A Hidden Risk in a Rising Cost Environment
Written by Erich T. Linder and Nathan R. Skeen, published in Utah Trucking Magazine, Summer 2023 edition.
“They” say we are out of the pandemic. Yet, the aftershocks still reverberate through our lives and the business environment. Our assumptions are undermined, even more than we experienced in previous historical shocks, and it is seemingly impossible to find a stable footing to support operations, let alone growth. Labor has left the building. Interest rates inexorably move higher. Costs rise while our own pricing power is limited. Technology not only marches forward but is arguably in a revolutionary era.
Whether we can accommodate the fragmented nature of reality these days, there is one common theme: distraction. We are pulled in many directions as soon as our eyes open in the morning.
In business, we fight fires seemingly daily, and in many cases, for trucking, those end up manifesting as higher costs. While parts costs may be stabilizing, labor is still increasing. And when costs are and have been leaping higher, we naturally look for lines in the P&L to control. An easy target is repairs and maintenance (“R&M”), and management can gravitate to that line with questions:
- How can this cost be reduced?
- What are our competitors spending?
- Can we use different suppliers?
- Can we live with a different (lower) level of quality for parts and labor?
And maybe there are opportunities there, depending on the nature and lifecycle of the equipment. Yet, when identifying potential savings in R&M costs, it can be easy to ignore an increase in risk and, therefore, potential future costs. Those costs of risk don’t show up explicitly on the income statement or even the balance sheet – they are out of sight, out of mind. Until they aren’t.
There are plenty of ideas out there about how to reduce fleet maintenance, from optimizing owning versus leasing to telematics to driving best practices; we won’t belabor those here, as these tactics are well covered in the industry and must be implemented on a case by case basis depending on the precise profile of your business. Ideas are everywhere, and you know best how to implement those that suit your operation.
Taking a step back though, how much does a 2% decrease in R&M, even if the methods used are well-implemented, increase the risk of failure? If there are multiple aspects to a maintenance process or system, and there are small increases in known or unidentified risks, how does that proliferate through the business and into an individual truck or operator? Conversely, if a higher quality level for repairs and maintenance or best practices actually increases cost, how might that change the risk level of the fleet when it comes to a major accident? Might that increase in cost on the income statement potentially reduce the risk of a catastrophic incident that can very well be catastrophic in these days of “nuclear verdicts”?
These are complex issues with no straightforward, boilerplate answers. When considering strategies in this challenging environment, it is important to consider hidden risks and their potential costs and create a comprehensive approach that includes prudent risk prevention and mitigation. Whether you are increasing or decreasing spend on repairs and preventive maintenance, keep hidden pitfalls in full view, insure appropriately, and consult with counsel to ensure your approach is sound.
Should you have any questions about this topic or need legal representation, please contact Nathan R. Skeen.