Costs: Fixed, rolling, and support

Scope

All carriers must have a detailed understanding of fixed, variable (rolling), and support costs to generate adequate returns from the business.

Regulatory citations

• None

Key definitions

• None

Summary of requirements

Fixed costs. Fixed costs are the type of costs that can be easily placed into a “budget.” They are known costs that are fixed over time and do not change based on the performance of the fleet. Regardless of the number of miles a company accumulates, these costs are the same. However, these costs are reduced in the overall cost-per-mile calculation as the carrier increases the paid miles of the fleet.

Example: The office and shop mortgage and utilities are $10,000 per month. The more revenue miles the vehicles cover, the lower the cost of the office and shop will be per mile. If the fleet ran 40,000 miles for the month, the cost of the office and shop would be 25 cents per mile. In comparison, if the fleet ran 100,000 miles for the month, the cost drops to 10 cents per mile.

While it is true that the relationship of fixed costs reduce as the mileage increases, fixed costs must be tracked and controlled. Many carriers assume too many fixed costs, causing an inability of the vehicles to provide enough miles to cover the fixed costs of the operation.

Examples of fixed costs are:

• Support and administrative functions
• Mortgages
• Vehicle payments
• Support personnel
• Insurance including Property, Liability, Health, Vehicle, and Cargo
• Employee benefits
• Facilities
• Property taxes and equipment depreciation
• Professional services (legal, accounting, etc.).

Rolling costs include:

• Driver pay. Driver pay is an unavoidable rolling cost. Whether the driver is paid by the hour or the mile, driver pay is the number one rolling expense for a carrier.
• Fuel. Simply stated, the more fuel a carrier uses per mile and the higher the cost of fuel, the higher the rolling costs will be for the fleet. Fuel costs are often times considered the number two rolling expense for a carrier.
• Tires. There is a tire cost to every mile each vehicle covers. The costs will vary depending on the tires used (cost and wear rate), care and inspection of the tires, and the driver’s driving techniques.
• Vehicle maintenance and repair. Rolling vehicle maintenance costs can be broken down into several sub-categories. For cost tracking purposes many carriers will divide this category into inspections and preventive maintenance, other maintenance, and unscheduled repairs.
• Road tax. Road-use taxes are possibly the easiest rolling cost to determine. There is very little a fleet manager can do to influence this cost, other than improve the fuel mileage of the fleet. This cost is offset by fuel purchases, but it is still a rolling cost.
• Tolls. While some tolls can be legally avoided at the cost of extra miles, some cannot and must be paid. Either way, operating in areas that have toll roads will add cost to the operation. The choices are to pay for the extra miles, and lose time, or pay the toll and use less miles to get to the destination more quickly. A determination needs to be made as to which costs less; time or miles?
• Loading and unloading. Loading and unloading fees are often a necessary evil. While there are laws against forcing a carrier to pay for services at a dock, there are times where it may be more beneficial to pay fees in order to get loaded or unloaded faster. This will add cost to the operation.
• Scaling fees. Quite often, drivers need to scale their vehicles and adjust the weight distribution in order to guarantee compliance with size and weight regulations. Even though this is an additional cost, it can have a positive effect on other cost lines, specifically vehicle maintenance as additional maintenance costs from carrying overweight loads and fines can be substantial.
• Fines. Ideally, fines are a rolling cost that a carrier wants to avoid. Driver training, prevention policies, and sound supervision practices can reduce or eliminate these costs.
• Accidents and claims. Accidents and freight claims, much like fines, are also a cost that carriers want to avoid. The majority of the cost associated with accidents and freight claims may be covered by the carrier’s insurance, but the carrier is still going to incur costs. Administrative time, deductible requirements, lost productivity and utilization, and out-of-pocket expenses are all examples of accident and freight claim costs that may not be covered by insurance.

