In our last blog, we left Nicky Hammerlane preparing to dive back into his apple pie with ice cream and a big cup of joe- but not the originals, as you’ll recall. B.A. Rhoades, angry over another trucking company stealing his customers, had slammed his fist on the counter, spilling Nicky’s coffee into his pie. Nicky and B.A. were now conferring at a table in the back of the truckstop restaurant, trying to figure out how B.A. can retain his customers. His competitor has been stealing shippers by tremendously undercutting the rate at which B.A.’s trucking company can afford to haul the freight.
B.A. began, “Nicky, I got no idea how to stop this low-life from stealing all my customers. His rates are way below what we can afford to haul them for.”
“Well, B.A.,” I said, “first, unless he knows something neither you or I do as far as lowering costs, or he’s doing something unlawful like stealing fuel, he can’t sustain this rate level for very long. If he does, it will start eating away his business piece by piece until his quality of service suffers, and customers start looking for another carrier.”
“So what do I do?” he asked. “I can’t just idle my trucks and wait for him to self-destruct. That could take months.”
“True, but there are a couple of actions you can take that’ll keep the pressure on him to keep his rates too low, and provide your carrier with the needed revenue to wait out his failure,” I told him.
“I’m all ears,” B.A. said.
“First and foremost, how long has it been since you sat down and looked at your costs?” I asked.
“WAIT A MINUTE!” B.A. yelled, slamming his fist on the table. I quickly picked up my coffee so as not to repeat the previous pie assassination. “Why should I have to hire an accountant and dig through bales of files?”
“Bear with me here, B.A.,” I said, as I put my coffee back on the table. “What we need to see is whether we can lower what you charge the customer, so when the opportunity to get them back comes along, you can make them an offer they won’t refuse. It’s obvious the last customer he stole is very freight cost-conscious, so you’ll need to appeal to that concern. If we find you’re providing them the lowest rate possible, you’ll have the documentation to back it up. If we find ways to cut some of the costs, then we’ve strengthened your negotiation position when the time comes to get them back as a customer.”
“I’ll be honest,” BA said with concern, “I’ve never even done a Cost Analysis. It sounds like a complicated, long, drawn-out process requiring a full-time accounting department. I don’t have an accounting background or the staff to undertake something like that.”
“B.A., I’m not talking about a Harvard School of Business MBA’s cost analysis. I’m talking about a nuts and bolts, get-to-the-details-quickly study of your costs. Something you could easily do over a weekend. Let me explain?”
“Well, if it’s not too complicated,” he responded, apprehensively. “I’m listening.”
I thought, “Careful, Nicky, you’re losing him. Make this simple, or he’s going to storm out the door.” “Stick with me, B.A..” I reached into my messenger bag for a pen and notebook and handed both to him. “Here, I suggest you take some notes to refer to later, and that way you can also slow me down if I start explaining it too quickly.”
“OK,” he said, with a tad less apprehension.
“Step one, make a list of all your business expenses, from insurance to truck payments to fuel, phone and other office expenses on separate sheets of paper. Place the title of each expense at the top of the page. At this time we’re not concerned with the amount of the expense. The more complete your list of expenses, the better. For example, I’d break down truck expenses by truck and trailer separately, giving each truck and trailer separate pages for fuel, tires, maintenance, repairs, truck payment, comp and collision insurance, along with anything else associated with running that truck. Do the same with your office, your shop and each employee or contractor.” I had another mouthful of pie while B.A. finished his first notes. “Under the title on each page, write the word ‘Eliminate’. Then below this on each page, list 1 through 4 and leave plenty of space between each number.”
“Got it,” he responded, “but all those detailed expenses are gonna take hours to get together.”
“I understand,” I said. “I wouldn’t ask you to do something that isn’t absolutely necessary. And this list is detailed too - but it’ll be worth it in the end. This list helps you determine what would happen if you totally eliminated any of these expenses. Here are the questions you need to answer on each expense. Just fill in the answer for each question under the corresponding number on each page.” And I wrote out my formula.
1. How necessary is the item, service or person?
2. What would happen if the item, service or person was totally eliminated?
- Would it lower or improve customer service?
- How would it affect overall efficiency?
- Would something or someone else have to replace or fill the void left by eliminating this cost?
3. Would eliminating the expense cause other costs to increase or decrease? By how much?
4. What is the net cost increase or savings after completing the elimination?
B.A. studied the sheet. “It’s making a little more sense. But what if I can’t eliminate anything?
“Granted, you’ll find the Elimination list is usually very short. And usually it’s small amounts, but occasionally you’ll find items that either aren’t needed at all, or cost way more than they should. So don’t be concerned if the list is either very short or even non-existent. The main objective is to look at the collateral effects of each item if eliminated - will it increase a cost elsewhere so there’s really no net savings? That’s all a part of the evaluation process. Now let’s move to the next step."
B.A. flipped to a new page in the tablet. “OK, fire away.”
Marge appeared with more coffee. Amazing server. “On the reverse side of each page, write the same expense title as on the opposite side and below that write ‘Reduce’ followed by numbers 1- 3 with space to write between each.”
“Hold it,” B.A. said, flipping pages and writing. Then he finished his pie. “Next?”
“Now for the questions which determine what’ll happen if you Reduce the expense instead of getting rid of it:
1. At what level is the item, service or person necessary?
2. What would happen if the cost of the item, service or person is reduced?
- Would it lower or improve customer service?
- How would it affect overall efficiency?
- Would something or someone else have to replace or fill the void left by this cost reduction?
3. Would the cost reduction cause other costs to increase or decrease? By how much?
“Did you get all that, B.A.?” I asked.
“Got it down on paper,” he said. “But how can I cut costs if I don’t know the amounts of each expense?
“Great question,” I answered. “What we’ve done here, rather than just look at the amounts of the expenses, is we’ve determined the quality and need of each expense. What many companies do is go after the high dollar costs and try to reduce or eliminate them, but in many cases those are the ones that are the life-blood of the operation. We’ve looked at the worthiness of each and the collateral effects each would have on both the operation and other expenses. That way when you do cut costs, you’ll make your carrier more efficient and more profitable, not just lower costs to try and save money.”
“Now I get it,” BA said with an air of excitement. “In the past, when I thought about cutting costs, I always figured it meant giving up things the company needed, not being more efficient. Now, you also said something about keeping pressure on him so he can’t raise his rates and find the needed revenue to keep going until he fails.”
I looked my watch. “This is Thursday. You think you could do this analysis over the weekend?”
“I’ll sit down with my wife; she’s majority owner anyway, and we’ll get this done. Our office is about 4 miles away - here’s my card and there’s a map on the back showing you how to get there. Say we meet at 10:30 Monday?”
“I have a quick run over the weekend, doing a favor for one of our customers. Got a new piece of equipment I’ve got to bobtail to, hook to a special trailer and bring back here by Monday. After I deliver and hook up my trailer again, I’ll run by your office and we’ll come up with the answers to those other problems.”
B.A. stood and picked up the check. “Thanks for putting up with my tantrum. Duke was right. I really think you can help us; hell, you’ve already taught this old dog a couple of new tricks. I’m looking forward to Monday.”
Join Nicky for the Conclusion of The Case of the Rate War in our next blog. Will B.A. Rhoades get his customers back from the from his low-life competitor, or has Nicky met his match?