Supplement to Trucking 106

Transcription

1 Copyright 2005 by Innovative Computing Corporation 750 Old Hickory Blvd. Suite 290 Brentwood, TN NW 2nd Street Suite 100 Oklahoma City, OK Innovative Computing Corporation This document contains proprietary and licensed information protected by copyright. All rights are reserved. The information contained in this document is subject to change without notice.

2 TABLE OF CONTENTS... 3 Expenses... 3 Fixed Expenses... 3 Truckload Operating Cost Structure... 3 Flexible Expenses... 5 Risk and Safety Department... 6 Understanding Profits through Operating Ratio... 6 Improving OR... 6 Additional Profit Concepts and Figures

3 Expenses Expenses are costs developed through the carrier s daily activities. These may include administrative fees such as mortgages on the terminal, fuel, the cost of the vehicles, maintenance fees, taxes and payroll. Typically, expenses with a motor carrier may average around 95% of a carrier s total income leaving less than 5% profit for the company. While the amount of an expense may vary, generally expenses are classified as Fixed or Flexible. Fixed Expenses are those such as payroll, taxes and fuel, which are regularly occurring and, though they can be lowered, cannot be avoided. Flexible Expenses are those such as accidents and service failures, which can be avoided through various efforts. Fixed Expenses Truckload Operating Cost Structure 1 Truckload Carriers face a very wide variety of costs with each element of their business. Some of these expenses and their approximate portion of the total expenses of a carrier are show below: Communications and utilities 1% Taxes and Licenses (Separate from Fuel and Employment Taxes) 2% Insurance and Claims 4% Depreciation and Amortization 4% Operational Supplies 7% Fuel 10% Rental and Purchased Vehicles 30% Labor 37% Other 5% Driver Pay One of the largest elements in a motor carrier s expenses is the salary of their drivers. According to the Bureau of Labor and Statistics, the average tractor trailer driver made $34,330 per year. Per a random May 2004 sample of driver advertisements in The Trucker magazine, salaries worth advertising began at $0.42 per mile with additional bonuses of between $0.01 and $0.08 a mile. 1 Consumables Consumables are one of the largest expenses found within the maintenance department of a carrier. These consumables include Tires, Oil, Filters, Belts and other similar items depleted by the vehicle while it is in use. Like fuel, these are required for the operation of the vehicle and must be replaced on a regular basis. While consumables are a fixed expense in that they need replaced on a regular basis, they can be managed so that expenses frequently associated with them are lowered. For Example Driving methods and regular tire rotation can improve the wear on a vehicle s tires. Some types of oil may reduce the need for more frequent oil changes. Fuel, the Not so Fixed Expense 3

4 Fuel, while a fixed expense in that it is always present in the cost equation, is one that can vary dramatically from day to day, carrier to carrier and even driver to driver. Any change in fuel costs can make significant changes in the bottom line of a company. Fuel costs and consumption can be influenced by elements such as: Driving Speed and Methods speeds closer to the speed limits and less aggressive driving are considered to have a positive effect on fuel consumption 2 Maintenance of the Vehicle better maintained vehicles operate more efficiently and thus offer better fuel consumption Limiting Driver Idling Time drivers will idle their trucks during their rest periods in order to run their heating and air conditioning units; limiting idle time can then limit consumption Fuel Vendor Discounts in order to gain a full carrier s business, many fuel vendors will offer discounts to carriers for using their stops; carriers may also spread their fuel card business between multiple vendors to allow competition and avoid being locked into certain prices Fuel Surcharges used to add additional fees to carrier s rates based on rising fuel costs External Fuel Prices even minor changes can have a significant effect on a driver and carrier s fuel costs For example Trucks typically fill two, 250-gallon tanks of fuel each fill up. On average, a truck may get seven miles to the gallon. If fuel costs $1.70 per gallon of diesel fuel, then a single fill-up will run $850. If the driver gets seven miles to the gallon, he or she will be able to travel 3,500 miles on one tank of gas. If that driver is more efficient, and gets eight miles per gallon, they can achieve 4,000 miles on the same tank of gas. If the carrier is able to receive a 1% discount on their fuel costs, then they receive $8.50 off of each tank. For a fleet of 100 tractors, each consuming 1.2 tanks of fuel a week for 52 weeks, this 1% discount can amount to as high as $51,000 a year for the carrier. Driver Retention and Acquisition Another Nearly Flexible Expense Acquisition Driver Acquisition, which refers to the hiring of new drivers, is one of the highest expenses in the trucking industry. After considering advertising for the position, recruiting, interviewing, background checks, training and probationary periods, acquisition costs can reach nearly $3,500 per driver hired. In addition, more experienced drivers are able to lower carrier expenses as this experience leads to better driving practices. Better driving in turn can improve fuel efficiency and lower accident ratios and expenses. More experienced drivers also improve the overall quality of the carrier to its shippers by providing better service. Turnover Compounding the acquisition issue are the high turnover rates within truckload carriers. Many may experience over 100% turnover of drivers each year. This means that each year, a carrier may replace every one of its drivers at least once. Certainly, some drivers may stay for years, but this is balanced by drivers staying for only months at a time. This turnover is due in large part to the lifestyles faced by drivers including weeks away from their families, other aggressive drivers on the road, long hours and potentially low pay. This lifestyle in fact, removes many drivers from the industry as a whole each year. Retention 4

