Richard "Dutch" Koch Jr. is stocking his company's warehouses a bit more fully these days. And he's encouraging his customers to buy in bigger quantities, too.

It's one of the strategies his Des Moines office equipment and supply company, Koch Bros. Inc., is using to try to mitigate the impact of record-high diesel fuel costs on freight charges.

With the average price of diesel nearing $3.50 per gallon, the cost of freight transportation is at the top of many business owners' minds, whether they're a business-to-business supplier, a retailer or a nationwide hauler of goods.

For businesses like Koch's that operate in the middle of the distribution chain, volume has become a bigger deal.

"What's happened is that factories have increased the minimum orders for paid freight," he said. "Other factories have instituted a freight surcharge. So in order to keep end users' costs down, we bump up our quantities, and we encourage our customers to order larger quantities. Instead of ordering a two-week supply, maybe order a month's supply. Customers who are able to stock a little bit will achieve a better price in an environment like this."

Delivery strategies

Matt Tofanelli, owner of Advance Delivery, said soaring fuel costs have also led him to reward higher-volume customers. The Des Moines business, which operates a fleet of about two dozen vehicles, has imposed a fuel surcharge based on the price of gasoline for the past four years.

"We have had a couple of customers who have generated fairly large bills with us over the past month, and we actually waived the fuel surcharge for them to cut them some slack," he said. For out-of-town deliveries, his company also tries to coordinate trips so that it can reduce charges whenever possible.

Tofanelli said most of his customers have been understanding about higher prices, though one client recently canceled his service and said he would begin having an employee handle deliveries.

For most companies with skilled workers, Tofanelli said, a delivery service is still a money-saver over having an employee run for parts or handle other errands. "I'd say it would cost a third of what it would cost to pull your man off the job," he said.

More planning

From one manufacturer's perspective, transportation costs are having the greatest impact on distributing finished products, said John Smit, president of Windsor Window Co. With plants in Iowa, Alabama, North Carolina and Texas, the West Des Moines-based business employs about 1,000 workers and distributes its products nationwide.

"We're trying to do a lot better planning in terms of our loads incoming as well as outgoing," Smit said. "Otherwise we don't have much of a choice, and we absorb [higher transportation charges] and try to offset costs in other areas that we have discretion over."

Higher fuel surcharges imposed by private carriers with which the company contracts have probably added between 1 and 1.5 percent to the cost of Windsor's finished products, he said. "That's the surcharge only," Smit said, "not the base freight." Carriers seem to be trying their best to hold the line on annual base rate increases, "because they know many manufacturers are already absorbing the increase," he said. Additionally, the cost of many petroleum-based components is also increasing as the price of oil goes up.

What about some of the largest haulers in the business, such as Des Moines-based Ruan Transport Corp.?

"It's a question I get asked all the time," said John Ruan III, the company's chairman. "How do you guys handle all these fuel costs?"

The short answer is, they pass them along to their customers in the form of surcharges, Ruan said.

`"Fuel prices are always a concern, particularly when they go through the roof," he said. "But for the most part, I think most trucking companies are in one way or another hedged against those increases. Ultimately, it's really the customers and the consumer who bear the brunt of the cost of fuel."

Cost recovery

Yoshi Suzuki, an Iowa State University professor of logistics and supply chain management who works closely with haulers on efficiency issues, said fuel surcharges don't entirely protect the trucking companies.

For the most part, I think most trucking companies are in one way or another hedged against those increases. Ultimately, it's really the customers and the consumer who bear the brunt of the cost of fuel.
- John Ruan III Chairman, Ruan Transport Corp.

"What I'm hearing is that typically trucking companies recover only 60 to 70 percent of the cost of fuel, because some shippers will negotiate and play games with the carriers," Suzuki said. "If you're a big shipper like Wal-Mart, it's really hard for carriers to pass on the entire costs to them, or they'll say, 'We'll go with another carrier.'"

Ruan said because his company is a dedicated carrier for an exclusive customer base, "we have a cost pass-through where the customer absorbs (the fuel cost increase) 100 percent. Where we would absorb it on the bottom line is where the fuel needs to go up or down to a certain level before the next surcharge kicks in. Correspondingly, if the rate comes down but doesn't come down enough, the customer absorbs that."

However, the company has also taken a number of steps to manage fuel costs, from training drivers to operate their rigs more efficiently to using its nationwide bulk-fuel network as much as possible, Ruan said.

"We buy our own bulk fuel, and it's generally cheaper than what's available at truck stops," he said. "We put extra fuel capacity on these long-haul trucks so they can carry as much fuel from the bulk-fuel facilities at our terminals as possible. They can generally travel 1,500 to 1,600 miles without refueling. And we'll try to refuel them with bulk fuel."

For its long-haul trucks that idle overnight at truck stops, the company has also begun mounting auxiliary power units on the tractors. Those units require only about one-eighth as much diesel fuel as a trucker would otherwise use to keep the electrical system operating while parked. The majority of the Ruan fleet, however, serves shorter routes and wouldn't benefit from such systems, Ruan said.

Over the long haul, Suzuki said, sustained high fuel prices would create further consolidation in the trucking industry and a greater shift toward intermodal transportation that employs both rail and trucks.

"In fact, some trucking companies are even promoting that they use intermodal because it's greener. So as the price goes up, I would expect more shift to intermodal transportation."

Looking at the issue with an entrepreneur's eye, Koch pointed out that businesses like his that offer complementary product lines may benefit by selling customers on the advantages of consolidating from several suppliers to one. It's worked well for his company as he has reduced his list of wholesale suppliers, he said.

"So a company consolidating their sources could save money," Koch said. "And each of these categories is experiencing the same (cost increases). So there are efficiencies to be had."