Searching for value

Fleets have access to sophisticated analytical tools that help nail down the true financial impact of individual customers and loads.

To be successful in the low-margin trucking industry, managers cannot wait weeks to determine how their operations perform financially. Business changes daily by region, customer, lane, shipment and other segments.

However, faster access to information alone may not solve the problem. Many fleets view cost information in terms of averages – cost per mile and cost per hour, for example. But is each mile or hour really the same? Not really. Some customers demand specialized equipment, or more time of your people. Some require more congested travel routes. Some take you into areas where fuel is more expensive. The volume of loads and the quality of backhaul opportunities also vary dramatically.

“Until you get past the discussion about how this or that should be costed, and trust the numbers, it is hard to take action,” says Bob Baker, vice president of administration for Sunco Carriers, a 450-truck refrigerated truckload carrier based in Lakeland, Fla. “A lot of times, ‘good’ customers don’t grade out quite as well on paper.”

Today, fleets seldom lack data on costs, thanks to the widespread use of advanced dispatch and accounting software, onboard computers and various other technical “bells and whistles.” Granted, digging through the data to find the true value of each customer, lane, trip, shipment and other details of your operations can be tedious work. But with specialized software to analyze costs and profitability, fleet managers can automate this task – and gain new insights into their business.

Getting specific
Fleets often use profit-and-loss statements to evaluate their performance over a given time period and to derive other useful metrics, such as operating ratio and cost per mile. But traditional accounting methods do not drill down to the true cost of each activity, such as transporting a load of beef from Kansas to California for a major customer.

Activity-based cost (ABC) accounting is one way to assess the cost and profitability of each load, customer, driver and other categories of your operations. ABC originated in the manufacturing industry as a way to measure unit production costs and to evaluate the cost impact of changes, such as adding a new machine or additional workers to a production line, notes Duff Swain, president of trucking consultant firm Trincon.

Trincon is one of several companies that have developed trucking-specific cost and profitability analysis applications that rely on ABC accounting. These applications query data from the general ledger and other files in a company’s dispatch, dock management and mobile computing systems and segregate variable costs and fixed costs by cost center – by terminal, company truck, owner-operator, etc.

In trucking, ABC is an objective way to measure the cost of an activity, such as a shipment, based on the amount of resources the activity consumes. Variable costs are measured by the mile and include wages, fuel and maintenance. Fixed costs, such as overhead and depreciation, are applied to each cost center using a daily/hourly allocation called a “burden rate.”

Fleets can use ABC-based tools to evaluate what-if scenarios, such as evaluating the impact of slip-seating or adding a driver team to a tractor, decreasing deadhead or adding a new backhaul lane, Swain says.

In the less-than-truckload sector, carriers add additional cost variables such as a shipment’s weight, destination, volume and the difficulty of handling from point A to B. Any technology that improves the precision of data collected for each variable naturally leads to better cost information, says Greg Confer, vice president of business development for Ward Trucking, a 650-truck LTL carrier based in Altoona, Pa.

Ward Trucking developed its own costing software to find the contribution ratio – sales minus variable costs – for each shipment. To make sure its variable costs are as precise as possible, the company uses street-by-street mileages from ALK Technologies’ PC Miler database. Ward Trucking also captures the actual arrival and departure times for each shipment using Cheetah Software, which runs on the GPS Nextel phones that drivers use, Confer says.

Old Dominion Freight Lines (ODFL) is one of the most advanced users of the LTL/CIS system from the Transportation Costing Group. With this cost and profitability system, ODFL can synthesize information from many sources to compile a complete database of cost information.
ODFL drivers and dock workers use mobile computers to capture the time spent on each activity of a “Pro Number” – the unique number the carrier assigns to a freight shipment that appears on the freight bill and bill of lading.

At ODFL, the activities captured for each Pro Number include the time consumed for pickup, cross dock, line haul and final delivery, says Rick Keeler, senior vice president of strategic development and yield management for the Thomasville, N.C.-based carrier. The LTL/CIS system allocates the appropriate variable and fixed costs to each Pro Number by pulling time, mileage and cost data from multiple sources. ODFL also uses data from its weight and measuring system in its cost analysis.