5 Carriers use a wide variety of methods to retain their drivers. Stronger acquisition practices are included in this process. Through these, carriers work to understand what keeps their drivers on board, what attracts the most qualified drivers for their needs and who makes the most retainable drivers. This improvement in acquisition processes improves the driver retention once they have signed on. Once a driver is hired by a company, that carrier will work to keep the driver happy by: respecting their needs for trips home offering a variety of loads for them to carry offering bonuses for lower miles per gallon (mpg) or for lower accident rates easing their paperwork requirements through mobile communications making fuel purchases faster and easier through the use of fuel cards limiting detention times Flexible Expenses Flexible Expenses are those that a carrier commonly experiences, but that are avoidable. Because carriers can avoid them, they are not necessarily present in the company s annual profit equations and therefore not fixed. Flexible Expenses vary, but often include the following: Fines such as those received for o Overweight Tractor-Trailer Combinations o Speeding o Driving Violations o Log and Hours of Service Violations Service Failures are failures of the carrier to complete a transport of goods. These may, at a minimum, result in a reduced or eliminated payment to the carrier for the transportation, regardless of the work performed. Cargo Claims are claims for damages to the cargo and for which the carrier will be held liable. These most commonly include: o Over the cargo delivered was actually more than scheduled for pick-up; carriers will not deliver additional goods to the consignee unless authorized to do so by the shipper o Short the cargo delivered was missing part of the load; consignees will sign only for the goods that have been received, regardless of what is stated on the Bill of Lading o Damaged part of the cargo was received damaged upon delivery Cargo damage can be further broken out into concealed damages, which are those that can not be seen from outside the container and evident damages, which can be seen from the outside. Note: Property Damage Claims are more common in truckload carriers due to their having more exposure to rolling accidents, which are vehicle accidents in transit. This is related to the longer number of road miles common in truckload carriers. Cargo Claims are more common in Less than Truckload carriers due to the additional handling that is performed with the cargo itself during the distribution process. Out of Service (OOS) refers to drivers, tractors or trailers, which are taken out of service if the vehicle is found to be unsafe for highway travel or cargo shipment or if the driver is unable to continue the drive due to illness or incapacity (i.e. intoxicated). Law enforcement may pull a vehicle during roadside inspections or carriers may pull their own vehicles during routine terminal inspections of the vehicles. o Federal, state and local safety inspectors use documented OOS Criteria as a guide in determining whether to place Commercial Motor Vehicles (CMVs) or 5

