How to Profit Under the New Hours of Service Rules 2-2-2
How to Profit Under the New HOURS OF SERVICEHours of Service Rules
White Paper by Duff H. Swain
November 24, 2003December 31, 2003
On January 4, 2003, the trucking industry will begin adjusting to the Department of Transportation’s new Hours of Service regulations for truck drivers. This will may prove to be the most significant happening event in the trucking industry since the implementation of the Commercial Drivers License.
The new regulations will create drive major change in the industry . The– change that can be good or bad for truckers.
FinallyOn the plus side, the regulations may force shippers and receivers will be forced to have acknowledge theira vested intereststake in the increased increasing the productivity of truckers and their equipment. . Shippers will no longer profit from depressed transportation costs resulting from poorly managed trucking companies and overworked truck drivers.
On the minus side, the increased costs of complying with the regulations could drive poorly managed trucking companies out of business. Far too many trucking companies fall into this category.
This will eventually be a good thing for the industry. The trucking industry is very capital intensive. Shippers will no longer be able to profit from depressed transportation costs resulting from poorly managed trucking companies and overworked truck drivers.
Poor Management Dogs the Trucking Industry
It is a strong statement to say that the industry has been dominated by poorly managed trucking companiespoorly managed trucking companies have dominated the industry. H; however, let the results speak for themselves:
1. Net before-tax profits for the industry continue to average below 2 percent, and the average return on investment in trucking averages below 5 percent.
2. Driver turnover rates continue to average upwards of 100 percent in the over-the-road truckload segment of the industry.
3. The driver shortage continues as the most serious long-term problem in the industry. The pool of experienced drivers continues to diminish, and the trucking industry has done virtually nothing to create develop the new human resource assets (drivers) needed to support an industry that is a key factor in Gross National Product.
4. The failure rate within the industry has averaged 10 percent over the past three years. Trucking companies that have survived all the industry hardships imposed by deregulation in 1980 are closing down, failing or being acquired by more financially sound and successful companies.
The Lack of financial management is the biggest single reason forfactor in these failuresnegative results is a simple fact. Ninety- five percent plus of the trucking industry does not havelacks the ability to define pinpoint costs as they affect their businessof doing business. .
Owners and managers have adjusted to many changes. They have adapted to DOT compliance requirements, become cost efficient in maintaining better and more expensive trucks, learned to use technology in the operation of their business and trucks and improved the quality of their services. . They have survived and adapted and still, --- they still they do not understand their costs.
Ttruckers cannot identify the cost difference in cost between two trips of the same distance that take different times to complete or that require different ratios of trailers to trucks. . This lack of knowledge is astounding, cThis is detrimental considering that trucking is as capital intensive as most manufacturing companies. To stay competitive in a global economy, manufacturing companies have implemented rigorous cost controls. Trucking companies must do the same..
Shippers Are Ahead of the Game
Trucking companies have been poor negotiators when trying to establish profitable pricing or increases needed to maintain profits at specific levels of service. ShipperShippers, on the other hand, have been good negotiators and have taken advantage of motor carriers. . Imagine this situation:
A motor carrier approaches the shipper for a price increase based on increased costs in fuel, tolls, driver pay or whatever. The shipper asks, “Can you sShow me how this affects my business and justify the request with facts and figures?” The motor carrier responds, “I don’t have facts and figures showing how it affects you. . I can only document my cost increases, but I still need the increase.” The shipper is now in control of the negotiations. The Shippershipper is asking the questions and on ‘offense’. . The motor carrier is answering questions, losing credibility and on ‘defense’.
Unfortunately, motor carriers have become used to this situation. They do have a historyHistorically, they have been unable to control of controlling the changes that affecting their own industry. . In support of the statement, cFor example, consider the following strategies that have dramatically changed how motor carriers function:
Ø The core carrier concept
Ø Just in time (JIT)
Ø Primary and secondary carriers in specific lanes
Ø The growth of brokerage and third party logistic (3PL) providers.
Ø Total Quality Management (TQM) and ISO 9001/9002
Ø The use of computerized bidding.
