Playing the numbers game
Homeland security, fuel prices, new regulations, insurance costs, congestion, and rising operations costs have all placed pressures on carriers to manage costs and communicate changes to customers.
The new hours-of-service rules, which went into effect Jan. 4, 2004, will undoubtedly drive major change in the trucking industry-both good and bad.
On the plus side, the regulations give shippers and receivers a vested interest in increasing truck productivity. Shippers will no longer profit from poorly managed trucking companies and overworked drivers.
On the minus side, increased costs associated with compliance could drive some fleets out of business.
POOR THE NORM
Saying that financially strapped trucking companies are the norm may seem like a strong statement. But the results speak for themselves:
-
Net before-tax profits for the industry continue to average below 2%, and the average return on investment averages below 5%.
-
The failure rate within the industry has averaged 10% over the past three years.
-
More than 95% of carriers cannot pinpoint the cost of doing business.
Fleets have adjusted to many changes, survived and adapted — but many still don't understand their costs. They often can't identify the cost difference between two trips of equal distance that take different times to complete or require different ratios of trailers to tractors.
And when it comes to establishing price increases, carriers have traditionally been ineffective negotiators, enabling shippers to take advantage of them.
The new HOS rules, however, present truckers with an opportunity to change this.
Shippers are willing to work with carriers, but expect pricing requests to be supported by hard data. So carriers must take the initiative. To do this, they need credible costing information, i.e., information based on activity-based cost accounting. (For more information on activity-based accounting software, go to www.TruCosting.com.)
An activity-based accounting system separates variable and fixed expenses. Variable expenses include settlements, fuel, driver pay, parts and tolls. Fixed expenses include departmental expenses, equipment and personnel. While variable expenses are allocated by the mile, fixed expenses are usually absorbed by assigning a burden rate to each truck in operation on an hourly or daily basis. This combination enables the carrier to measure the effect of time, distance and increased productivity.
Carriers need to understand which costs they can control and which they can't. Underutilized equipment will not only affect the burden rate of a carrier, but will also affect the variable costs as well. Equipment utilization will dramatically affect the controllable costs and hence profitability. To understand the impact, carriers need to identify the costs that can be allocated to equipment and the activities within the company that support that equipment.
One example of improving asset utilization is moving to drop-and-hook. However, that requires investment in equipment and a well-negotiated lane volume. And since the key to success in this type of movement is the turnaround time at both the receiver and the shipper ends, the shipper needs to be made aware of the cost of non-compliance with negotiated standards for pickup and dropoff. That does not happen in a competitive environment unless you truly know your costs.
SETTING STANDARDS
Carriers can get more control of their own destiny. Rising fuel costs, driver wages, and insurance, along with the new hours-of-service regulations, provide a platform. Knowing your costs and being a good negotiator will allow you to profit from the new environment you face.
