Supply Chain Shift Fuels Regional LTLs
The trucking industry is in a tight spot. Costs continue to rise amid a crisis in driver recruitment and retention.
The industry understands that it must pay higher wages and improve the position and opportunity of the truck driver, but this will require a major investment.
Where are the funds to come from in an industry that continues to offer a sluggish return on investment year after year?
The driver shortage is, simply stated, the industry's most serious problem. Although we can discuss various solutions, we agree that solving the shortage will require a significant financial investment. That leads to the second biggest problem, underutilized trucks.
Do we fully understand what "underutilized" means? After all, the industry is starting to talk about increasing utilization. We read opinions from major investment firms and industry associations that discuss the subject, but the troubling fact is, they interpret "productivity" as manned versus unmanned trucks, and not whether trucks are "fully utilized."
Companies that learn to fully utilize their trucks will make more money than those that don't. That's an economic fact, but the pressures created by the driver shortage and new hours-of-service rules have obscured it.
Prior to the new rules it was obscured by the weak economy. The fact is, in most fleets, trucks that do not have assigned drivers still exist. They are called "trucks against the fence."
Another consideration is inventory turns. The entire supply chain is capital-intensive, just like trucking. Manufacturers, wholesalers and major retailers are utilizing their assets on a 24/7 basis and in a just-in-time environment. Truckload carriers are the only part of the supply chain that does not routinely operate on a 24/7 basis.
What makes trucks any different than buses, trains, planes and ships? Nothing. They perform the same function. They are treated as "capital investments" in the tax laws because of their cost. They generate revenue and they are expensed using depreciation over their useful life. When was the last time you had to get off a bus, train, plane or ship because the person operating the vehicle ran out of working hours? It doesn't happen. Using a trucking term, they "slip seat" the vehicle with another operator.
Consider the following: Trucks can be depreciated over three years. They are the only capital item in the tax code that allows that kind of accelerated depreciation. Trucks commonly have a warranty life of 700,000 miles, which means you should operate trucks 700,000 miles in three years if you want to maximize revenue, minimize expense and pay less tax on your profits.
Unfortunately, you cannot drive a truck 700,000 miles in three years with one driver.
Why doesn't the trucking industry slip seat? Using airlines and bus companies as a model, it means that trucking companies will have to operate in highly saturated lanes by employing drop and hook techniques and domiciling drivers and trucks differently.
This is major change. Can the cost be justified?
Most trucking companies cannot answer this question because they cannot define their costs and measure the profitability of pricing and/or operating strategies.
It can be done using "activity-based cost accounting," a type of cost analysis that manufacturing industries have used for years, which easily measures the effect of increased utilization.
This type of accounting separates variable and fixed expenses and measures the variable expense as a function of mileage. The fixed expense is absorbed by assigning a daily or hourly burden to each truck in operation. The more trucks you have in operation, the higher level of utilization. The profit effect is dramatic.
For example, assume a fleet of 50 trucks has five units without drivers. The burden of fixed expense is being absorbed by 45 units. If the daily burden is absorbed by the single shift, then the second shift operates burden-free.
In this example, assume the revenue per truck for a single day is $600 and the revenue creates a 5 percent net before tax profit. But don't park that truck at the end of the day. Adding a second shift will double the revenue and generate a 20 percent net before tax profit for the day's operation.
The dramatic increase in profit margin results from the fixed cost being absorbed by the first shift of operation. The second shift gross margin (contribution after variable costs - typically 35 percent) is all net profit.
It may sound complicated, but it works, and can be easily applied to both short- and long-haul situations.
The bottom line is that trucking companies are leaving money on the table by under utilizing their fleets. Not only is this money enough to help the industry flourish; it's also the ticket to funding the necessary expenses for driver recruitment and retention, and keeping up with technological enhancements to trucks.
So, how do we make it happen? How does the industry earn its way out of this Catch 22?
First, trucking companies must become better managers of their capital-intensive businesses. They have to learn to understand their costs and be able to measure their productivity. Next, companies have to change their way of thinking and look at new ideas. They have to stop saying simply, "That's how we've always done it."
Change is not easy and most of us usually resist it; however, our economy thrives on it.
Duff H. Swain is president of the Trincon Group, a business advisory company that provides strategies, planning and implementation services to the ownership and top management of corporations in the transportation industry. www.trincon.com, call (614) 442-0590, or e-mail firstname.lastname@example.org.
Increased Truck Productivity: The Only Answer
Increased Truck Productivity: The Only Answer
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