A closer look

Aug. 1, 2006
Is it that foolish for fleets to plan for $85 per-barrel crude oil, driver wages of 55 cents per mile, a 15% per year increase in fringe benefits? Not in today's environment.

Is it that foolish for fleets to plan for $85 per-barrel crude oil, driver wages of 55 cents per mile, a 15% per year increase in fringe benefits? Not in today's environment. But if carriers want to prepare for that scenario, many will have to rethink how they look at operating costs.

There are three very important decisions a carrier has to make before determining what its operating costs actually are. First, you must develop a chart of accounts that captures your company's financial data in a meaningful way. Keep in mind that organizing this information in a way that makes your accountant happy at tax time may not be sufficient for an accurate cost analysis exercise. It turns out that many carriers fall into the trap of failing to develop an appropriate information base for their operations.

It's really not acceptable to handle your fleet's finances based on the adage, “We've always done it this way and it's working, so don't mess with it.” If you don't change, you'll find yourself at the mercy of a market price for your services that's been established by your customers and other fleets, not by you. Unless you have the information to appropriately assign costs to specific activities, you will have to accept the average market price for your services. This is true for both private and for-hire carriers.

The second important decision is what operating statistics are appropriate for your firm. It is up to each fleet to decide which measures of operating statistics best apply to their unique circumstances. The most common statistics gathered are miles operated, loaded miles and loads. But many fleets do not formally take into account the utilization of their fleet on a time basis as well. And that's a mistake. All operating statistics need to be generated for the specific periods that the financial data reports, whether it's weekly, monthly or quarterly.

Each fleet has equipment available for use during a given time frame-and it's probably safe to say that it's never fully utilized. There is down time for maintenance and repair, as well as idle time when the driver is out of service. Granted, some of them are planned for and some are not. In any case, it's important to understand the realistic availability of the equipment and establish a target utilization rate to meet company goals.

In the old days, the industry focused on reducing percent of empty miles as a way to increase revenue opportunity. But that is changing as carriers recognize that all miles have to be paid for and all time the equipment is in use has to go toward covering fixed costs. This doesn't mean that reducing empty miles is not important, but there are new strategies in pricing and routing to maximize a carrier's revenue.

Finally, the manner in which costs are allocated will have a profound impact on how reasonable rates for services are determined. Depreciation is one example. The standard calculation is a tax avoidance decision by the person who does your taxes. It does not necessarily reflect what it actually costs you to operate the facility or transportation equipment. In fact, it may be more appropriate to allocate depreciation for transportation equipment by the hour used or the mile traveled, and to allow for more reasonable trade-in or sale prices of the equipment.

Another issue is how to allocate fixed costs. Should it be by the hour of equipment availability, by the hour of actual equipment use or by the load? The answer depends on your type of operation and how you want to be compensated by your customers or budgeted by your management.

Understanding and acting on operating costs is crucial to running a fleet successfully today.

About the Author

MARTIN LABBE e-mail: [email protected]

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