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A lower rate can be higher

September 29, 2004 | Adalbert

Winning entry of the nationwide competition \”Pen for Logistics\” – Edition I, organized by the portal www.logistyka.net.pl

In accordance with earlier announcements, we would like to present an article by Piotr Sikorski from DHL Express (Warsaw) entitled \”A lower rate can be higher\”, which won the first edition of the nationwide competition \”Pen for Logistics\” for the best paper devoted to selected issues in the field of broadly understood logistics, organized by the internet portal www.logistyka.net.pl. The author discusses, among others, the issues of payment terms for services provided by Polish carriers and the resulting benefits and inconveniences, recognizing that \”payment morality, or rather the lack of it, and the \”squeezing\” of small and medium-sized companies by large market players is one of the brakes on the development of the Polish economy\”. According to Sikorski, the aim of the work was to show large and small transport enterprises cooperating with each other on our market that a 30-day payment term allows maximizing the benefits for both business partners. Let us remind you that 7 authors submitted 9 papers for the competition, evaluated by a Committee from the Institute of Logistics and Warehousing (publisher of the portal) consisting of: Ph.D. Eng. Stanisław Krzyżaniak (chairman), Ph.D. Eng. Aleksander Niemczyk and M.Sc. Tomasz Janiak (members). All papers were qualified, with the score ranging from 86 to 165 pts. (out of 190 possible). The topics of the submitted papers concerned, among others, the possibility of increasing rail transport for sustainable development, logistics network design, ratio analysis as a method of assessing enterprise activity, warehouse management in the logistic aspect, the main assumptions of logistic customer service, and the assessment of whether the twilight of public postal operators is coming.


The expansion of the European Union opened up a huge market for Polish carriers, which was previously protected, if only by the barrier of bilaterally granted permits for entry or transit through the territory of a given country. Under these conditions, the basic competitive advantage of a Polish carrier, which is lower costs, could not be fully consumed. After May 1, 2004, Polish carriers have a chance, within a few years, to gain a share in the road transport market of the European Union corresponding to their development potential. This is an extremely privileged position resulting from a bonus in the form of relatively low costs (labor, fuel in the country, etc.), although one should not forget the competition from Czech, Slovak, or Lithuanian carriers. The bonus resulting from the disappearance of queues at borders (savings on standstill costs) works equally to the advantage of all transport companies operating on the territory of the EU, and therefore we can omit it. However, the basic condition for utilizing this potential is investment capital. In this case, we are talking about the ability to maximize the transport rate obtained by Polish transport companies in order to faster repay loans and take out new ones. However, maximization alone is only a necessary condition for success. A sufficient condition is receiving payment for the services rendered. Only these two factors allow utilizing the development potential.


Market expansion means a larger number of potential customers. However, these are customers based in various countries, which means an increase in the risk of payment delay or loss of payment altogether. We are convinced that the payment morality of Polish enterprises is very bad. This is a fact. However, it is untrue to believe, arising spontaneously in connection with the bad image of domestic companies, that in other EU countries it is certainly better. Of course, we then think of the Fifteen countries, i.e., the \”old\” Union. It seems to us that the risk will be lower if the payer is a company from Benelux or Portugal. We will not trust companies from the Czech Republic or Lithuania. Is this actually the case? I think appropriate research would be useful, and its result could be surprising for a simplified, intuitive picture. The fact is, however, that the average, contractual payment terms in the \”old\” Union for carriers range from 45 to 90 days (actual from 60 to 105 days). The reason is both market competition and much cheaper and more easily available credit for enterprises, similarly to longer repayment terms for installments, including leasing. It is also a fact that debt collection companies operate more efficiently and cheaper in the Fifteen countries.


Observing the course of negotiations with Polish carriers (although often also in the case of talks with transport companies from the \”old\” Union), I noticed that the basic decision-making criterion is the rate level (per kilometer or from \”to\”). The payment term always takes a back seat. Most often, the carrier is willing to sacrifice a dozen or even several dozen days of the payment term to obtain a slightly higher rate. It seems that few people from this group are aware that money is a scarce commodity and credit costs. Perhaps this stems from the fact that it is easy to calculate the cost of a loan taken from a bank, but much harder to carry out an opportunity cost calculation. Especially if the loan is hidden, e.g., in the form of a longer waiting time for money. Pondering this problem, I decided to calculate the carrier’s revenue depending on the payment term (contractual and actual), the recoverability of overdue receivables, and taking into account certain benefits that a small or medium-sized transport company can gain from cooperation with a large logistics operator or a large customer (if the latter decides to play the role of a logistics operator instead of outsourcing this task). The result was surprising, not in principle, but in the scale of losses (from unrealized revenue maximization to actual losses) suffered by a transport company driving for a rate nominally higher by 25%. This is an elementary school math exercise, but often something that is simple and obvious is no longer so.


I assumed that company A offers a rate of 3 PLN per kilometer, and company B – 3.76 PLN. For most carriers in this country, it is obvious that a contract should be concluded with company B. I assumed that both companies commission a round trip to\/from Germany on a 2000 km route.


Thus, the potential revenue from company A is 6,000 PLN, and from company B – 7,520 PLN. I also assumed that the best possible payment term (contractual and actual) is 30 days. This reference point is also convenient because most of the carrier’s payments (salaries, loan and leasing installments, fuel card payments, insurance installments, etc.) take place in a thirty-day cycle. Even if the contract starts in the middle of the month, one can negotiate an earlier first payment and thus achieve a match of cash inflow and outflow dates. Consequently, throughout the rest of the calculation, I assumed very optimistic conditions for company B to ensure that the final result is unquestionable. To begin with, I compared the offered, contractual payment terms, assuming that the interest rate is only 7.5% – the result is shown in table no. 1.




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