By guess and by golly won’t work
By Timothy Brady
According to Logistics Management 2011 Rate Outlook (http://www.logisticsmgmt.com/article/2011_logistics_rate_outlook/)“Volatile oil and diesel prices, capacity shortages, another looming driver crisis, debilitating regulatory uncertainties, and an improving economy have led industry analysts across all modes to one conclusion: Shippers will have to shoulder some of the burden associated with escalating transportation costs this year.”
With all of this looming over the next several years, the best opportunity to increase hauling rates is upon us. But again, shippers are very smart when it comes to what they pay to haul their goods. In order to increase your rates, you’ll need to provide justification to your customers on why and have the supporting math to prove your point.
A common question I’m asked is: “How do I establish a profitable hauling rate?” That’s a wide-ranging question. Its answer depends on the type of freight, area in which the carrier is domiciled, lanes in which you operate. I help carriers establish rate ranges as a part of my Business Coaching service. The first instruction for my client is that he/she must initially determine what it costs to provide their level of service.
An aside: I find it interesting in that some small carriers will quote a static, per-mile rate based on their costs over the last year. That is so wrong in so many ways in determining a rate range. The problem with a static, per mile Break-even Point (BEP) is that it will vary up or down depending on distance traveled; i.e., the shorter the distance, the higher the cost per mile; the longer the distance, the lower the cost per mile. This can vary as much as 20 to 30 cents per mile on a variance of just 500 miles per week.
There are four different cost areas one needs to address: Fixed Cost per day, Operational Cost per mile, Fuel cost per mile, and Load-Specific Costs.
Fixed Costs: any expense which occurs regardless of whether your truck(s) are rolling. This would include items like truck payments, insurance, 2290 FHUT, base plate, communications, office rent and utilities, salaried driver pay, etc. This is a number which is calculated by the day, week, month, quarter or annually.
Operational Cost: any expense which occurs each time your truck(s) are rolling. This would include items like truck and trailer maintenance, repairs, tires, other equipment repairs, and per-mile driver pay, etc. This figure is based on the expenses paid in the past 30 days with items such as tires and repairs amortized over their expected useful life. It’s figured on a per-mile basis.
Fuel Cost: this expense is always figured separately due to the volatility of its cost and because it is one of the largest expenses of any trucking operation. Simply put, by figuring fuel cost on what it will cost on a specific load or run rather than relying on a fuel surcharge to compensate the fuel purchaser, you’ll be sure you’ve covered this expense. Fuel Cost is also figured by the mile.
Load-Specific Costs: every load has specific costs which don’t occur on each load or may be different on each load. This can include percentage driver pay, tolls, lumper labor, pilot cars, special permits, or any expense that is unique to a particular load.
Finally, to determine your specific rate range you must establish two additional factors:
1. What’s the required capital to sustain your operation when revenue doesn’t meet costs?
2. How much money is required at what times to grow your company’s net worth and add additional hauling capacity?
From these numbers you are then able to establish a hauling rate range that will provide the revenue needed to attain these goals.
Good loads and good roads, everyone.
Timothy Brady ©2011
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