What's Really 'Normal'?

Managing certain change for long-term profits.

Lana Batts • Guest Columnist

Successfully managing a trucking company is a daunting task. Everything that is basically required is in a state of change — fuel prices are volatile, driver turnover is rampant, equipment prices are skyrocketing, technology is shifting and shippers are facing dynamic changes in their own markets.

All too often, I hear carrier executives say, "Once things get back to normal, profits will improve." My question is this: When was the last "normal" year? 1998? The changes carriers are now experiencing are the new "norm."

Charles Darwin once said, "It is not the strongest of the species that survives, or the most intelligent, but the one most responsive to change." You don't have to embrace change, but you do have to respond to change. The first step is to understand which changes are long term versus short term or transitory.

For example, fuel prices are never again going to be $1.15 a gallon. So why are so many fuel surcharges based on that? When prices are over $2.80 a gallon, surcharges can be as much as 25 percent to 30 percent of the freight bill. No wonder shippers push back and want to renegotiate not only the fuel surcharge, but also the rate.

Another example of a lasting change is the driver situation. First, carriers need to understand that they are not experiencing a driver shortage. Any time a carrier has to annually replace 125 percent of its drivers, the problem is not on the recruiting end. Rather, it a retention problem, which makes it a management issue.

Several long-haul national carriers understand that today's drivers will not stay with a company that requires weeks on the road. Exacerbating the problem for long-haul carriers with teams is the elimination of the split-sleeper berth provision in the new hours of service regulations. These carriers understand that they either have to (1) change the way they do business or (2) price their services based on a 125-plus-percent driver turnover rate and its accompanying $8,000-$10,000 cost per driver. With rail intermodal placing a cap on how high they can price long-haul services, carriers have no choice but to change the way they do business. As a result, many are opting to move into the regional markets — either through organic growth or acquisitions — where they can get drivers home more often.

For smaller regional carriers that have historically believed these markets belong to them, the game just changed. The question is, how will the regional carriers respond to the new "norm?"

Carriers also must adapt to permanent highway congestion. Why dispatch a driver though a major metropolitan area on a Friday afternoon when rain is in the forecast? While the industry associations deal with fuel tax increases, tolls and truck-only lane options for congestion, carriers need to be reviewing their routes, pricing and driver pay patterns to determine where they are most susceptible to service failure and the inability of drivers to make an adequate number of miles.

In some cases, carriers are going to hourly pay for drivers because of the congestion. Unfortunately, I know of no optimization, routing or mapping service software that incorporates time of day and day of week with up-to-date weather information to reflect daily, predictable occurrences of congestion. Such information is the only way a dispatcher can truly predict an arrival time.

Responding to permanent change all begins with round-trip pricing. Accepting a load on Monday that puts a truck and driver in Bangor, Maine, on Thursday afternoon without pricing for the empty or reduced rates out is suicidal. The back-haul problem was not created on Thursday; it was created on Monday. The front-haul should have been priced with the empty miles it created or the load not accepted.

Pricing also means knowing where costs are generated. For example, a new truck that has two or three different drivers a year can increase maintenance costs 2 to 3 cents per mile over a truck with only one driver during its 48-month lifetime. Assigning those extra costs to maintenance rather than retention only further hides the true cost of driver turnover. Peter Drucker summed it best when he said, "If you cannot measure it, you cannot manage it."

Furthermore, today's costs are not just mileage-driven. In fact, with the current hours of service, carriers can only utilize a driver for 660 minutes a day. If the hours are reduced to 10, the total productivity for a driver will be further limited to 600 minutes. Yet very few carriers measure the productivity of drivers or tractors in minutes per day. Accepting 600-mile loads on Friday for a Monday morning delivery should be priced for the extra day of lost productivity, not just the miles driven.

Only carriers that understand the changes that are permanent and calculate for that changing environment will understand the dynamics of the market, recognize where it might be going in the future, and plan accordingly. These carriers are the only ones who will view change as an opportunity, innovate and prosper.

Lana Batts is managing partner of Transport Capital Partners and former president of the Truckload Carriers Association.