Last month I addressed a carrier's need to institute surcharges when it encounters an unexpected increase in costs that are well beyond its control, such as a hike in fuel prices related to world or national events. At times like these, surcharges can make the difference between whether or not a carrier stays in business.
Unanticipated costs are particularly troublesome in an industry like trucking, where service contracts are long and prices can't be adjusted. They can be even more crippling when there are no substitutes for the commodity involved, i.e., diesel fuel.
Surcharges became an issue in another industry recently. Considering the differences between trucking and the steel industry, surcharges in trucking appear all the more necessary. An incremental change in the tariff on steel caused manufacturers using steel in their products to suggest that a surcharge was in order. They argued that since the tariff had been instituted without warning, they had no time to adjust product designs to reflect the higher cost of steel. In addition, they said that sales of goods manufactured with steel would decline as customers turned to products made with alternative materials.
Let's consider these manufacturers' claims of their need for surcharges and compare it to the need in trucking. The argument that the tariff occurred without warning is a little weak since it had been under discussion for years. Moreover, to some extent, these same manufacturers brought the tariff on themselves by switching to offshore producers in the first place.
The argument that near-substitutes existed for the final goods made with steel also appears dubious. Manufacturers of similar goods that require steel have already endeavored to substitute aluminum, glass, and plastic in production. The effect of the tariff on shifting consumers to similar goods that contain less steel probably will not be substantial.
Moreover, one could argue that the steel tariff was a one-time event. As such, the need for legislation to force a surcharge when a tariff is implemented would seem unnecessary.
In the for-hire trucking industry, on the other hand, fuel price swings come with virtually no warning and they are definitely not one-time events. These fuel price swings are directly correlated to carrier profitability: When fuel prices rise, carrier profits decrease; when fuel prices fall, carrier profits increase. In fact, fuel prices play such an important role in trucking that their volatility can determine whether or not a carrier stays in business.
The fact that carriers must now bid for service contracts that sometimes last for extended time periods means that they often provide services at costs that are too rigid to allow for uncertainty. I'm not taking the bidding process itself to task. But when deregulation causes excess capacity to exist and flourish, then the controlling contractual power lies in the hands of the buyers, not the providers.
As an advocate of the free-market system, I would not normally find this so troubling. But its impact on the economy as a whole is something to be concerned about. By the end of 2002, we will see the largest continuing fallout of businesses than at any other time in our history-businesses that are necessary to keep the economy going. We can do without telephones, software, and biotech promises; but food on the table and clothes on our backs are something else.
Next month, I am going to suggest an approach to this problem that both carriers and shippers should find acceptable. Assuming, of course, that we all agree that a healthy trucking environment is better than a weak one.