Having followed a recent LinkedIn blog discussion on A Truckload, Trucking, Logistics, Supply Chain, 3PL, Distribution group, I feel compelled to comment on some of the realities in calculating Heavy Commercial Vehicle (truck) Owning and Operating costs. Before we start, let me say that the cost of owning and operating a truck has nothing to do with market-driven rates! Rate per mile is simply set against supply versus demand. The cost of each trucking opportunity varies according to a number of variables, mostly influenced by external factors out of your control, so be aware that what might work perfectly well in one contract could lead to a loss situation in another.
In reading the many discussion responses, I find reference to "Cost per Mile" yet no reference to the truck configuration, payload, type of commodity being transported, over which route / lane, nor the actual (running) Gross Vehicle / Combination weight of the truck. If we are referring to an 18 wheeler, is it a flat bed or a volume van operating on an intercity >150 miles per day, or short / medium haul <150 miles per day? This is a very common error that renders these figures misleading and downright dangerous, especially for smaller Carriers. As we will see, Cost per Mile is the first mistake truckers make in endeavouring to calculate load pricing. It begins with a paradigm shift to Cost per Dollar of gross Revenue earned! In other words, the single most important issue is how many Cents-in-the-Dollar drops to the bottom line in negotiating price per ton-mile transported from point A to B. Most importantly, what are the terms and conditions that are likely to influence costs?
It is well for Carriers and Shippers, for that matter, to understand the basics of deploying road transport in a Logistics environment. Trucks mean different things to different people: OEMs, Road Traffic Authorities, dealers, repair shops, other road users, truck drivers, and, of course, the Investors. Investors are people who are prepared to stake large sums of money at very high risk and use ROI as the incentive to motivate their decision, so never lose sight of the fact that this is the primary driver keeping the show on the road (excuse the pun).
Hard lessons I learned over the past 45 years
- Turnover (sales) is not profit. If increasing turnover does not contribute to the bottom line, don't risk your business chasing it. Forget about the Marginal Costing theory, unless the improved overhead cost recovery is so great that it offsets sponsoring loss-leader business.
- If costs are not recovered for every truck mile run, throughout the vehicle life, there is no opportunity to make it happen at some future time in the latter part of the vehicle history. In other words, if a truck hasn't earned its keep today, it is impossible to make it up tomorrow. This is where the Lifetime Value Quotient comes in. LVQ=total revenue/total cost. Simple enough but remember LVQ must always be greater than 1.00, or you are working yourself into bankruptcy. A safe LVQ would be in the region of 1.15 BT.
- Commit a fleet replacement policy to writing, which takes into account that at some predetermined future time, a vehicle must be replaced for economic and technical obsolescence reasons – and that the amortisation reserve created by the vehicle being replaced must fund its replacement cost. My experience is that few fleet operators, Public or Private, have a replacement policy committed to writing, or otherwise, and even fewer have documented fleet replacement policies for each vehicle / application in their fleet on which to base their costing model. The first indication of under recovery in any fleet, Carrier or Private, is when there is insufficient Capex to timeously replace vehicles.
- Last year's budget "adjusted" by a CPI general inflation figure, then "panel beaten" by a CFO to justify ROI to shareholders, is a sure way to collapse an otherwise healthy transport business. Many CFOs demand less money spent on servicing and repairing the fleet. This becomes a seriously challenging task when replacement cycles have been pushed out, and the Operations division needs vehicles of all ages and miles on the clock to operate as efficiently, reliably as well as economically as new trucks. One sure way to go out of business is to cut Service, Maintenance and Repair (SMR) in order to meet sub-economic rates simply to get business. It's a no-brainer that plagues the road transport industry.
- Finally, remember that there is a tendency for Shippers to avoid, at all costs, picking up the tab for the empty leg. It therefore makes sense that you cannot produce two ton-miles of haulage and only get paid for one! As has been said in the many responses to this post, if you decide to compete for new business far from home, don't waste your time bidding unless you have hope of return leg business as well.
About the Blogger: "5 Ways to Avoid Crashing Your Trucking Business" was written and illustrated by Hugh Sutherland, msoe, mirte, LCGI. His experience includes 16 years as editor of four road transport publications. Hugh currently works as Lecturer in the Department of Business Management at the University of Pretoria and Non-Executive Director of Pickitup. For more information, please visit www.fleetassignments.com.
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