Fuel prices worry distributors

As oil and gas prices rise, customers consider scaling back purchases and distributors ponder passing along fuel surcharges

By Joe Nowlan, Associate Editor -- Industrial Distribution, 6/1/2006

As summer approaches, this year—much like last—is dominated by worries about the price of a barrel of oil and, by extension, a gallon of gas.

Manufacturers and distributors are always watching the price of fuel and have been through this before. Still, it doesn't mean they have to like it—or can afford to take things in stride.

As the price of oil remains more than $70 a barrel, distributors are feeling the impact on expenses and profits. If a supplier adds on the costs of shipping the product to its distributor, some part of that will be passed on to customers.

"We're reminded that freight costs are a huge portion of our business," said Keith Nowak, president of MPT Drives, Inc., in Madison Heights, Mich. "When we start to do the math at the end of the month, these freight charges can be 10 to 12 percent of the product costs. It's just huge."

MPT is a fluid power distributor. Usually, the company covers the cost of transporting freight into its building, and customers cover the cost of then shipping it to their respective locations.

MPT leases from area transport companies, which have been assessing fuel surcharges in recent months. MPT passes those charges on to customers, Nowak said.

"We'll group the whole thing together as a freight charge," Nowak explained. "We pass along what we get hit with."

Not every distributor has taken that approach. A. Louis Supply in Ashtabula, Ohio, has a fleet of seven trucks, two of which are on the road daily, with the rest used as needed. As a distributor of electrical equipment, cutting tools, abrasives and industrial PVF, A. Louis Supply emphasizes value-added service, explained president Rick Coblitz.

Those trucks symbolize that value, Coblitz said, pointing to the convenience of being able to get products to customers on very short notice.

"We consider the trucks to be one of the services we provide," said Coblitz. "...It's an expense that has increased, obviously. But we feel that gives us a competitive advantage, so we have not charged customers for that."

When a steel shortage occurs, the price impact may not be felt by every consumer right away. Regardless of their occupations, however, everyone is confronted with the price of gas whenever they fill up. And the more gas prices are talked about, the more of an impact you'll see in other areas of the economy, say many business owners.

"It definitely depresses our sales," said Tim Higgins, vice president of sales for Conney Safety Products, in Madison, Wis., which counts the construction industry as a major part of its customer base.

"This past April, there was an awful lot of talk about the price of oil and gas. Our year had been pretty strong up to that point, but we were disappointed with those April results," he said.

Higgins said that worries about gas and oil prices can create an apprehension on the part of companies as far as how much to spend, be it on a project or on inventory.

"It seems that the talk about the oil and gas prices creates a caution in [customers'] buying," said Higgins. "And that causes companies to keep their inventories lower, not run production up, and maybe hold off on starting major projects. Construction companies seem to delay some major projects when oil prices spike."

These delays are caused, in part, by companies hoping that oil prices will come back down, even if only a few cents a barrel, Higgins explains.

"They're just trying to buy a week or two of time in the hopes that the price will go back down again," Higgins said.

Finding new sources for oil and energy has been a source of debate for years, of course. One consultant on the issue of energy and oil prices is Dave Ross, director of education and training at Lawson Software, Inc., which recently acquired his former company, Intentia Americas. He encourages more research and exploration into new sources.

"There isn't enough discussion about alternative sources here in America," he said, referring to ethanol, among other potential alternatives. Ross agrees that more exploration for oil sources might help, but would have limits.

"I heard someone say recently that even if we opened up potential [oil] reserves in Alaska, it would hardly make a dent. That's not Saudi Arabia up there," Ross said.

In addition to gasoline, many products used by manufacturers and sold by distributors are petroleum-based. Louis Supply sells many of them, such as wire insulation, Coblitz said.

Nowak is intrigued by the long-range potential of alternate fuels like ethanol and electric and hybrid cars. Some MPT customers are researching and investing in hybrids, he said.

"Two years ago, you'd drive down the street and never see a hybrid car," Nowak said. "If you did, it would stick out like a sore thumb. But here [in suburban Detroit], the automotive capital of the world, we're seeing a lot more electric and hybrid cars."

Allen Andreas, chairman of Archer Daniels Midland, said recently that he expects ethanol capacity in the United States to increase to 6.5 billion gallons over the next 12 to 18 months—up from 4.5 billion gallons earlier this year.

Purchasing magazine recently reported that the price of synthetic ethanol has doubled over the past 12 months to just less than $3 per pound in spot markets this spring. Since ethanol is made from corn, however, supply would seem to present far less of a "keeping up" challenge than oil.

Until cars can "fill up" at their local vegetable stand, however, what can a distributor do? The best advice seems to be for companies to stay smart, be cautious and do what has worked up to now.

"We watch our shipments. We'll try to consolidate [shipments]," Nowak said. "We're just more aware of freight costs than we ever were before."

"You try to buy smart," Coblitz added. "We'll maintain the customer service our customers are accustomed to, in the hopes they'll choose us over the competition."