Not one ne of these initiatives was started by began within the trucking industry. They were all conceived and/or promoted by shippers, and largely through the Council of Logistics Management.
The stage is set for change. The question is who will benefit from the results. The options are:
Ø Increased cost of freight; or:
Ø Increased productivity of dDriver and eEquipment
ShipperShippers have become used to this situation. They take the position that this is a motor carrier problem. We are hearing the same thing from shippers regarding the H‘hours of Sservice rule.’. They will work with the carriers, but they expect pricing requests to be supported by facts and figureshard data. . Quite frankly, it is a reasonable request!
The motor carriers should be the first to act andmust lead the initiative. They are the first recipients of the problem, the increased costs are theirs to justify, and they should be able to define utilization strategies that will minimize or eliminate the effect of the problem
Given time, the shippers will find ways to increase productivity. . Their solutions will maximize their benefit and minimize the motor carrier’s benefit. . Given less time, the 3PL willth create solutions as aan intermediary or third party. . This would be a credible and logical position for them to take; however, the motor carrier will benefit the least.
Knowing Your Costs is the Key
So what prevents the motor carrier from taking the initiative? It is not lack of intelligence, assertiveness or unwillingness to try. It is purely and simplye the lack of credible costing information about their own companies and operations. . What is missing is an a“Activity-b Based cCosting aAccounting sSystem” that can be used by a trucking company.
Activity-b Based cCosting is an accounting process that is very common with manufacturers. . They separate variable and fixed expenses. The variables are typically their bill of material. Fixed costs are assigned as burden rates, typically to be absorbed by manufacturing man-hours. Costs and revenues are then allocated to cCost cCenters, usually product lines. . Units of measurement are established as criteria and/or benchmarks. The actual results are measured for variances. Manufactures are capital intensiveLike truckers, manufacturers have made heavy investments in capital equipment, and increased productivity decreases their fixed cost.
The same process can be applied to trucking. Variable expenses are caused by moving trucks or creating revenue. Fixed expenses are departmental expenses, equipment and supporting personnel. Variable expenses like fuel, driver mileage pay, parts, tires, and tolls are measured by the mile. Fixed expenses like depreciation, maintenance, operations, marketing, and administration are absorbed by assigning a burden rate to each truck in operation on an hourly or daily basis. You can then measure the effect of time, distance and increased productivity.
It can be done. Trincon created an aActivity bBased cCosting sSystem for the trucking industry in 1983. . We have been using it as an evaluation tool with every new client since that time. It enables us to determine the profitability of company trucks vs. owner- operators, a customer, a lane, a truck, a driver and a trip. Furthermore, we can define the profitability in pricing and determine trip pricing necessary to meet a predetermined profit level. . The system is called TruCosting®.
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Example Shows Impact of Hours of Service
Attached you will find an example of an activity based spreadsheet measuring the impact of the Hours of Service rules for the fictional T. Load carrier. The analysis covers a 1,030 mile round trip with pricing that was marginally profitable before the new Hours of Service Rules.
The new rules create a loss. The example shows how the loss can be improved through increased truck productivity. The criterion below explains:
1. The format for the profit & loss statement on page 6 as it defines variable cost per mile and fixed cost truck burden for a fleet of 50 over the road company and contractor trucks.
(Note – Expenses for each department have been condensed to save space)
2. Three different analysis of the same trip on page 7 that measure the impact of increased truck productivity through reduced load and unloading hours, in addition to ‘drop and hook’ operations.
SHEET ‘A’ - A sample operating statement and worksheet for a fleet of 50 Trucks:
Ø Rows 1 thru 4 define fleet details and productivity criterion.
Ø Column ‘A’ shows the organization of Revenue, Variable Expenses and Fixed Expenses by Department.
Ø Column ‘E’ shows the consolidated revenue, expenses and profit result from the entire fleet.
Ø Columns ‘G’ and ‘I’ show that revenue, expenses and profits have been allocated to the cost centers of Company Trucks, Contractor Trucks and Brokerage.
