Financial Data
Updated 20 Jul 2018


Managing costs without affecting customer relationships

Freight and logistics players face rising costs that impact the bottom line. Here’s an overview of the transport landscape and what you need to know about managing customer expectations.


26 March 2018  Share  0 comments  Print


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According to The World Bank, South Africa remains a leader in transport and logistics among middle-income countries. But numerous challenges, resulting in higher costs for transporters (and inevitably their customers), are a cause for concern.

Infrastructure is cited as the leading challenge for transport businesses to strategise around where growth is concerned.

And, although infrastructure challenges are a common trait amongst BRICS members (Brazil, Russia, India, China, South Africa), South Africa’s under-utilised rail network means the country is more reliant on road freight than its BRICS counterparts.


In 2016, logistics made up 11.8% of South Africa’s GDP (Gross Domestic Product), totalling nearly R499 billion.– Focus on Transport


A snapshot of SA’s transport and logistics landscape

Bizconnect Embedded _Transport 2

According to a report by local trucking journal,Focus on Transport, South African businesses must look at reducing logistics costs.

But how can that be achieved in a country with long in-land and coastal transport corridors, where truckers rely heavily on infrastructure that’s arguably not on par with international standards? The price of fuel keeps going up too, placing added pressure on margins.

Related: Budget Speech 2018: Increase in fuel and RAF levies

Johan Pienaar, deputy executive director of Agriculture South Africa (Agri SA), says he can’t place an exact number on how much farmers, in his experience, spend on contracted transport, but farmers themselves are believed to spend around R12 billion just on diesel each year.


“Fuel price increases [and the cost of road tolls] impact transport costs to a large extent,”Pienaar says.“The poor condition of infrastructure in many areas is also leading to increased vehicle damage and maintenance costs.”


An academic perspective on transport and logistics in SA

The University of Stellenbosch launched its Logistics Barometer in 2015 to garner a better understanding of South Africa’s transport and logistics industrial megacomplex. In one of the papers published by the Logistics Barometer’s chief authors, Professor Jan Havenga, notes that road transport is the most significant component of logistics costs in South Africa.


“In the past, we noted that up to 85% of transport costs in South Africa were attributable to road transport tariffs with rail tariffs contributing approximately 13% and pipeline tariffs 2%. Fuel, however, remains the biggest contributor to road transport costs. Uncertainty seems to be the only constant in the fuel price going forward and mitigating this risk requires a more in-depth understanding of the structure of the transport market.”– Professor Jan Havenga – University of Stellenbosch


What SA’s freight movers can expect in the year(s) to come

Local economic analysts say that the price of fuel and the country’s fuel levy will continue to rise year-on year and this situation will particularly impact transport-reliant businesses and transporters who are already functioning within narrow profit margins.

Professor Havenga writes that transport and logistics costs are a serious problem, impacting the overall competitiveness of supply chains.

“The increases in transportation costs is mainly caused by the cost of fuel, but a larger workforce and above-inflation salary increases and demands are also a key challenge,” he explains. “The fuel price itself is determined by government and a major component of the fuel price consists of fuel taxes, therefore transport and logistics-reliant companies have no control over this.”

Related: 4 Mega-trends set to impact the transport and logistics sector

He says that if you are involved in a supply chain at any level, you could alleviate narrow-margin situations through:

  • Better planning of your cargo loads and fleet route optimisation
  • Forming partnerships with other transporters in your niche
  • Assuring you have booked both forward and return loads.

In the years to come, inadequate infrastructure, the rising cost of fuel, uncertainty over human resources capacity (because of unrest and strikes), and operational inadequacies might lead to added cost consequences for transport and logistics businesses and the many companies that rely on freight movers.

If you move freight for companies, here’s how you can confidently talk to customers about raising your transport prices:

How to raise transport prices and keep your clients

Talking to a customer about raising prices, in any sector, especially when the economy isn’t buoyant can be a nerve-wracking experience – even for the most accomplished of businesspeople. But, raising prices is inevitable and you can’t avoid the conversation when seeking growth.


“When discussing a price increase in a business-to-business environment, it is important to remember that your customers have probably had to have the same discussion with their own customers.”– Mark Hunter, senior contributor at TheBalance.com


Here are five key questions and suggestions, courtesy of Mark Hunter at The Balance, to reflect on before talking to your clients about price increases for your transport and logistics services this year:

1) Does your client factor your transport services into their pricing structure and do they add a standard percentage based on your freight rate when selling goods on to their customers?

