Financial Management

Gasoline prices in 2001 surged during April and early May, rising nationally 31 cents per gallon to reach $1.71 in mid-May. Some U.S. regions have experienced even greater price hikes, often as much as twice the national average. The surging prices are attributable to a number of factors, but the root of the problem is the tight crude oil market, which causes low inventories and increased potential for higher prices, according to John Cook, director of the petroleum division, U.S. Department of Energy, Washington.

As gas and diesel prices continue their upward climb, most jan/san distributors are feeling the pressure. Increased product costs and decreased profit margins — results of the flaring fuel costs — plague the bottom lines of many jan/san distributors.

The chain reaction begins with manufacturers as they pass cost increases on to distributors, who then pay more to ship and receive their products. They then need to pass along cost increases to end users. However, it is only a matter of time for those who haven’t already begun to pass increases on to end users and have been willing to take losses before they are forced to pass increases on to their customers.

Pyramid School Products/Pyramid Paper Co., Tampa, Fla., handles multiple freight orders each year and is feeling the sting of rising gas prices. On the other hand, Dallas Flooring Supply, located in Dallas, deals with a lot of smaller shipments and the effects of the price increase are minimal.

“Since transportation costs have gone up, we absolutely have had to raise our shipping costs,” says Kenneth Miller, executive vice president of Pyramid. Since Pyramid runs tons of freight, the company feels very affected by the countrywide gas price burden, he says.

Even with the steep shipping increases, Pyramid has been trying hard not to pass the increase on to end users, which is nearly impossible. “Costs are constantly going up. The manufacturers have been raising their prices and that rise trickles down,” he says.

Jerry Chandler, president of Dallas Flooring, says because his company does a smaller scale of shipping than most distributors, the gas price increases haven’t affected shipping costs too much thus far. However, his company is dealing with other related expenses. Dallas Flooring’s customers have been hit with price increases.

“There have been many price increases on products, especially those products that are petroleum-based,” he adds. “This is due to raised shipping costs on the manufacturers’ end.”

Kenneth Miller also has begun using certain sales tactics to help increase profit margins. “Every business is different when it comes to passing increases on to customers. Some companies have to pass it straight to the end user, but we figure the freight increase into our cost in advance,” he says. “Ahead of time we figure it into our price. Gas prices have to do with everything, so we are very conscientious when it comes to our freight business.”
Although Pyramid’s price increases might not be as noticeable, unfortunately they still exist.

Savvy distributors are constantly looking for methods to save costs on shipping and receiving bills, yet many distributors don’t have a lot of flexibility — if an end user wants a product, a distributor has one of two options: provide the product or the customer will shop elsewhere.

Distributors are backed up against a wall. “When cost keeps going up with products we can’t keep absorbing those increases,” says Chandler.

So distributors do what they can to cut corners and lessen the burden on their customers. For instance, Pyramid often tries to group more products together in a shipping run to avoid making extra trips. Miller warns, though, that distributors have to be careful to keep in mind the possibility of delayed shipment and dissatisfied customers.

So far, Dallas Flooring has not had to change its minimum policy orders. “We have kept our policy as-is,” says Chandler. “And we don’t foresee having to change the way we are currently shipping in the immediate future.”

Although it seems impossible for distributors to prepare for price increases like the current one, there are opportunities that distributors explore to keep customers happy until prices drop.

“We try to take care of the customer as much as we can — maybe by offering more in the way of service or product,” says Chandler.

Besides servicing the customer in the best way and trying to eat as much cost as they can, positive-thinking distributors can also see an end in sight.

Chandler and Miller both heard that fuel prices might stay the same or even begin to go down — yet one question remains: When?

Demand for gasoline is likely to remain strong during the summer driving season, keeping pressure on prices, however next year the storage situation is expected to improve somewhat, and with that, consumers should see a dip in average gas prices, says Cook.