Why Benchmarking Alone Isn’t Enough for Proper Transportation Cost Analysis
Editor's Note: This post is a slightly modified guest post from Ahern & Associates, a transportation management consultancy. Given that our proprietary TMS, the Cerasis Rater, provides multiple reports, giving our shippers' many insights, this post is quite appropriate, just like getting the data that is meaningful, in order to make the best decisions for your business possible.
Carriers in the trucking industry and also shippers today are actively looking for ways to combat the rising costs of operating their businesses, but they often do not fully understand proper benchmarking, transportation cost analysis, and profit management are intertwined. Without understanding true costs and using benchmarks as just that – benchmarks – carriers and shippers will struggle to effectively analyze and reduce their costs.
Benchmarking as a Hard Rule within Transportation Cost Analysis Can Be Damaging
A popular, and possibly overly-stressed, component of profit management is benchmarking. Although it is certainly important for carriers and shippers to review industry averages in comparison with their own costs and profits, many may use these averages – or benchmarks – without proper conjunctive analysis and without fully understanding their costs and profits. For a trucking company, shipper, or logistics provider to be profitable, owners must understand their cost of purchased transportation and expenses need to be in line with desired profitability. Using only industry averages in your transportation cost analysis to gauge business successes can not only be inaccurate, but can also be ineffective and even damaging.
The following categories represent a major portion of a carrier’s operating cost and a shipper's direct transportation cost; the average cost per mile for the industry over the last year, according to industry experts is as follows:
- LTL – $1.79 per mile
- Specialized – $1.73 per mile
- Truckload – $1.51 per mile
In addition, experts figure that on average for carriers:
- Fuel costs represent 39% of a total carrier’s cost
- Driver wages represent 26% of costs
- Payments on leased/purchased trucks and trailers represent 11% of costs
- Maintenance repair was the next most expensive line item expense
For shippers, popular metrics that shippers benchmark year over year that are often benchmarked, but don't have reliable enough industry wide data are:
- Freight cost per unit shipped
- Outbound freight costs as percentage of net sales
- Inbound freight costs as percentage of purchases
- On-time pickups
- And more.....for a full list, see our White Paper on Transportation Metrics.
Do you know how your company fares against these figures above as a carrier? Do you benchmark yourself against yourself year over year or even if you know your industry well enough to get accurate data as a shipper? If you are looking for ways to reduce your costs but don’t understand a comprehensive breakdown of those costs, benchmarking won’t be a useful tool by itself. Comparing your own metrics as a shipper or carrier is a much better approach.
Fortunately there are several sources on benchmarking information available for carriers, two of which include the American Trucking Associations and the American Transportation Research Institute. The ATRI provides an analysis of operational cost of trucking and update the report once each year; the report is available online on a donation basis. The ATA can also provide you with specific materials on the subject.
Profits Need More than Benchmarking in your Transportation Cost Analysis
While benchmarking is a valuable tool to gauge costs and profits overall, it is critical to also utilize effective profit management skills as well. In order for a business to be successful, you must plan your expenses to your profits, treat every truck, and sometimes, your inbound freight management practice as a profit center, and know prior to dispatching every truck or executing your routing guide whether or not you’ll make a profit each time it is dispatched or picked up.
One of the reasons why benchmarking alone isn’t enough to properly measure profits is that there are constant changes that influence the industry and affect costs and profits. Furthermore, each change that comes about impacts every business in a unique way; no two businesses are exactly alike, and fluctuations in the industry are never going to impact two companies in exactly the same way. Some of those changes come about as a result of changes in laws; currently, there are more than 20 laws pending that will impact the cost of transportation – not to mention CSA compliance, Hours of Service, e-logs, and changes in other areas as well. Oh, and have you heard of the doozy of a bill called the "Driver Coercion Law." You should follow this law as it could drastically change the freight shipping world. JOC.com reports:
Under a driver coercion regulation now on the federal drawing board, that shipper or consignee could be accused of “coercing” the truck driver to violate federal safety rules in order to make that on-time delivery, and coercion will carry stiff financial penalties.
“The driver coercion rule-making could be the most significant change we’ve seen in transportation in our lifetime,” Mike Regan, chief relationship officer at TranzAct Technologies, told the more than 200 shippers, carriers and brokers at the conference.
“How many of you are now prepared to verify that when a truck driver pulls up to your dock, he has the hours available to move your freight?” Regan asked. No one in the audience, which included more than a few receivers and shippers of freight, raised their hand.
Not being prepared could be costly. The rule-making in question would hit offenders, including motor carriers, logistics operators and shippers, with penalties of up to $11,000 per incident, and possible revocation of the operating authority of a carrier, freight broker or forwarder.
Focus on the Future, but not at the Expense of Today
Regardless of how your numbers stack against benchmarked industry averages, it is important to not only think about the future, but also to deal with the complexity of today. Today there are too few drivers, costs are rising, and staying ahead of the technology curve while being one way to grow a business is often overwhelming. Staying on top of today’s developments in the industry will provide you with a roadmap to the future. With sound awareness of benchmarking and diligent, accurate profit performance management, you will be on the right path to a proper transportation cost analysis that allows you to operate acontinually profitable business not only today but in the future as well. For help with effective cost analysis and management for your company, contact our leading trucking and transportation consultants for help.