  • If they do add your transport costs on as a percentage of their prices, you can reason that they will make more money by taking a standard percentage of a higher amount.

2) How reliant is your customer on your transport service in terms of their full logistics scope and requirements?

  • If your contribution to the customers transport and logistics spend is a small percentage, you could argue that that the amount of your price increase is only a small addition to overall business costs.
  • If you move a lot of freight for the customer and you are closely involved in their warehousing, consolidation and distribution, you could argue that your price increase is required to sustain on-time, every time delivery across the chain.

3) Have your customers had to deal with increases from other transporters or logistics providers?

  • Your customer has probably dealt with price increases recently, so you could try and identify the extent of those percentage increases and how they responded to it. Depending on your rapport with clients, you could simply ask them what increases have been levied on them by other freight movers. Should your percentage increase fall closer to the lower end of the spectrum, you can actually point out how your price increase is comparatively smaller than the other service providers.
  • What happens if your prices have gone up more than the competition? It’s suggested that you either explain what necessitated the increase (fleet rejuvenation is a good thing to talk about here). You could also ask the customer what stops his or her other transport suppliers from raising prices again in a few months, assuring the customer that your increase will be fixed for at least the next year.

4) How does your customer view (and revere) the freight moving services you provide?

  • Should your reputation for on-time, safe and secure delivery of goods herald you in the eyes of the customer, you can emphasise that your price increases have been sensibly calculated and arrived at to guarantee continued quality of service.
  • Some transporters might not have the best rapport with a customer, so if that’s the case, you can use a price increase opportunity to assure them that the increases are to allow you to start fixing some of the operational matters. You can even reassure the customer that your services are going improve through the crafting of a Service Level Agreement

5) How should I respond if the customer raises an issue related to the price increase I have presented to them?

  • It’s advised that you thoroughly prepare to answer the tough questions about your prices increases. If you have crafted any projections of how your costs have escalated in moving freight for the customer, and how other companies are experiencing the same increases, you should share this information during client meetings.
  • The rising cost of fuel, increasing tariffs, heightened tolls – these are just a few of the costs that you can unpack, but you need to have the costs in hand and ready to discuss. It’s believed that having this sort of open conversation with the customer can show you have an understanding of why they might be distraught that you’re raising prices.
  • You could also prepare a document that highlights how your transport company is taking steps to reduce its costs (fitment of fuel saving devices, installation of telematics for better route planning). You can also emphasise that you haven’t pushed prices up for a while, if that is in fact the case, and that you need to keep prices in line with inflation to ensure you can provide a quality service to the customer.

“Price increases are again growing more common and acceptable as long as they are well thought through and not seen as a way to merely increase profits,” says Mark Hunter, senior editor atThe Balance. “Because price increases are an inevitable part of business, you can't avoid them.”

So, instead of letting a price increase conversation stress you out, why not rather leverage the opportunity to improve your freight-services selling skills?

NEXT STEP

If you would like to grow your transport and logistics business, you can make use of our tailored financial solutions to fund new trucks, trailers, warehouses or telematics technologies. Or, why not talk to one of our representatives in the Community section to learn more about the transport-focused specialised services we offer.

Resources:

[1] http://www.focusontransport.co.za/index.php/features/featured-may-2017/3271-down-with-logistics-costs.html

[2] https://www.fin24.com/Budget/BudgetInsider/significant-knock-on-effect-if-fuel-levy-is-increased-in-budget-2017-expert-20170208

[3] https://www.thebalance.com/how-to-sell-a-price-increase-to-your-customers-2948463

[4] https://www.sun.ac.za/english/faculty/economy/logistics/Pages/logisticsbarometer.aspx

[5] https://www.standardbank.co.za/standardbank/Business/Loans-and-finance

[6] https://www.standardbank.co.za/standardbank/Business/Specialised-services/Fleet-management

[7]A Logistics Barometer for South Africa: Towards sustainable freight mobility, Jan H. Havenga, Anneke de Bod, Zane P. Simpson, Nadia Viljoen, David King (ISSN: (Online) 1995-5235, (Print) 2310-8789)

[8]A logistics sector’s perspective of factors and risks within the business environment that influence supply chains’ effectiveness: An explorative mixed method study, Johanna A. Badenhorst Weiss, Beverley J. Waugh (Published: 11 Sept. 2015)

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