...
Carriers must have a plan for their business and metrics to determine success against their plan. Company growth covers aspects to consider when developing a carrier’s growth plan, which includes when it may prudent to delay growth.
Scope
This information applies to carriers of all sizes and types that need to understand the considerations around growing the business.
Regulatory citations
- None
Key definitions
- None
Summary of requirements
Determining capacity and utilization. Capacity utilization can be determined in several ways. The key is what the Fleet Manager wants to view and compare. The first step is determining what capacity you want to view. Which capacity utilization rate is more important to you will depend on your type of operation.
Some capacity utilization formulas can be used as a snapshot taken at regular intervals, or they can be used to determine, daily, weekly, or monthly averages.
The snapshot method is more useful if you are trying to predict short-term capacity, while averaging is better when calculating long-term capacity and utilization. A common practice is to do a snapshot of capacity availability (uncommitted to work) and utilization (pre-committed to work) as of Monday morning, before the dispatch or customer service personnel begin committing to additional shipments for the week.
If capacity utilization averages are low, and remain low, that tells the Fleet Manager that something may need to be done to improve the operation. Some common reasons for low driver and equipment utilization are empty trucks due to driver turnover, drivers taking excessive time off, or injured drivers unavailable to work. The utilization of drivers available to work is impacted by factors such as detention time at customers’ docks, poor appointment times for deliveries as compared to pick-up times, and vehicle repairs and maintenance.
The following are several ways that capacity and utilization or productivity can be determined:
- Percentage of assigned units. This is determined by taking the number of vehicles assigned to active drivers and dividing it by the number of available vehicles. Carriers tend to vary this formula by changing the definition of available units. Some do not count units that are not licensed, units that are down for major repairs, and/or units that are normally assigned to a driver but are presently available (drivers who are on vacation or personal leave and vehicles are being saved for them).
- Available drivers. To calculate the driver utilization, divide the number of available or working drivers by the total number of drivers employed.
- Lost capacity or unavailable drivers. Drivers that are off due to regular time off or vacation, extended personal time off if allowed by company policy, or unable to work due to injury or other reasons.
- Mileage. To determine capacity utilization based on mileage, the Fleet Manager needs to first determine what the capacity of the fleet is. This will require some study. Then operational tempo, hours-of-service limitations, and average length of haul all need to be considered when calculating capacity in this way.
- Revenue per working vehicle. Whether you manage a trucking fleet, service technicians, or a passenger-carrying operation, an indicator of productivity is also revenue per available vehicle per day or per week. The drivers’ time is measured in hours so revenue could also be measured in terms of revenue per on-duty hour by day of the week. Understanding the root cause of productivity decreases may require looking at the causes of unproductive time by hour of the day and by day of the week.
- Revenue per total vehicle. The impact of non-working vehicles should also be considered in a calculation of revenue per total vehicle in your fleet which includes units down for maintenance, crash repairs, or excess units due to losing drivers or business. The less available working vehicles you have, the more pressure there is on the working units to cover the cost of the idle portion of your fleet.
If it is determined that each available vehicle should have a capacity of 2,500 miles per week or $4,000 revenue per week, to determine the fleet capacity or revenue potential, simply multiply this by the number of vehicles. To determine the percentage of capacity utilization or potential revenue generation, simply divide the miles operated or revenue generated by the fleet by the mileage or revenue targets for the fleet that you have determined.
Again, there is some variation between carriers because of the definition of available vehicles. Some carriers use all owned vehicles (total capacity), while others use only assigned vehicles (normal capacity).
Engage drivers and your operations team in determining actions to take to improve results as they usually have great insight into why utilization or revenue may not be optimal or below target.
Customer demands vs. cost of demands. Whenever a customer places an additional demand on you, you will need to review the demand in terms of cost, liability, and compliance.
As with any other change in operations, the Fleet Manager should perform a cost and feasibility analysis before agreeing to demands.
If the demand places liability on the company or places the company in a position where fines for noncompliance are possible, you may need to negotiate with the customer, adjust your liability protection, or change your operational methods to become compliant (use of teams, buying lighter equipment, returning units empty to save drivers’ hours, etc.). Also, using hours of service exceptions to run longer hours is not a defense in the event of a crash. Drivers cannot operate ill or fatigued and significant increases in demand can create unsafe situations if not proactively managed.
If you cannot meet the customer’s demands and remain profitable, or are going to put the company in a situation where it will be bearing unnecessary risk or experiencing excessive driver delays, and the customer refuses to negotiate, you may be forced to give up the customer.