Support costs. These costs bear special attention by the business owner or operations manager. These costs, if not monitored and controlled, can drive the fixed costs of a carrier so high that the carrier goes out of business. Support costs are costs that the carrier incurs to support the operation. Many people refer to these costs as overhead. While these costs may be necessary, the question is are they appropriate for the operation or can some of these costs be covered by outsourcing or other methods?

Outsourcing is defined as obtaining goods or services from an outside supplier, or to contract work out. Outsourcing is a particularly attractive option if a carrier does not have enough work in a specialized area to justify the addition of specialized employees. In such cases it may be advantageous to outsource work, even if only temporarily.

Another reason for outsourcing would be that the carrier does not want to expend man-hours on a function that is well outside of the scope of the operation, or to perform short-term or one-time projects.

Functions that are often outsourced by carriers include:

• Maintenance. Contracting with an outside maintenance facility can be done to lower maintenance costs. This is a particularly attractive option for carriers who do not have enough vehicles to keep a staff of mechanics working full time. Carriers can also consider a combination of in-house and outsourced maintenance based on the level of work to be done. If a carrier is in a position where the maintenance workload is such that the maintenance shop and personnel are being tied up by long-term projects, such as major rebuilds and overhauls, they may consider a policy that says; “All projects with an estimated shop time of over 12 hours will be sent out to a major repair facility.” This would then free up the in-house maintenance crew to conduct necessary minor maintenance and repair.
  • The opposite approach is also possible. The carrier can contract all inspections and preventative maintenance to an outside facility, and only perform major maintenance in their own shop. The business owner or operations manager will need to perform a cost analysis comparing the inside shop costs and contract costs at available shops to determine which of the two choices would be most beneficial.
• Safety. Many of the safety functions can be outsourced to reduce the personnel necessary in the safety department. Third-party services are available to manage a carrier’s driver qualification files, develop and manage a substance abuse program, audit logs and hours-of-service to assure compliance, retain records as associated with the hours-of-service regulations, audit the safety management controls of the carrier, and manage the carrier’s claims.
  • The carrier will still need an employee designated to handle these issues on-site, but their work would only involve the direct driver contact component. Third-party services in this area can take care of all the clerical work and tracking that is a normal, but labor intensive, function of a safety department.
• Driver recruiting. Many carriers have gone to “headhunters” that specialize in driver recruiting to reduce or eliminate the recruiting staff. These specialists function as either the entire recruiting department of a carrier; finding the applicant, screening, then qualifying the applicants, and ultimately hiring them or simply as a service that generates qualified applications for the carrier to decide as to who to pursue further.
• Claims. Many carriers outsource claims management by having their insurance company handle claims for them, either all claims or claims that are valued above a specified dollar amount. An arrangement some carriers have is to outsource claims involving payment, while using their own personnel to settle and collect incoming claims.
  • Another practice used to outsource claims management is the hiring of a third-party administrator to manage claims. A third-party administrator could be an independent unit of an insurance company or claims adjusting company that hires out its services on a contract basis, or a company that specializes in claims management.
  • Outsourcing claims management can allow a carrier to avoid having a full-time employee with the specialized knowledge necessary to correctly negotiate and settle claims. The carrier would only need to have an employee with a basic understanding of claims procedures to work with the outsource company. This person could be the safety person or a member of the clerical staff.
• Payroll:. Carriers can hire a third-party service to perform all payroll functions for them. The carrier simply provides the raw data and the payroll company does the rest. These services take care of everything in the payroll process. Calculating, printing, and mailing paychecks (or direct deposits), as well as calculating and paying payroll taxes are services offered by these companies.
• Billing. There are billing services that can take over all the billing functions for a carrier. While this is a fairly new concept for transportation, it is a long-accepted practice in other fields, such as medical care. The carrier would provide the billing service with the raw data, and the service can take care of the billing functions, including generating, mailing, and collecting all customer bills. This is attractive to some carriers as it keeps them from having employees that once a week must drop everything to do billing.
  • Some carriers use a billing service to do all billing, while others only use this type of service just for customers that they do not have an existing billing agreement with or customers that are known as “slow payers.” Other carriers only use a specific type of billing service, a collection service, to collect on delinquent accounts. Factoring, the “selling” of your book of business in order to obtain immediate cash flow for a price, would also fall under this area.
• Accounting. The accounting function and its many areas of concern may also be outsourced. This is done by entering into an agreement with an accounting firm, establishing an information exchange format, and then providing the accounting firm with all receipts and billings. The accounting company then maintains the company books, performs all tax functions, and creates and distributes any accounting related documentation and payments to the appropriate agencies.
• Property management. Carriers can reduce their personnel numbers by outsourcing the care of their property. Mowing lawn, snow plowing, lot care, cleaning of the offices and various other property maintenance functions can be outsourced.
• Drivers. Outsourcing the driver function of a transportation company may seem odd but it is not a far-fetched idea. A carrier can outsource driving by using owner-operators, brokering freight to other carriers, hiring lease drivers, or using intermodal shipments.
  • Leasing owner-operators as independent contractors for example, transfers much of the capital and operating costs away from the carrier. The carrier still retains some of the operational costs, but the bottom-line result is usually a positive realization of net revenue. This is advantageous if the carrier needs to increase capability but does not have the ability to quickly add trucks and drivers.

