would be to adjust parts prices upward by, let’s say, one percent. The fuel surcharge on a $1,800 engine assembly would, for example, be $18. The fuel surcharge on an $18 set of spark plugs would be 18 cents. Using this method, each shop’s share of increased fuel prices would be based upon parts purchased, not on arbitrary numbers like the frequency of delivery or the number of shops being served by the supplier in question.

LOOKING INTO THE FUTURE
Although fuel prices have settled down from past highs, they remain a loaded gun pointed at the head of every parts distribution system. As long as fuel surcharges are perceived as a truly unanticipated, off-budget expense, they will be accepted by the wholesale market. If fuel surcharges are perceived as still another method of squeezing profits from service dealers, I think it would be fair to say that automotive repair shops might begin looking for a cheaper method of obtaining resale parts.















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