COSTING DISCUSSION
Getting an accurate depiction of trucking movements requires breaking down the cost structure
of the company at the lowest level of its operation, usually this means at the terminal level. The
costs themselves need to categorized into four types:
Fixed Costs - usually allocated by time and/or load
Variable Costs - usually allocated by miles (loaded and empty)
Allocated Costs - usually assigned based on the origin/destination of the load,
examples would fuel expense and deadhead
Assigned Cost – based on actual activity like tolls and loading fees, commission, etc
Fixed costs are normally defined as costs that do not vary by the load, mileage, or geography of
the load. Common examples are equipment costs, and terminal or corporate costs. Variable
costs vary by the load and usually do not occur unless the "wheels are turning". Driver pay, fuel
and maintenance costs are obvious examples. The other components of cost that must be
included involve deadhead miles, dwell time, and margin requirements. Depending on the type
of trucking involved, deadhead miles as a percentage of total miles usually runs 10-15%, but
can be as high as 30-40% in tanker operations. Given this significance, deadhead must be
properly accounted for or the cost structure will be inaccurate and lead to poor decisions.
While deadhead may appear to be an easy cost to assign to a load, it is really much more
complicated than simply assigning the subsequent empty miles to the next load. In fact, many
carriers establish their dispatch from the current truck/driver location (last delivery point) to the
pickup of the next load, to the final consignee location of the load. This is operationally correct
as it lets the "load" end and then the customer can now be billed and the driver paid. However,
if one only looks at the deadhead in such a way, they miss the cause and effect relationship of
the load and the subsequent or resultant deadhead. Using an extreme example, loads that final
in Miami are the "cause" of the deadhead to Jacksonville. The load out of Jacksonville should
not be assigned (allocated) the 350 miles of deadhead that was incurred to pick it up. If the load
would have delivered in Daytona, it would been assigned only 75 miles of deadhead. The 350
miles of deadhead was caused by the load delivering in Miami, not the load loading out of
Jacksonville.
The reason deadhead must be allocated is not just because of the method used to collect the
data. If the carrier looks at a driver’s tour (a tour is the activity over a period time from their
home terminal until they return to their home terminal again), the actual deadhead can
determine the "profitability" of the tour, and on an aggregate basis, and this will give a picture of
profitability by driver. However if a driver empties in Miami 25 times in the course of a year, he
may deadhead to 25 different locations to pick up the next load. Because of this, it is important
to establish a deadhead allocation process that normalizes how a "load" is reviewed for its value
to the carrier. As an example, let’s say the deadhead allocation for a load delivering in Miami is
450 miles, this is roughly the average deadhead for every truck that emptied in Miami. By
definition, the deadhead miles allocated should be equal to the deadhead miles travelled for the
period. Timing, day or week, week of month, and month of quarter, all have an impact on
deadhead, but since customers will not allow pricing based on these timing issues, it is
important to get the best estimate of how deadhead was incurred. The origin of the load has
very little impact on the deadhead resulting from delivering a load. On our Miami example,
whether the load originates in Newark, Cleveland, or Los Angeles, it doesn’t differentiate the
deadhead if all loads deliver on the same day. Their next load assignment: Tampa,
Jacksonville, or Atlanta are really random, based on who is available first and on the service
requirements of the next three available loads. Without a deadhead allocation, the costing of a
particular load would be inconsistent, being dependent upon the next deadhead, which makes it
difficult for trucking management to decide the operational value of a load or lane.
The goal of any costing system should be to easily evaluate loads across lanes and customers.
How does management account for all the special situations if the costing process produces two
different results for the same load? This problem is also present with regard to the other two
cost areas: dwell time and margin requirements. Dwell time is the time between delivery and
the pickup of the next load minus the driving hours for the deadhead miles incurred. This
represents a time which could be measured in days, that has cost implications. Again, like
deadhead measured on tours, dwell time is also an allocation process. This is one of the more
difficult cost areas to analyze, as it requires some programming to match drivers on deliveries
and pickups, so it is often not incorporated into costing systems. Take the situation of inbound
shipments into Los Angeles. Since the average length of haul is over 1500 miles, all the system
loads picked up on Wednesday, Thursday, and Friday are likely to deliver in Los Angeles on
Monday, meaning 60% of the inbound trucks are delivering on Monday. Unless loads are
stockpiled for drivers, it will take 1-2 days of dwell to get these trucks loaded out. While not as
pronounced in other areas, this is a real cost of taking loads to certain areas and needs to be
accounted for in the costing model.
The remaining cost - that of margin requirements - is still another area missed by most carriers.
Most carriers know their costs well enough to be able to make a good guess at this "cost".
Margin requirements are used to properly cost/price the value of a load. In general, carriers
have a revenue goal per day or week as a guideline for their dispatchers. Similarly, most
companies can calculate the total margin for the month and divide that number by the number of
trucks and work days. This number, say $50, gives an overall average margin per work day.
Taking our Miami example into account, yields the following. A load going into Miami
deadheads about 450 miles before it reloads. Since this is a full work day, the load inbound into
Miami needs to cover this "deficit" margin on the work day margin lost while deadheading. Next
there is the issue of this deficit margin on the next load after the Miami inbound. Carriers are
price takers in backhaul areas and price makers only in headhaul areas. Due to this "fact of
life", continuing with our Miami example, the load out of Jacksonville probably is not going to be
able to generate a positive margin. In fact it may break even for two days or even worse. In
such a case the inbound Miami load would need to cover the 450 miles in deadhead, plus the
deficit margin on that day, plus two days of deficit margin on the Jacksonville outbound load.