While outsourcing may be able to significantly reduce a carrier’s support costs, it can create problems for a carrier, both real and perceived. Managers and employees may not be comfortable working in an outsource environment. This could be due to a lack of trust in the basic concept of outsourcing, letting someone else do the important work, or a fear that all positions may eventually be outsourced resulting in the loss of jobs.

Outsourcing does require a considerable amount of trust between the carrier, their employees, and the company providing the outsourced service. This is because the carrier is ultimately responsible if the company chosen to perform the outsourced work makes an error. Because of this, some managers and employees may never become comfortable with outsourcing. Remember, this is a business decision based on the profitability of the company. It should not be done without substantial research and evaluation as to its purpose and perceived benefit.

Another potential problem with outsourcing is the business owner or manager may not be able to directly question the outsource company’s employees on problems or issues related to an outsourced function. Channels of communication and management within the outsource company may separate your company from the person actually doing the work.

When working with an outsource company always assign a point of contact inside your company. This contact should handle all of the day-to-day correspondence with the outsource company and have the authority and knowledge to make immediate decisions. This contact is also who should be responsible for monitoring the proficiency of the outsource company.

Periodically, the business owner or manager should challenge the outsource company to prove that they are in compliance with pertinent regulations and are doing the tasks assigned to them. For example, if you are using a driver management company to take care of driver qualifications, occasionally ask them to provide a complete driver file for your review.

This approach should be used on in-house services as well however, it may not be necessary to do this as often because the manager should assess performance on a day-to-day basis. The use of an outsource service to audit the carrier’s in-house safety, payroll, accounting, or billing functions is also a sound cost control measure and assures continuous compliance and good business practice.

A combination of outsourcing and technology is an often-used method to reduce the support costs of a company. A business owner needs to look at the cost of technology and outsourcing, versus the cost of in-house operations. It does not do a carrier any good to reduce support personnel if the costs of the technology and/or outsourcing used, are greater than performing the same tasks with low-tech solutions and in-house employees. A simple activity-based cost study and/or overall cost comparison can provide the information necessary to make the correct decision.

Studying the non-monetary effects of the technology and outsourcing may be more difficult. It is hard to determine the level of comfort the management and employees will have with technology systems or outsourced companies. These issues can many times be overcome with good communication from the business owner, assurances of job security, and education. If employees can be shown that they are not going to be replaced by a machine or an outsourced company, and that their jobs will become easier, the addition of technology and outsourcing should go smoothly.

Surveys, studies, unofficial questioning, and/or hiring a consultant can all help the business owner assess the value of technology and outsourcing, employee and customer acceptance, and the non-monetary effects on their business.