Hi there, this is an important budgeting update, please read as there is some critical news and changes pending that will effect pricing and how we pass on price adjustments moving forward.

Those of you who have been with us a while will know we’ve been able to maintain our average annual increases to less than 1% for the past 13 years http://supplycs.com/budget-update/ which has been an extraordinary achievement compared to our competitors, we’ve done this through applying pressure on suppliers and wages through the recession, leveraging our growth and implementing smarter storage and facility options (higher stud heights, VNA racking models and building bespoke technology solutions). This year is different however, our overall increases are closer to 3%. The historical increases included the recession from 2008 to 2013 (according to us). There are a number of factors that have caused the lift this year, most are based around a correction as we’ve caught up on wages (done) and are catching up on bulk freight both of which were held under a lot of pressure during the recession. My anecdotal estimate is that moving forward  our annual increases will be closer to 2% for the foreseeable future rather than the historical sub 1%  we’ve all enjoyed up until now.

Key factors and changes as follows:

Commercial factors

Courier

Some good news to start with, CP APA this year is only 1%. They are also changing the way they construct their charges in so much as they are wrapping up their VFR (variable Freight rate)  into the base rate as they feel fuel has stabilised. So this will not effect the rates just the structure, effectively the VFR will be reset to zero. Additionally CP have committed to absorb the next 20% increase of diesel meaning the Diesel index will remain at zero up until that point at which case it will kick in again, so this simplifies things somewhat. Increase is effective July 01.

CP introduced a signature fee of 10.5 cents last year which we have been absorbing until now, effective from July 15 this year we will be passing this on, at cost i.e. 10.5 cents.  Historically we have passed
he rural charges on at cost (i.e. no mark-up) over the last few years the profile of rural shipments has changed and volumes have increased significantly largely due to material increases in B2C shipments. Rural shipments require additional administration so effective July we will be adding our standard margin onto these shipments to recover this cost.

An interest fact is that as of May this year, SCS is now Courier Posts 6th largest national account.

Bulk Freight

We are close to concluding our tender, it has been an extensive process taking 3 months, we started off reviewing 9 carriers and have conducted a thorough market review. A final decision has not yet been made but we are very close and expect to announce a decision within the next couple of weeks. There will be an increase on the base rates which we will publish as a result however we will be explaining the context around this on a one to one basis through clients reviews and communications due to the complexity of the process and our findings. I can tell you now that the increase will still be in single figures. The good news is that FAF has reduced which creates an offset so the end (net) result will be negligible. I can tell you that despite the fact there will be an increase you will be happy with the outcomes when we tell you the strategy one to one.

Storage

There is a chronic shortage of quality warehouse space in Auckland, we’ve been working very hard on a number of options to protect our clients and despite the fact everyone we are speaking to is predicting significant increases in rent over the next few years as the shortage bites home, we have some good news to share with you shortly explaining the outcome of two years hard work to mitigate and manage these increases to the lowest possible levels for you, we  expect to announce our strategy here within 2-6 weeks.

Legislative factors (please be aware/reminded that increased costs due to law changes are outside of contract agreements are passed on as they are out of our control)

RUC’s (Road User charges) –  additional to the base rate review for bulk freight, the Government announced details of amendments to the Road Users Act in 2012 that come into effect from the 1st of July 2015. The rules are complex and in some cases ambiguous some forwarders are still seeking clarification. Regardless we are working closely with our partners to uphold our commitment to shelter you from spiraling costs and we intend to keep any rate increases related to RUCs to a minimum.