Like the deadhead, the margin requirement is a compilation of all the activity from an area.
If the rate per deadhead mile is $1.00, then the inbound load into Miami would need to cover
$450 for deadhead and $150 for the 3 days of deficit margin, or $600 of additional allocated
costs. If the load were coming from Cleveland and its 1250 miles, then the load to Miami should
have an extra $.48 per mile incorporated into the standard running cost for the network. These
allocated costs are the real differentiator of the value of the load within the traffic network of the
carrier, without them, every 700 mile shipment is costed the same, hardly a reality.
The following diagram depicts the typical load evaluation process:
0
1
2
3
4
5
6
7
8
Days
Dashed lines are deadheads and solid lines are loaded. The deadheads and the margins and
dwell time are summarized over a 10 to 14 day period. Most times a tour will be less than 10
days. Load evaluations past 14 days will normally approach the average for the system.
From the data provided:
Driver Cost Per Mile
Other Cost Per Mile
Base Fuel $1.25/6.2
FSC @ $2.75
$
$
$
$
.526
.194
.20
.24
Running Cost per Mile
$ 1.20
Fixed Cost Per Day
Corp OH Cost Per Day
$ 169
$ 66
Cost per Day
$ 235
These cost factors (assuming loaded and empty cost the same) generate the following cost
structure:
TOT
MILES
500
600
700
800
900
1000
COST COST/MILE
835
$1.67
1002
$1.67
1169
$1.67
1336
$1.67
1503
$1.67
1670
$1.67
Based on a discrete day calculation these cost factors generate the following cost structure:
TOT
MILES
500
600
700
800
900
1000
DAYS on
LD
1
1
1.5
1.5
2
2
COST COST/MILE
835
$1.67
955
$1.59
1193
$1.70
1313
$1.64
1550
$1.72
1670
$1.67
When actual days are used these cost factors generate the following cost structure:
TOT
MILES
500
600
700
800
900
1000
Days on
LD
1
1
1.5
1.5
2
2
COST COST/MILE
835
$1.67
955
$1.59
1193
$1.70
1313
$1.64
1550
$1.72
1670
$1.67
DAYS on
LD
1
2
2
2.5
2.5
3
COST COST/MILE
835
$1.67
1190
$1.98
1310
$1.87
1548
$1.93
1668
$1.85
1905
$1.91
This illustrates the need to include some type of time cost factor. The use of a time factor more
accurately reflects the resources utilized in the movement of the freight.
If time is going to be used as a cost factor, the discussion must continue with a definition of
time. Most shipping is done in the afternoon and unloading is done in the morning, so a
definition of what is a day and how to allocate these costs is important.
A simple time definition:
Each day would be broken into four, 6 hour time periods
Period 1
Period 2
Period 3
Period 4
2400 - 0559
0600 - 1159
1200 - 1759
1800 - 2359
PICKUP
Pickup and delivery times could be defined by the following table:
Period 1
Period 2
Period 3
Period 4
2400 - 0559
0600 - 1159
1200 - 1759
1800 - 2359
DAY 1
DELIVERY
Per Per Per Per
1
2
3
4
0.5 0.5
1
1
X
0.5
1
1
X
X
0.5
1
X
X
X
0.5
DAY 2
DELIVERY
Per Per Per Per
1
2
3
4
1
1
1.5
2
1
1
1.5
2
1
1
1.5
2
0.5 0.5
1
1
Day 3 and beyond would be calculated by simply adding one day. The minimum day use would
be .5. This definition basically weights the two day time shifts as one-half and not giving much
weight at all to the late night and early morning time periods. The next issue that must be
decided upon is how to handle weekend days. Options include ignoring them totally or adding a
.5 day for Saturday and Sunday, basically giving them a full day of cost for moving a load over a
weekend.
To continue with the Miami inbound example:
Dwell
DH
&
Days Margin
Ldd
Miles
Cost
Miles Cost/Mi Cost Days /Day
Day
Cost
DH
Alloc
DH
$
Newark
1300
$1.20
$1,56
3.5
235
$823
450
$540
$235
$150
$3,308 $2.54
Cleveland
1250
$1.20
$1,50
3.5
235
$823
450
$540
$235
$150
$3,248 $2.60
Los Angeles
2700
$1.20
$3,24
5.5
235
$1,293
450
$540
$235
$150
$5,458 $2.02
To Miami
Tot
Cost
The example is rough, but sets out the type of results that are obtained using this methodology.
It also points out the issue of backhaul rates as the load from Los Angeles above shows a cost
per mile of $2.02. While there are not many loads running in this lane, it is obvious that the
market price would not generate sufficient revenue in this lane.
Another way of handling time is to breakdown costs into an hourly basis; this is especially useful
when the loads are short, less than .5 of a day or when the units are slip-seated. This process
will more accurately reflect the cost.
The use of a comprehensive costing model that fits your operation is important tool to
understand when and with whom your company makes it money. A model will not only improve
pricing decisions, but it will also identify areas of the operation that can be improved. The old
adage: “there are not any bad loads, just bad rates” is true, but sometimes decisions are made
by gut feel without any relationship to costs, at least with a comprehensive pricing model the
company will make decisions based on hard data and gut.
Cost
/Mile