Do you know exactly how much it costs you to deliver product to each customer? If not, how do you know if you are making any money at the bottom-line on each trip?
If you want to get your arms around transportation costs once and for all, you must segregate transportation expenses from the rest of your general operating expenses. You have two choices for segregation — a separate division or a separate company all together. There are merits to both.
With a separate company, you gain liability isolation. With a separate division, you achieve control while avoiding the extra costs of another corporate entity. No matter which option you select, you will have similar challenges.
The first challenge is pricing. How will the transportation division or company charge your operating division for service? The most common solution to this dilemma is use of common carrier rates, which has a side-benefit as well — If your transportation company is not profitable at this rate, you will know it is time to seriously consider getting more efficient or eliminating your fleet!
Next, all direct costs must get charged to the new entity. This means equipment depreciation, truck loan interest or lease payments, driver expenses, dispatch and loading expenses, licenses, taxes, fuel, liability insurance, etc. Be sure to keep track of overtime separately from regular payroll. Overtime is typically a problem area for many marketers.
Next comes that wonderful task of allocating general overhead. At Meridian, we have observed that a payroll-based formula works very well for transportation divisions. Compare the transportation division payroll to the total company payroll and express that number as a percent. Then, multiply your general overhead by that percent and charge it to your transportation division.
Once you are satisfied that your new entity reflects all income and costs, it’s time to fine-tune your data. Once again, you’ll have choices — segregating the information by truck or by business sector. In the ideal system, you should be able to see both.
Seeing results by truck can be handy for identifying driver inefficiency, routing inefficiency, and excessive repairs and maintenance costs. Per-truck income statements require a software system that can apply all hauling revenue to each individual truck. Likewise, direct costs must be identified by truck and overhead must be allocated out to the truck level.
To allocate overhead at the truck level, mileage works best, not payroll. Take each truck’s mileage for the month and divide it by the total miles driven for all vehicles that same month. Apply this percentage to all non-direct costs including all overhead assigned to the division. (Normally this is achieved through the use of one administrative division.)
By using truck-level income statements, you will immediately know if each and every vehicle in your fleet is producing bottom-line profit. If you have losers, you can begin to work on them. If you are fortunate enough to have one or more big-profit vehicles, you can identify the reasons for that good results and try to duplicate the strategy with other trucks.
An alternative way to segregate and fine-tune your transportation entity is by class of business. Common classifications include:
± internal truck and trailer fuels
± external truck and trailer fuels
± tankwagon fuels
± bulk lubes
± package lubes
± heating oil
Segregating by type of business will allow you to fine-tune your pricing system and know the true delivery costs by sector. With some sophisticated general ledger systems, you may even be able to have the best of both worlds using your class of business segregation first, and then breaking down further to individual trucks within that class.
Once you get the transportation division nut cracked, it’s incredibly handy to know the per-mile variable cost of each truck. To do this, you will need to segregate your operating expenses into two categories: fixed and variable. Fixed expenses are those that don’t change whether your truck is running or not. Fixed expenses include depreciation, liability insurance, licenses, fees, and any financing costs.
Variable expenses are all those expenses that increase in dollar amount with use of the truck. The variable expenses would typically include payroll, repairs and maintenance, and fuel. If you are using a payroll-based overhead allocation method, overhead is also a variable expense.
With this system, the important number to identify is the total per-mile variable costs for each truck. Track this data monthly and you will begin to have a firm handle on your true transportation costs.
If you don’t like what you see, remember that increased volume won’t cure a variable cost problem. Reductions in variable costs can only be achieved through efficiency improvements, preventive maintenance, and in some instances, driver incentive programs.