A company that jumps at every request of every customer, trying to be all things to all people is not seen as a solid business, but more as a desperate company scratching for any business it can get. This type of approach does not usually follow any business plan or vision statement.
Planned growth vs. planned non-growth. Growth in a company is not something that should just happen; it should be a planned, measurable expectation. Planned growth can be in the area of equipment, revenue, physical location(s), personnel, or any other part of your company that flexes as it matures.
An incorrect assumption often made by new businesses is this: “We as a company want all the business we can get regardless of the associated costs.” This train of thought coincides with the adage, “any business is better than no business.” Pursuing this path of unplanned growth can be disastrous if it does not coincide with your original mission and vision for your company.
For example, you’ve recently started your trucking company; you have two trucks and a small handful of satisfied customers. These customers have helped you realize your vision and you feel a certain level of loyalty to them. You are right on schedule based on the action plans that you developed earlier.
One day you get a call from a new potential customer. The customer says, “I want you to haul all my freight and I need to know how soon you can accommodate me.” Your immediate thought may be, “what an opportunity!” Think of all the new revenue you could realize with an immediate increase in your freight volume. You may tell the new customer that you can start next week; all you have to do is figure out how to get more equipment.
Here is where the problems start. The new customer needs to move 10 trailer loads of freight a week, and goes to areas of the country that you had not previously explored as far as return freight feasibility, associated costs, etc. You are a knowledgeable business owner; does this make good business sense? Remember you only have two trucks and a few loyal and very satisfied customers. Can you obtain more equipment and drivers immediately? Can you really afford to increase your equipment debt based on an assumed increase in revenue? Will your current customer base experience shipping delays because you are stretched too thin? Will the people that have supported you thus far feel abandoned and start looking for a new company to haul their freight? If you don’t take care of them, they will.
Here’s the most important question you have to ask yourself as a business owner whenever presented with a situation such as this: “is this part of my vision and plan for success?” If the answer to this last question is no, then you must turn down the new customer and move on. The lesson to learn here is you have just honored your plan for growth and realized that consistent, planned business growth is sustainable and ultimately much more profitable.
These kinds of opportunities will come again and again. If you stay true to your plan for growth, they will naturally fit into your business when the time is right. Remember this is your business, your dream, your vision. Many companies have tried to be all things to every customer that walks in the door or calls on the phone, only to fail miserably in the attempt. Nowhere in the creation of your business plan and the careful and thought-out development of your vision and values did it state that you would do everything for everyone. Don’t let outside forces drive you away from your well-thought-out plans for success.
Planned non-growth. Even though the normal assumption is that a profitable company is always growing, there may be times where a business may have planned non-growth. This could be due to the realization of preset benchmarks for equipment, personnel, or capacity. This could also be because of changes in the industry, re-evaluation and changes in action plans, or changes in the management or business structure.
Every business as it is created has a “life cycle.” Coming to the end of this life cycle may be another reason to have planned non-growth. For example, as was discussed in the section on succession planning, the valuation of a business needs to be determined when presented with ownership changes due to death, disability, or retirement. This would be an ideal time to have a specific plan for non-growth to allow for a stabilizing of all pertinent business matters associated with the company. This would then allow for a clear picture of the business’s overall structure, and provide a solid footing to make informed decisions, pertaining to the future ownership of the company.
Another approach to non-growth planning in a company may be in one area of the company as it pertains to the company’s progress as a whole. For example, if a company were planning a major shift in the business location or the type of freight they were hauling, that company may plan for a period of non-growth in equipment acquisition to support the other major changes mentioned.
It’s important to remember that planned non-growth does not mean stagnation of the business, loss of revenue, or “down-sizing.” Planned non-growth is as much a positive business decision as planned growth is. Planned growth and planned non-growth should both be an intricate part of any overall long-term plan for success.
Replacement scheduling. Part of growth is establishing a replacement schedule for equipment. New verses old, when to trade? These are important questions in this process.
One argument that is ongoing in the industry involves when to retire and replace vehicles. Some carriers believe that vehicles should be kept in service as long as possible, while others believe a vehicle should never be kept longer than the warranty.
Still other carriers base their decision on how much money they have into the vehicle in terms of purchase cost, depreciation, and major overhauls. This process can involve a fairly lengthy evaluation of all vehicle costs over time.
To sum it up, this is a decision that each carrier must make based on several variables, and their acceptance of cost/benefit and risk, both of equipment failure and excessive maintenance costs due to component failure.
