Letter from Ed: So, You Think You Know Your Costs?
When trying to calculate costs, you have to look at the details. Every time your people touch a pallet, it adds cost.
By Edward C. Brindley, Jr.,
Date Posted: 4/1/2009
Late last summer and early last fall I could see the storm clouds gathering. Things were likely to get tight. It was time to start planning for a more difficult time for the pallet industry. After all, the sawmill and logging industries were already struggling with what some had called a recession; a few were even beginning to call it worse.
Yes, I knew that tougher times seemed inevitable. Many readers knew it was coming as well. I sketched out ways to cut costs and still maintain our products and services and support our people. I thought my initial plan was sufficient to handle anything that I could foresee. After all I am a mathematician and understand numbers. Right? Well, maybe!
The first thing I re-discovered is that running a business keeps on getting more complex each year. Billing tends to follow this pattern in many instances. The more complex your invoices get, the more difficult it becomes to know your cost and understand what adds to it. From examining our printing bills to phone and credit card bills, my head began to ache.
I said that I “re-discovered” business complexity because when you are surrounded by it you just adapt. This wasn’t really a new concept to me. But I had lost my bearing about just how complex things have become. Anther reason is that complexity tends to be hidden in the details that are overlooked when you are dealing with the everyday grind of managing a small business.
Let’s examine one aspect of this business complexity – jargon. The phone bill is probably the best example of this. We currently use a T-1 line and are looking to change to Business Cable service. Our current phone bill has items ranging from “intrastate” to “intralata” usage, T-1 usage trunk, “Power Pak”, internet gateway and more. I don’t know what much of this means. The language changes so frequently when it comes to technology that it is hard to keep up.
Service providers love to quote the main flat rate and then leave off all the ancillary charges, fees and taxes. These are real costs though that must be factored into any real apples to oranges comparisons. The same thing happens to your customers when a competitor quotes a really cheap rate and skips on the quality standard or cuts back services. Then these services get tacked on later through additional fees if the customer demands them.
Your customers have to deal with the same complexity when it comes to pallets. Comparing white wood to rental or new to repaired pallets, cost is more than just the base price the buyer pays at the point of purchase. What about lost pallet fees for pallet rental? These costs can skyrocket if you don’t have a good logistics infrastructure in place to keep track of pallets. Additionally, these hidden costs can be used to “hold accounts hostage” if a company expresses desires to switch away from rental.
Rental companies claim to remove the headache of managing pallets. But I have talked with end users who report that pallet rental simply creates a new set of headaches. Customers have to reconcile lost pallets, haggle over daily usage rates, verify audit numbers from the rental companies, etc. I recently spoke with a rental pallet customer who claimed that it costs on average 75 cents to $1 per pallet per year for a company to manage its involvement in the CHEP pool. This cost is not something that most people consider when they are being told about getting rid of the headache of being in the pallet business.
While a customer may find it easier dealing with one or two big vendors, those suppliers will have more negotiation power than a number of smaller companies. Many customers that have switched to rental have found this out the hard way.
Of course, rental has its advantages too. Costs can be lower if you have precise controls that minimize billable rental time and lost pallets. Rental companies may tend to offer on average a higher quality pallet than what many white wood companies provide. Rental companies have a large volume of block pallets available while a majority of the white wood pallets are stringer style.
The point is that the sales price is not always the greatest consideration when it comes to price. You have to consider the law of unforeseen consequences. Back a few years ago when companies first started deploying RFID in warehouses, research by Michigan State University found that companies had underestimated the costs and disruptions caused by employees purposely sabotaging readers. Even the best designed plans can come up short if the people who are supposed to make it work don’t really buy into the program.
When trying to calculate costs, you have to look at the details. Every time your people touch a pallet, it adds
cost. Every time a pallet causes product damage, your customer experiences
lost revenue and potentially a lost sales opportunity.
By reviewing bills with vendors, we have discovered both discounts that we didn’t know we were getting and hidden costs. For example, I saw a line item for Web hosting on our T-1 bill. Our provider has been charging us $25 per month for almost three years even though we use a different company to host our Web sites. You bet I’m going to get this credited back to us.
The development of new technology has a way of creating competition as well as confusion and complexity. Looking at the phone bill provides another great illustration of this point. Ten years ago 1-800 numbers were a selling point because customers were paying for every long distance call they made. I remember bills with pages after pages detailing every little call we made. Now with the prevalence of unlimited calling plans, the value of a 1-800 number is much less. In some instances, a 1-800 call can be very expensive. For example, if you call a 1-800 number using your cell phone both parties have to pay for the call in many instances. This “free” call becomes more expensive than simply dialing a regular number.
When looking at costs, there are always trade offs. One of the difficult things is calculating which features or benefits are truly important. Looking at the difference between T-1 and cable technology proves this point. Cable tends to offer faster speeds, but it doesn’t come with service level guarantees the same way that a T-1 does. Most serious IT professionals will tell you that a T-1 line is still considered more reliable than cable technology. I am not really sure how much of this is merely perception and the fact that a T-1 line is a much older, proven technology for a multiple phone line situation.
There are some things you just can’t do without. Phones are one of them. We have found that keeping up with technology can help you make the right decisions and reduce cost. Cable technology has just become available in our area for businesses with more than four phone lines. We hope it will allow us to cut costs and increase the speed of our Internet connection at the same time.
As a general rule of thumb, stick with suppliers that are progressive about providing you the services and products that truly help you meet your customers’ needs. The Enterprise has added digital editions over the past year, which we believe provides benefits to both readers and advertisers. As a publisher our company continues to innovate and provide a wide variety of electronic communication products.
Ever find yourself wishing for the grand old days when business was easier and more fun? I know that I do. And I know that the best way to move in that direction is to keep as lean and mean as possible while still maintaining the contacts and products that you need to advance.
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