6 CMV Drivers out-of-service. This is a list of violations, which are so unsafe that they must be corrected before operations can resume. Accidents are a flexible expense to motor carriers. While each accident may be in the tens to hundreds of thousands, with the national average now well over $59,000 per accident 3, careful recruitment, training and enforcement of policies is intended to decrease the number of accidents a carrier experiences in a year. The cost of an accident can involve many fees including repair of the vehicle, medical treatment for involved parties and extraction of the freight. Expenses can include the following: o Damages, which are funds awarded to an injured party or owner of damaged o property to compensate for the repairs and / or medical expenses. Punitive Damages, which are additional funds delivered to a plaintiff for an accident. These are beyond compensation for repairs or medical expenses. Extracting Freight may be required if a tractor is placed out of service or an accident has occurred. Specifically, this is the need for a carrier to go to the location of a vehicle no longer able to carry a load, and move that trailer on for the remainder of its shipment. This is a Termination of the original shipment and involves the expense of sending a new driver, tractor and possibly trailer to the location to pick-up the cargo. Risk and Safety Department Carriers devote an entire department to handle many of the issues related to the flexible expenses of Accidents and Driver Safety. This Risk and Safety Department also works within limits set by the Occupational, Safety and Health Administration (OSHA) to provide safer environments for its workers and encourages driver training and related programs to create safer drivers. Another element playing into the Risk and Safety department is Driver Acquisition and the role that proper selection of drivers and their training plays in safety. Understanding Profits through Operating Ratio Operating Ratio (OR) is the profit that a motor carrier receives after paying its expenses. This is simply the cost of running the organization subtracted from the revenue gained through its services. Operating ratios are percentages showing the percent of costs experienced by a carrier. The difference between those costs and 100% are the carrier s profits: the lower the OR, the higher the profit margin for the carrier. For example An OR of 92% means that the carrier is making a profit of $0.08 on every dollar earned. This is considered a good OR in the trucking industry. Often in the first years of a carrier s operation, they may experience OR s over 110% meaning that they can expect to loose over 10% per year for these years. In 2004, Transport Topics magazine examined the largest for-hire carriers in North America and included a focus on the OR s of the most profitable carriers from this group. The number one OR from this group of largest carriers was 79.0%. This means that the carrier was keeping a profit of $0.21 per dollar earned, which is considered exceptional by market standards. 4 Frequently the best OR s of the most successful carriers still may range above 95%. Improving OR 6

7 The goal of every carrier is to improve their OR. Doing so not only allows for greater profit for the organization, but also allows them to improve their service to their customers, broaden their market and invest in drivers and vehicles. Because the market is so heavily competitive and laden with multiple carriers, lowering costs is the most manageable way to improve on operating ratios. This begins with a focus on lowering flexible expenses through better business practices. For example: Freight revenue and costs are based on where a shipment is destined to go and what is involved with getting it there. Profits decrease for the time that the carrier drives without cargo for any part of the trip. Specifically, costs to the carrier will remain unchanged if goods are being shipped or not. If there is something to backhaul from the destination, then the carrier s revenue for the overall trip will increase and improve the profit for the trip as a whole. Additional Profit Concepts and Figures Additional terms are used in relation to determining profits. These include: Billable Ratio is the ratio of billable time to time for which the carrier will have costs, but not be able to bill. Ideally, this ratio should be nearly even. Freight Density refers to the amount of freight a carrier is shipping in a year. The higher this density, the better it is for the carrier. Equipment Utilization is the frequency with which the equipment owned by the carrier used in daily operations. Lane Analysis refers to analysis of the carrier s work and the profits associated with a journey between cities. Carriers study these to determine if the given lane is profitable to the carrier and if it should be continued. Endnotes 1 United States. Department of Labor, Bureau of Labor and Statistics. National, State, and Metropolitan Area Occupational Employment and Wage Estimates. May The Trucker Magazine. May Miller, Ted, Eduard Zaloshnja, Rebecca Spicer. United States. Department of Transportation, Federal Motor Carrier Safety Administration. Revised Cost of Large Truck and Bus Involved Crashes (2002). Available at 4 Long, Mindy. Select Carriers Craft Low ORs with Painstaking Attention. Transport Topics, Top For-Hire Carriers (pull-out). 19 July