ODFL evaluates its costs and profits a variety of ways – by freight class, customer, lane, length of haul and trips, or a combination of customers and trips in specific lanes, Keeler says. “The more information, the more precise the costing is,” he says. “When it lacks information, you tend to get a little more general answer.”

Grappling with complexity
Compared to the complicated cost structure of LTL carriers, truckload may seem much easier. Sunco Carriers uses an application that was developed internally to apply fixed and variable costs to each load. The application extracts details such as revenue, driver pay, customer and dispatch information from the company’s McLeod LoadMaster enterprise system, Baker says.

With a database of “fully costed” loads, Baker uses a report writer, Crystal Reports, to create summary reports such as “profitability by customer” and “profitability by lane.”

But knowing the profitability of a shipment from point A to B may not reflect its true value, experts say. Even if a load is profitable, operations and sales departments often interpret the value of a load differently. Operations may see little value in a load based on its deadhead and layover time. Sales representatives, on the other hand, may concentrate on the load’s revenue, how it fits within their sales territory, and the fact that the customer is a good golfing buddy.

“The problem is using an objective measurement of what is weak and what is strong,” says Ben Murphy, president and chief operating officer of Integrated Decision Support Corp., a developer of planning and execution software for truckload carriers.

One mistake fleets can make when calculating the profitability of a movement is assuming that a truck magically appears at the origin. This assumption ignores the time to get a truck to an origin and time a driver sits between load assignments, i.e. dwell time.

Another mistake is not considering the value of the next load or two – for example, what rates and utilization can you expect once you reach the destination?

In short, to find a truly objective measure of a load, you have to find its network value or “yield,” Murphy says. IDSC’s Netwise product uses an algorithm to find the yield of each load in a carrier’s freight network – loads that have been moved, and those being evaluated. The value of yield for a single load is determined from a function of four main variables – revenue, variable cost, time and network balance, or “flow,” Murphy says.

Netwise calculates the revenue of a load by adding the revenue of a movement from point A to B to the revenue of the load before and the load after. The variable cost is allocated based on the miles to get to point A, and from point A to point B. The time includes the time it takes to move a truck to point A, the in-transit delay from point A to B, and the dwell time at point B waiting for the next load. The Netwise product integrates with leading dispatch systems to automatically capture the data it uses to compute yield, Murphy says.

Rodney Holland, traffic director of AMX Trucking, a 277-truck carrier in Ashford, Ala., says that using Netwise has helped the company restructure its pricing and set new strategies for sales and operations. “It does a very good job helping us understand which loads are good and which are not so good,” Holland says. “It is an objective system.”

With the current trough in truckload freight volumes, Holland doesn’t use Netwise as frequently as he did in the past two years. “You take whatever people give you,” Holland says. “There is not a lot of use for us being selective right now.”

Dealing with the market
Advanced software applications can mine through data quickly to determine objective measures of the value of each load and customer to your business. Yet when it comes time to make split-second pricing and rating decisions, the process is as much art as science, fleets say.

Pricing is determined largely by the market, and even with a clear understanding of their costs, fleets may have to offer deep discounts to keep their trucks moving. Technology, fleets say, plays a valuable role in helping create checks and balances in their organization for pricing activities.

Summitt Trucking uses a cost and profitability analysis solution called RealNumbers. Dan McKinnon, network administrator for the Clarksville, Ind.-based carrier, says the application provides a comparison of Summitt’s historic high and low rates in each lane to the national average. Load planners now have cost and pricing information at their fingertips when quoting lanes, McKinnon says.

Each month, RealNumbers queries the fleet’s enterprise system, TMW Suite, to update the fleet average for cost per mile and revenue by lane. By entering the origin and destination ZIP codes into the application, planners see the cost, the lane density by revenue, and the fleet’s rates compared to the national average. “It is telling us what we should rate based on those parameters,” McKinnon says.

