Hours of Service
It's time for Carriers to take the initiative. Good cost data can help put you in control.
The High Cost of Compliance
Patricia Smith
Senior Editor
Many initiatives over the last several years have dramatically changed how motor carriers function — the core carrier concept, just-in-time freight scheduling, computerized bidding, and third-party logistics, to name a few. Unfortunately, all of those important initiatives were conceived or promoted by shippers, not truckers, says Duff Swain, president of the Trincon Group, Columbus, Ohio-based transportation management consultants. As the industry grapples with the possibility of reduced productivity under the new hours of service rules, he warns that shippers, not truckers, could again control change.
"The new rules are showing us that what we're currently doing is inefficient," Swain notes. The initial industry reaction is to force needed changes with cost penalties such as higher detention charges for loading and unloading delays. That's logical and, in some cases, may work. But shippers are already starting to protest what they see as knee-jerk price hikes. If carriers can't justify higher costs, and if they aren't prepared to discuss productivity improvements, shippers are likely to tackle the problem on their own. Alternatively, says Swain, third-party logistics providers will seize the opportunity to step in. In either case, the solutions they come up with are likely to provide the most benefit for shippers, not truckers.
"The trucking industry has the perfect opportunity to take control," Swain says. Economic upturn is expected to bring a marked increase in freight demand this spring. That will squeeze trucking capacity, which is already tight. A serious driver shortage already exists and the new hours of service rules will exacerbate the problem. The door is wide open for shipper/carrier negations, but carriers will need good cost and productivity data if they're going to take hold of the reins.
While most fleet managers can take a pretty good guess at what it costs them per mile to run a truck from point A to point B, they're often stymied when you add deadheads, pool trailers and shipper/receiver delays. "This lack of knowledge is astounding," says Swain. The remedy: activity-based costing, which essentially is the ability to measure costs by two key variables — distance and time.
Costs associated with distance are usually no mystery to experienced truckers. Variable costs like fuel, driver pay, tires and repairs are almost second nature in an industry accustomed to running by the mile. But fixed costs, like depreciation, sales, operation and administrative expenses, aren't affected by mileage. They're incurred whether the truck is rolling or parked, so to get a fair picture of profit or loss, they must be allocated to specific revenue-producing units, such as individual trucks. Trincon's costing system also segregates semi-fixed costs, such as shop labor, that change with business volume but don't increase or decrease in direct proportion with mileage.
There will be times when the company wants to look at expenses and profits for the operation as a whole, but an effective costing system must also be set up to look at individual cost centers. Is it really more profitable to use owner-operators than to run with your own equipment and drivers? You can't know unless you segment revenues and costs for the two operations. Brokerage and trip-lease operations should be measured separately. So should your maintenance shop if it generates revenue from outside service or parts sales.
Swain says it's also important to set up the cost analysis system on an "accrual" basis, recording costs as they affect the business, not as they're incurred. Replacement parts, for instance, are purchased for inventory but the expense must be applied to trucks during the course of service. Insurance and taxes may be paid annually or quarterly, but are an expense throughout the year.
It may seem complicated, but "it's not rocket science," says Bill Wettstein, CFO, Nussbaum Trucking, a regional truckload carrier based in Normal, Ill. "Activity-based costing is something that is very important, but a lot of times the industry makes it a little more difficult than it really is."
Nor is activity-based costing the exclusive domain of large carriers. Nussbaum designed its own costing system several years ago using a spreadsheet program, and has continued to make refinements. Trincon created its activity-based costing system in 1983 as an evaluation tool for clients of all sizes. The PC-based system will soon be introduced as TruCosting analysis software, retailing for about $5,000 (www.trincongroup.com).
One of the TruCosting system's features is an analysis worksheet that enables users to quickly and easily apply variable and fixed costs to a specific trip, customer, lane or geographic segment. This kind of analysis should be used routinely to gauge the profitability of new business or to periodically look at existing business. But in the coming months, activity-based costing systems are likely to come in handy for determining how new hours of service rules affect productivity — and for negotiating rates or operational changes with customers.
To illustrate, Swain ran a trip under three different scenarios. The sample trip includes two revenue legs plus two deadheads for a total of 1,030 miles. He emphasizes that all segments of a trip must be defined, including deadhead between deliveries and pickups and empty miles from the final destination to the next revenue paying trip. Total revenue for the round trip is $1,275.
The worksheet can be used to determine whether or not a load will yield any profit at all, but Swain suggests that fleet managers always start with a profit goal. In these examples, he specified an operating ratio of 95%, i.e. a 5% operating profit. The examples use a variable cost of 90 cents per mile and a fixed "burden rate" (amount of fixed and semi fixed costs allocated to each tractor) of $177 per day.
Trip A looks at the effects of unproductive driver and equipment time by factoring in 2 hours to load and 4 hours to unload. Under the new hours of service rules, most waiting time must be counted in a driver's 14-hour on-duty maximum, even if he isn't working. Total time for the round trip is 57 hours, including drive time, load/unload time, and mandated rest. Variable cost is $926. Allocated fixed cost is $442. The trip falls $93 short of the targeted profit, thus the carrier will have to lower the profit goal or make up the difference in detention charges or higher rates.
Trip B reduces loading/unloading times to 1 and 2 hours. This enables the driver to complete the trip with less mandated rest and trims total trip time to 51 hours. Variable costs are the same but allocated fixed costs drop to $396. Profit for the trip is now $46 shy of the targeted 5%.
Trip C looks at a drop and hook operation at both loading locations. It assumes that the shipper or carrier has a good management system for the trailer pool, allowing the driver to get in and out in 15 minutes. Now the trip can be completed in 34 hours, including mandated rest. Total trip time drops to 34 hours. Even with extra fixed costs for the additional trailers (one at each loading location), the trip exceeds the targeted profit margin by $36.
As Swain emphasizes, the sample trip analyses are not arguments for drop and hook or any other operational changes. They're offered simply to show how activity-based costing can provide important data needed to work most effectively with shippers. "This isn't a fix," he adds. "It's a process that improves how you manage your business. With this information, you can come up with a fix."
"No matter how good a system is, it's still just a tool," cautions Nussbaum's Wettstein. "Good information is the key to making good decisions, but you have to think it through."
"Many trucking companies have a standard freight they're used to hauling," he explains. "Your costing software or model needs to recognize what the company's standard load looks like so you can accurately compare the piece of business you're analyzing." For instance, it may require more trailers than the carrier normally uses, or it may be in an area where the driver market is tighter, thus wages are higher.
"Maybe you're a Midwest carrier looking at potential business on the East Coast," he continues. "The East Coast has a lot more tolls, driver wages are different, and traffic is different. You're going to have to take that into account or you're going to be wrong."
Hours of Service continued...
