If you are serious about consistently turning profits, you should consider implementing activity-based costing (ABC) systems. Using ABC, you can answer the question, “Are we really making money on that good load?”
“ABC is the best methodology for determining profitability in motor carrier operations,” says Ken Manning, founder and president of Bethesda, Md.-based Transportation Costing Group, which specializes in implementing ABC for carriers.
“We’ve helped many carriers achieve and maintain operating ratios in the upper 80s,” Manning says. “They did this by disciplined application of ABC techniques, using them in picking customers, routes, and loads carefully, rejecting the poor ones or using ABC to negotiate better rates.”
What’s so special about ABC? Two words: Competitive advantage. A company that knows which customers, lanes or loads to emphasize – and which to avoid – will win in the transportation business with our razor-thin margins.
It seems that most carriers consider any load a good load as long as it meets a minimum rate per mile. They eagerly take on customers or loads that are unprofitable. They just don’t know that they are unprofitable because of limitations in their accounting systems. Their profit-and-loss statements show a loss, but they don’t have a clue which customers or lanes are causing the problem. Only ABC can effectively help you understand this.
The first step in understanding ABC is to understand your cents per mile. Most software packages that compute P&L probably give you an aggregate cost, revenue and profit per mile for the month, quarter or year. But is each mile for every customer really the same? Not really. Some demand more time of your people. Some require that you use more congested travel routes or take you into areas where fuel is more expensive. The quality of backhaul opportunities varies dramatically. In short, at a given rate, some customers are less profitable than others.
ABC goes far beyond a simple average to break down your P&L statement further – by load in the best systems. In effect, ABC takes all the “indirect” expenses on your P&L, such as salaries or billing costs, and treats them as direct expenses attributable to each individual load based on the time each person spends dealing with that matter. You can then accumulate these into lanes or individual customers or groups, or any logical grouping – even days of the week.
ABC rejects the traditional cost accounting concepts of fixed and variable costs. Rather, ABC is a more accurate cost management methodology because it traces, rather than allocates, each expense category on your P&L to a particular cost object – such as a load.
And when broken down this way, you’ll see that the “average” load is just that – the midpoint of a wide range of loads that range from very unprofitable ones to very profitable ones. What if you eliminated the very unprofitable loads by refusing the freight or negotiating a better rate with convincing data? This would bring up your average considerably, of course.
Manning believes that any company can reap the benefits of ABC, but probably 75 power units and up is the optimal size to begin considering ABC software systems. Lower than that, you can attempt it manually.
If you’re really serious about long-term profits and survival, learn more about activity-based costing. It is fast becoming the recognized tool for supply-chain and value-chain management. It may take time and effort to properly implement ABC. But to be competitive in the future, it will be essential.
Introduction to Activity Based Costing (ABC) – Internet ABC Online Presentation, created by Narcyz Roztocki, University of Pittsburgh (www.pitt.edu/~roztocki/abc/abctutor).
White Paper: “Throw Out Fixed and Variable Cost Thinking – Bring in Activity-Based Costing For Distribution Decisions” by Roger Harvey, D.B.A., president of Value Associates, Ltd., Carbondale, Colo. (www.acornsys.com/Company/downloads/White1.doc).