MONTREAL, Que. - It's a sad reality in the trucking industry, but many carriers don't really know their exact operating costs. The result is that some trucking companies out there actually lose money ...
MONTREAL, Que. –It’s a sad reality in the trucking industry, but many carriers don’t really know their exact operating costs. The result is that some trucking companies out there actually lose money operating their vehicles, because they accepted contracts that don’t even cover their expenses. Moreover, by doing so they are putting pressure on prices that can negatively affect those who know how to count.
According to expert in pricing Frederik Francois, the key is to break down a fleet’s expenses as much as possible in different categories, in accordance to the context where these expenses are made.
President of VISA Concept, a consulting company in the trucking industry, Francois was one of the speakers at an educational seminar organized by the Markel Insurance Company in Montreal.
“Pretty much everybody calculates their operating costs. The difference is that some do it more precisely than others,” he said, adding that the most common mistake made by carriers, regardless of their size, is to assume that pricing is “costing + X%”.
The customers you serve have different requirements. The equipment you use for each differs, as well as the kind of roads your vehicles travel on to get their shipments to their destination. This means that each customer has a different impact on your fuel costs (flat roads vs hills), city routes represent costs that differ from long-haul, a day cab costs less to finance than a big tractor with a sleeper and the context in which each truck is used has a direct impact on its unique maintenance costs.
In a nutshell, if you establish that your average operating costs are “X”and that you add a percentage of “Y” to make a profit, you put yourself in a position where you are charging too much to certain customers (and your competition might take them away from you) and not enough for others, actually losing money instead of making a profit.
There is a lot of number crunching to be done, but in the end it is worth doing it, insists Francois, adding that a fleet needs to take into account all of its costs when establishing rates, not only the ones generated by the operations. “Always remember to take into account all your administration costs, such as vehicle registration, permits purchase, drug and alcohol testing, etc. Also, when calculating your operating costs, make sure to involve all the departments of the company, not only accounting, because many factors can have an effect on costs.”
He gives a simple example:”The cost of a driver is more than his pay and benefits. When he or she is on vacation, you have to replace him or her, and there are costs associated with that.”
He also advises to verify how many empty runs you make and in what geographic area they occur. An empty trailer on a flat surface doesn’t cost the same as an empty truck in a hilly area. Of course, spec’ing your trucks right for your application will help to lower the costs. This is why it is so important to know and understand every aspect of your operations.
Waiting time and the time it takes to load and unload the trucks are also an important source of e xpenses. Yet, they differ from one customer to another.
This is why it is important to calculate these and establish your rate accordingly.
Customers with effective dock crews should not be paying for lousy shippers.
When calculating your operation costs, include those generated by driver turnover.
Replacing a driver costs an average of $10,000. Besides, it will take a while before the new hire is as productive as the experienced driver who left. This also represents a cost.
In the end, the process is quite simple. Yes, it does take time and a lot of math.
But having the most effective method of establishing rates for different customers will allow you to offer the most competitive prices to the customers who deserve it, and maybe abandon others that actually make you lose time and money, allowing your sales team to better focus on potential new markets that offer better business opportunities.