A service rate that has not change in 7 years….How?

sugar cane fieldI came across a sugar mill operation that hires a lot of heavy equipment to do trenches and canals and similar works in the field. This is done all year round, although, depending on the seasons, it´s more intensive based on the rainfall. They have equipment of their own for the regular work and hire extra services when the heavy rain comes, to cope with the extra work. There are individuals that own heavy equipment that are hired for a price per hour rate.

To my amazement I found out that the price per hour for some specific tractors and heavy machines has not changed for the last 7 years. I can understand that in some cases price per service might not change in some scenarios, for example a stable economy, government fixed rate, labor union negotiations. This was not such a case. No government fix, no union labor negotiation, nothing of the kind. How can you deal with inflation, investment cost, labor cost, fuel cost, etc. for 7 years and not have a price move?

Digging a little deeper I found that the price was set on a Price per hour rate. What the service providers did was to slow down or adjust their productivity in order to charge accordingly to the real cost. They would take longer times in order to get more total money. Interesting enough the sugar mill was on board with the fix. Scared to have a reaction from the market, they would agree on the hours adjusted to a total cost that would reflect the real cost of the works.

At this point nobody wants to move rates, but pressured by the low international sugar commodity prices there´s a need for improvement on cost on production. A sourcing event was setup to challenge the market. Have the service providers bid for the total hours needed to complete a specific Job keeping the price per hour fixed. The result, 18% cost improvement and a historic 7 year old rate unchanged. Vendors will bid for a fixed number of hours for a specific job. If the job took longer, it was at the vendors cost, and, if it took less it was the vendors profit.

The right thing to do is to review rates, but it is a cultural hurdle that vendors and sugar mill are not ready to take, but still there was a bottom line impact on having them bid for total hours for two reasons: First the market was challenged to compete amongst the current vendors, second, any efficiency that vendors could find they will translate into benefit for the sugar mill in the form of less hours. Vendors will now search for this efficiencies in order to compete.

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