s a f e t y   &  o p e r a t i o n s

IS Your Price Right?

Are you sure that load will really pay?

KEN MANNING
TRANSPORTATION COSTING GROUP

      You're offered a load from Detroit to Atlanta. It's a new shipper, but it's a lane you've run and cargo you've hauled before. It pays $1.20 a mile. Your average cost is $1.00 per mile. Should you take it? Many carriers would jump at the job, but they may be jumping into a money-losing situation.
      In the last few years, truckload management has become more aware of how "customer cost to serve" impacts profitability. Carriers from bulk to flatbed are realizing that there is a wide range of service demanded by shippers and that it is no longer tenable to ignore those differences in pricing truckload services or in the evaluation of customer profitability. In other words, costs must be assigned to loads when and where they occur, and pricing must reflect those costs.
      In a linehaul trucking operation, the primary "activity" is the truck rolling down the road. But numerous other activities may be required, like loading, unloading and extra stops. The cost to haul a particular load or serve a particular customer may be further complicated by service characteristics such as trailer pools and delivery appointments, and by capacity issues such as the opportunity for backhauls.
      The Detroit/Atlanta load may look like any other run, but could vary dramatically in unloading time. If that $1.20 a mile gets you there and unloaded, and reloaded right away, that's great. But suppose you have to wait four hours to unload? All of a sudden it's 5:30 in the afternoon and you've missed the load you planned to get that day. You have to stay overnight then drive empty 150 miles to get another load. All of a sudden, that $1.20 is a terrible deal.
      Start by identifying the activities required for a customer or a load — that truck rolling down the road, extra stops, loading or unloading, dispatch, billing, and on through the list. Then identify resources and determine costs for each activity — fuel, maintenance, driver and other costs for the linehaul portion of a load, salaries for dispatchers, salaries and systems for billing, etc.
      You should also identify "cost drivers" or factors that cause activity to occur. For instance, the number of miles operated drives linehaul costs. The number and type of stops drives stop costs. The quantity of these cost drivers will determine the cost for each activity.
      For our Detroit/Atlanta example, let's say linehaul costs (fuel, driver, tires, maintenance, tolls, etc.) come to $1 a mile. Mileage is 750 miles. The cost for the linehaul activity of this load is $1 multiplied by 750 or $750. Let's also say you pay the driver $35 for extra stops, and there are two on this run. That's $35 times 2 or $70. This adds up to $820 or $1.09 per mile even before the day's delay, extra, empty miles and overhead.
      Of course it's seldom that simple. Operating miles may be the driver for linehaul costs, but your calculations must differentiate between loaded and empty miles. If you pay your drivers different rates for different types of stops — touch versus no-touch, for instance — you have to figure them separately. And if a customer requires local, hourly-paid service, it must be treated differently than linehaul.
      This is activity-based costing (ABC). Unlike traditional cost-per-mile systems, which measure costs on the basis of volume, ABC measures the activities and resources required to satisfy customer needs.
      ABC is widely used in many businesses, but it had its beginnings with motor carrier rate bureaus and less-than-truckload carriers. It has been slow to catch on among truckload carriers — and one reason is that truckload has generally been thought of as a "simple" business, with little variation from customer to customer or even load to load.
      Another key feature of ABC is its treatment of overhead expenses. Overhead is typically allocated on volume: fixed costs divided by mileage for the period. But ABC recognizes that service, not volume, is what drives overhead costs.
      Some overheads, like general and administrative expenses, might be applied equally to all transactions but, again, you need to differentiate varying demands on overhead resources.
      For instance, the activities of your driver service managers may only apply to the linehaul function, while local dispatchers may only work with local drivers. Thus, a load that has no local driver activity would have a different overhead than one picked up or delivered by a local driver.
      Your ABC system should be designed to accurately allocate direct and indirect costs to each and every load, whether you're looking at prospective shipments for pricing and load acceptance, or analyzing the profitability of specific customers or loads.
      Providers of stand-alone and integrated ABC systems are now having success in the industry, and the track record of ABC systems in LTL applications is impressive.
      If you're looking at the profitability of actual, historical loads, you'll get service characteristics and activity costs from various accounting, dispatch, driver trip sheets and payroll or settlement records.
      While some costs, such as driver pay, can be directly allocated to a load, others need to be determined by accumulating all records that identify activities consumed by specific loads. The cost of each activity can then be pro-rated to the relevant load based on the cost driver applicable to each activity carried out.
      The most advanced systems accumulate each month's costed freight into a costed traffic database that can be accessed quickly to determine the profitability of any traffic segment you're considering. Carriers commonly want monthly reports on the most profitable and least profitable customers and lanes, but the system should be able to "drill down," to individual loads if necessary, to help you determine why any segment is profitable or unprofitable.
      No system we know of can see forward with 100% accuracy. Predictive costing models, often provided as an adjunct to load optimization systems, typically use ABC derived averages and costs for activities in a carrier's principal traffic lane.
      If you're using ABC for pricing new freight, you haven't moved the freight so there will always be some guessing. But at least this guessing will be an educated forecast.

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