Companies also can create a process to continually review their costs versus their pricing to look for areas to improve profitability. Since Sunco Carriers began using its costing software two years ago, it has found numerous ways to work with customers to improve profitability, Baker says.

“We were able to work with customers in the bottom of the list, and pull them up closer to the mean,” he says. “The best news, in a lot of cases, is that we were able to do it without raising rates.” Customers generally were willing to take the necessary steps to improve Sunco’s profitability, such as reducing waiting time and the number of spot trailers.

“We talked a lot about partnership and the need for our relationship to be more profitable,” Baker says. “We can raise rates, but opposed to raising rates, in a lot of cases, in this lane or at this shipping point, we were not getting the utilization we need.”

Keeler says ODFL is determined to use its costing system from TCG to make good business decisions that are priced properly for profit and need. “In some cases, you take freight at a loss, but it is actually helping you,” Keeler says. “In backhaul lanes, it is better to have revenue that operates at a slight loss and contributes to overhead, than none at all. If the cost exceeds fully allocated costs without overhead contribution, it is not worth hauling.”

At ODFL, sales personnel submit information to a pricing department, which uses the TCG software in determining rates for new accounts. A separate costing department uses the software to review the account to determine if the freight was as profitable as anticipated – for example, perhaps the freight required extra handling or more lengthy deliveries.

“We have checks and balances running through the organization,” Keeler says. “Sometimes we are right on the money. Sometimes we are better, but more often it is a little worse.”

Finding a fit
Just like fleets, costing software comes in many sizes

Software for analyzing the costs and profitability of trucking enterprises comes in many shapes and sizes. In many cases, developers offer “third-party” applications that integrate with a fleet’s dispatch and accounting systems to provide objective measures of profit and value that can be used throughout an organization.

One of the most significant factors in selecting a system is determining whether or not a company has the resources to reap all the benefits a particular system can offer. Applications range from custom spreadsheet programs to advanced decision support and business intelligence tools.

RealNumbers, for example, is a solution designed for companies looking for a more robust analysis tool than a spreadsheet. The application has the look and feel of a spreadsheet with built-in queries to import data from a carrier’s enterprise system into its profitability analysis model. Typically, customers use RealNumbers as a monthly reporting and training mechanism for the front-line decision makers in an organization, says Paula Joyner, the company’s founder.

Relatively simple applications also can be used to collect and present cost and profitability measures for truckload and LTL carriers. Yet fleets often lack the resources and organization to make use of new software. Trincon developed a cost and profitability software system that includes a spreadsheet version. While the software is offered as a standalone system, 90 percent of Trincon’s software clients also use the company’s consulting services, says president Duff Swain.

“What we find missing is that trucking companies have not grown accustomed to organizing their cost data,” Swain says.

Companies that have the resources to take advantage of more advanced “decision support” software tools also have several options. The Transportation Costing Group has developed a comprehensive activity-based costing model for both LTL and truckload carriers. The model integrates with all the major providers of dispatch, freight billing and mobile communications systems, the company says.

For truckload carriers, Manhattan Associates offers a system called the Profit Analyzer. The software is browser-based and is one of several decision support and optimization tools the company offers. Profit Analyzer integrates with a carrier’s various information systems to provide real-time information on a wide variety of profitability measurements, such as lane value. Companies that use the system operate more than 300 trucks and are typically large enough to have separate groups for costing, pricing and profitability analysis, says Faizal Enu, principal of profitability analysis for Manhattan Associates.

Integrated Decision Support Corp. offers an advanced planning tool for truckload carriers called Netwise. The pricing of the Netwise package is based on the number of trucks in a fleet, says Ben Murphy, president and chief operating officer. The key component of the application is its ability to determine the network value or “yield” of each individual load in a carrier’s freight network.

Yield is a complex calculation that considers the revenue, cost, time and “flow” of each load. Yield can be used as an objective measurement in an organization to establish a quality management program, Murphy says. The objective of such a program is to continuously work on fixing or replacing freight below the average yield.

Like any technology, the value of analysis software ultimately depends on the time and resources an organization can commit to using it.