Health and Safety

As many of you know I am a part owner in a company called WSAS (Work Safety Advisory Services), this company helps businesses become compliant to the new act which is being enforced later this year. One reason I love WSAS is that it makes good margins (3PL margins are truly pathetic, if SCS did not have the scale we do the business model makes no sense financially, in fact it took us 9 years to start making money, would I do it again and go through that pain for the level of reward, no…but we’re here now and it finally makes sense and our staff and clients are amazing) but I digress…WSAS already have over a 100 customers and its only 9 months old (it took SCS over 10 years to gain 100 clients!). The costs to comply with the new ACT are not insignificant and I can tell you there are a lot of large fines being handed out already, the government has increased the task force of auditors from 30 to over 200 people. In our own business, warehousing is identified by Worksafe as one of the top 5 high risk categories and we are a high target industry (another good reason to outsource).  Our compliance to the new act has meant a material increase in staff dedicated to H&S as well as a reasonable amount of CAPEX expenditure across various areas of the business.

We have been audited twice by Worksafe this year so far, in the last 13 years we never saw them.

A key issue with Worksafe is that to avoid prosecution we need to be able to prove we have identified all workplace risks and dealt with them, then either removed the risk or can prove we are managing it with regular SAFE WALKS by qualified staff that identify risks, we need to create SOP’s specifically for these risks (we have 70 pages of H&S specific SOPs now documented), we then need to train this SOP documentation to all of our 160 staff repeatedly and be prepared to provide proof of training records, additionally we need to hold monthly H&S meetings complete with minutes with representatives from every department and facility (17 staff), under advice from Worksafe we’ve had to employ traffic management staff for our yards and under the new legislation dedicated health and safety representatives from each department now need to undergo 2 days external training per person per  annum.

For SCS we’ve calculated this has resulted in 80k of extra costs per annum compared to the old H&S regime. Our turnover is circa 16m/annum so at this level it is not a large % however to ensure our clients continue to enjoy competitive pricing and brilliant uninterrupted service levels regrettably we need to pass these new legislative related costs to our clients. We have considered a mix of pallets, labour, facility and invoice values and decided the fairest and easiest way to implement this is as a 0.5% line item on the invoice of invoice value or 7.00 whichever is the greater, this way it is transparent and easy to identify,  calculate and reconcile. We had been aiming to announce this in line with the new act  being implemented however the implementation date keeps getting deferred, the government originally flagged a go live date of April 01 this year and we were ready before this but it keeps getting pushed out, the latest update is that it will be enacted towards the end of the year (maybe October) however as we continue to carry the cost burden of compliance we believe it is fair and reasonable to implement this starting August 01, 2015. BTW ref the image this actually happened recently, a freak accident but one of our guys got his foot run over by a hoist, the safety boot saved his foot and he’s back at work and back to normal.

Summary

Our increases over the last 13 years have averaged less than 1%, this year the overall increase (to include all freight,  labour , storage and H&S compliance) for 2015, normalised, is looking to end up at around 3%, moving forward, to keep up with inflation (outside of recessionary pressure) and in consideration to strategies we are executing to control costs better than our competitors we are reasonably expecting  increases to fall back from this peak however we don’t see it being sub 1% moving forward and expect future variations to be closer to the 2% mark for the foreseeable future.

Starting from 2106 we are also considering changing the way we manage inflationary increases, where historically we have always dealt with labour, facility and freight differently and at different times, many customers have flagged they would prefer a single % number as its easier to work with so its likely we’ll adopt this model. It’s likely this will occur around mid year. Legislative changes e.g. (H&S, increases in minimum wage and Road User charges) will still be dealt with ad-hoc as they appear.

As always please be assured we are doing everything we can to ensure our rates remain highly competitive and you continue to enjoy the highest possible, uninterrupted, service levels. Also, to finish on a positive note, through our property strategy (Which I’ll be sharing within the month) we met an investor who follows the 3PL market very closely and he mentioned to me that 3PL penetration in the NZ market is close to 35%, in the US and Europe it is close to 70%. So it just goes to show you what a bunch of visionaries we all are!

If you have any questions or concerns please don’t hesitate to contact me directly to discuss, further updates re bulk freight and our facility strategy will be following shortly.

Cheers

Brad