Here is a list of issues to consider:
- Cost of maintaining and overhauling equipment once the warranty expires. With engine overhauls running in the thousands, many carriers have determined that trading before the vehicle is off warranty and requires an engine overhaul is beneficial. In-frame or out of frame overhauls cost the same as one to several vehicle payments, but the money is being spent on a vehicle that is on the second half of its useful service life, where payments are being spent on a vehicle that is on the first half of its service life. Driver retention strategies have required many carriers to run newer vehicles and to trade equipment well before engine overhauls occur.
- Percentage of “unscheduled repairs” and “downtime.” Unscheduled repairs, also known as breakdowns, can be very costly to carriers. The cost of on-the-road repairs, the cost of missed customer deliveries, the cost of additional downtime for maintenance and repairs, and the cost of either reimbursing the driver for their lost time or potentially losing the driver, needs to be considered when deciding on when to replace vehicles.
- Cost of payments. Vehicle payments are a significant, but necessary fixed cost at any carrier. Some carriers view any time a vehicle can operate without payments as the “highly profitable” period in the vehicle’s life cycle in the fleet. Because of this some carriers attempt to get as much life out of the vehicle as possible and accept major component overhauls as a cost of doing business. Carriers that are successful at keeping vehicles for extended periods will generally have a rather extensive maintenance program and a strong driver safety and retention culture.
- Depreciation costs/tax breaks. Once a vehicle is fully depreciated there are no longer any tax benefits that can be generated. The loss of this tax benefit is used by some carriers as a component in their decision making on replacement of vehicles.
- Driver acceptance. With driver retention still a concern in the transportation industry, driver acceptance of vehicle replacement must be considered. In general, drivers believe that newer vehicles are more reliable, more comfortable, and easier to operate. However, drivers may not be accepting of new equipment that is “too different” from the equipment they are presently operating. Advanced driver assistance systems (ADAS) are becoming more commonplace and require extensive training for drivers to know what to expect and to increase acceptance of the safety technology.
- Fleet image. As a general rule well painted, clean, and reliable equipment will present the image a carrier is trying to project. New equipment automatically presents this image. Older equipment can be kept in a condition that presents this image, but it will be more costly. Vehicle defects are much easier to spot and repair on a well-kept, clean vehicle and dirty vehicle attract an inspector’s attention.
- “Turnaround” point. One comment made by some fleet managers is “we can’t afford new vehicles.” Keep in mind there comes a point where a fleet can’t afford to keep the existing vehicle operating. When the cost of maintenance, downtime, and repairs become excessive; the loss of depreciation, and the loss of driver acceptance reaches a critical point, the fleet cannot afford to keep the older vehicles.
- Intended or planned life cycle at time of purchase. One way to prevent many of the problems with the decision making is to purchase vehicles with the intention of replacing them on a “schedule,” and budget capital accordingly. Studying the above factors on existing or past vehicles can provide a Fleet Manager with guidance on defining specifications for new vehicles and a general idea of when the vehicles are “turning the corner” and need replacement.
If a fleet of 50 vehicles is operating vehicles that require 4 hours per month in preventive inspection and maintenance, the facility needs to be able to provide 200 hours of preventive maintenance per month. Assuming the vehicles can be scheduled to keep them “spread out” during the month, this alone will be enough work for one to two mechanics. This is arrived at by dividing 200 hours by 160, the average number of hours a mechanic will work in a month = 1.25 mechanics. Each mechanic would need their own workspace, so the facility would need to provide space for either one or two mechanics.
If the same fleet is also seeing vehicles spend an average of 2 hours a month in the shop for unscheduled repairs, the company would need to provide 100 shop hours per month for repairs. If you divide 100 by 160, this justifies an additional .62 of a mechanic. When combined with the preventive maintenance requirements, this now justifies two mechanics and maintenance bays.
Next, take all other responsibilities, the time to complete them, plans for future growth, and factor those into the maintenance facility following the same model.
If you intend to do your own heavy maintenance (engine and transmission rebuild and replacement, etc.) you will need to provide additional floor space and an investment in technician skills and tools. This will allow these long-term repair projects to sit in the shop and not cause delays in the other maintenance functions. If additional space is not provided the floor space will have to be cleared every time another vehicle needs routine maintenance or repair.
Other maintenance functions to consider when making maintenance facilities decisions include parts storage, wash bays, inside equipment storage, and maintenance office space (if not sharing office space with operations).
Other factors to consider may not be as easy to determine. How much privacy do you wish to provide for employees? If you want full privacy for all employees your facility will become quite large over time. Each employee will need a desk and space for storing job-related materials. The more employees you have, the more space will be required. How many employees you have, how much space you intend to provide each employee with, and how many employees you intend to provide with private space, will determine your facility requirements.