Like many other businesses, motor carriers tend to become complacent about the small stuff when the economy starts to improve. But what they don't realize is that it's the small stuff that can put them out of business.
“Creeping inflation” has always been on of my favorite terms in the body of economic lingo. It's got a kind of insidious ring to it. And indeed, it can be every bit as deadly to a business as full-blown, runaway inflation.
Creeping inflation refers to the onslaught of small increases in costs across a broad array production factors. At first, they don't even show up on management's radar screen because the increases are small enough to be considered cost variances that could be caused by any number of things.
In fact, it's often not until the costs have increased to a significant amount that fleet managers are forced to acknowledge them.
Some of the cost items that tend to slip in under the radar include office supplies, on-the-road expenses, utilities, and maintenance parts. Individually, they don't account for a major portion of overall expenses. But when the costs start to inch up, they can quickly eat away at a fleet's profit margin.
It's the costs associated with fuel, equipment, and wages and benefits that make the headlines. And they do need to be monitored closely since any movement in these expenses has can have an immediate impact on the bottom line. Carriers are so tuned in to these expenses that they react right away when costs start to increase.
Many carriers have systems in place to monitor variations in fuel prices, and are conscientious about keeping meticulous records of driver pay and productivity. But they're not so conscientious about keeping track of the “miscellaneous and supply” category. Consequently, month-to-month variations in this area get lost in the shuffle.
One reason it's so difficult to monitor these cost changes is that the buying and use patterns often do not coincide. A fleet might decide to purchase oil filters for the maintenance shop in bulk to take advantage of a retail special or because it's more cost-effective to order in quantity. But those purchasing patterns don't reflect variation in filter use.
If the cost is recorded at the time of payment, there will be a bubble in the pattern of operating expenses. This is also the case for many other expenses. And they're often categorized as being at a level that doesn't require management approval.
What sometimes happens is that by the time these cost increases come to the attention of management, they've been in place a quarter or two. How does this happen? Most accounting systems allow for cost variances in so-called Category B expenses, while maintaining tighter control over Category A expenses. Category B items are really only brought to management's attention when a consistent pattern of increase has developed.
It looks like our economy will move into a pattern of creeping inflation for the next six to eight quarters. Even though we could see inflation at rates that are double those of the last six to eight quarters, we will still be below some historic levels of 6% overall inflation.
Our problem is that to minimize the impact of inflation, we tend to manage the major cost items, but not the minor ones. In fact, some of these minor cost items could experience double-digit inflation over the next six to eight quarters — and we might not even realize it.
But ignorance is not bliss.