Ø Column ‘B’ defines the basis that was used to allocate the revenues and expenses to Company, Contractor Trucks and Brokerage.
Ø Row ‘45’ defines the Variable Cost per Mile for the Fleet, Company and Contractor trucks.
Ø Row ‘102’ defines the daily Burden Rate per Truck for the Fleet, Company and Contractor trucks.
Ø Row ‘103’ defines the profit or loss for the Fleet, Company and Contractor trucks.
Trip Summary examples demonstrate how increased truck productivity can reduce the cost impact from the new Hours of Service Rules. Each example is the same 1030 mile round trip as shown in the diagram. The costs represent a 100% Operating Ratio (re: line 23). For example:
Ø EXAMPLE #1 – is based on the Total Fleet composite. The trip uses up 57 hours. Each stop and delivery takes 2 or 4 hours and the trip falls ($ 82.00) short of a profit.
Ø EXAMPLE #2 – shows the effect of reducing the loading and unloading times to 1 and 2 hours. The increased efficiency reduced the trip to 51 hours and the profit shortfall is reduced to ($ 37.00).
Ø EXAMPLE #3 – shows the effect of using the ‘Drop and Hook’ method of pick up and delivery. The cost of two (2) additional trailers has been added to the fixed costs (re: line # 50). Loading and unloading times have been reduced to ¼ hour. The increase in efficiency results in a 34-hour trip and a profit of $ 29.00 per trip.
Attached you will find an example of activity based costing being used to measure the impact of the Hours of Service rules. The criterion on page 5 explains:
1. The format for the profit & loss statement on page 6 as it defines variable cost per mile and fixed cost truck burden for a fleet of 50 over the road company and contractor trucks.
(Note – Expenses for each department have been condensed to save space)
2. Three different analysis of the same trip on page 7 that measure the cost effect of increased truck productivity through reduce load and unloading hours, in addition to ‘drop and hook’ operations.
Control Your Destiny
It is time for truckers to become good asset managers. . For all practical purposes, the industry was reborn in 1980 and is really only 23 years old in many respects. . That explains why asset management has not been a strong industry characteristic. The result has been annd industry that has been victimized by its customers while its driver resources diminish. . Now it is cconsolidating, yet we still hear the term “underutilized equipment.”. That term is seldom defined. To define it, consider:
Ø When was the last time you were on an airplane that stopped because the pilot ran out of hours? When was the last time you sSaw a train stop because the engineer ran out of hours? ? Or a bBus? AOr a rRiver bBarge?
Ø Trucks are the one capital asset that can have accelerated depreciation over three (3) years. The typical warranty life is 700,000 miles, with a design life now exceeding 1,000,000 miles. . That means, if youto ber profitable, the optimum utilization use for revenue generation and tax advantage is to operate the truck 700,000 miles in three years. . Those who that do will be more profitable than those that don’t . and – yoYou u can’tcannot do that with a one-driver per truck operating philosophy.
We are not yet through the changes started by deregulation. We are not yet a mature industry. Many changes are yet to come as we solve the issues of dDriver sShortages and eEquipment uUtilization. . Strategies like ‘drop and hook’, ‘slip seating’ and ‘absorbed man-hours’ will have new meaning. .
The expressionDuring World War II, General George Patton famously said, “Do something. Llead, follow or get out of the way.” For the trucking industry, a logical application of this philosophy is: may be interpreted as:
“leadLead” - Get bigger or find a special niche!
“Ffollow” – Work for a 3PL!
“Gget out of the way” – mergeMerge, sell or quit!
It is time for truckers to start controlling their own destiny. The new H“hours of Sservice” regulation is provides a the platform. Knowing your costs and being a good negotiators is the right strategywill allow you to profit from the new regulations.
The Trincon Group offers the TruCosting® system as part of its business advisory services. Trincon has also joined in partnership with Martin Labbe and Associates to release the system as a software package through TruCosting® LLC. For more information, call Trincon President Duff Swain at (614) 442-0590, or e-mail .