Executive Briefings

Carrier Costing Systems at Work

Motor carriers increasingly have turned to costing systems to help navigate the difficult pricing environment brought on by the recession, says Bill McGinley, vice president of pricing and revenue management at Wilson Trucking Co.

Whether purchased or developed in-house, McGinley says, these systems generally work the same way. "You start with actual costs and then write mathematical formulas to turn those into allocated costs," he says. The "tricky part," he says, is writing formulas that drive costs down to the freight-bill level as accurately as possible, so that each freight bill reflects its contribution to overall corporate costs. "Once all freight bills are costed, if you want to know what an individual customer's costs look like, just add up all the freight bills for that account."

These systems are a form of activity-based costing, so it is important to identify the activities that drive costs, McGinley says. In the less-than-truckload industry there are five primary categories of cost drivers. McGinley outlines these: pickup costs or the costs of driving to an account and loading the freight; delivery costs or the cost of moving the freight from the dock to the consignee and off-loading it; transfer costs or handling costs on the dock; linehaul costs; and overhead costs.

Carriers use the results of such analysis to determine pricing, but pricing decisions involve more than costs, McGinley says. "In reality, many factors go into that decision - the competitive nature of the business environment, current economic conditions, how well the customer pays, claims history and exposure, and even the credibility of the sales representative and of the customer.

Additionally, a company must attempt to look at how an account will operate in the future under a new pricing program and how that will impact the trucking company's profitability or operating ratio. "All these go into determining whether to go forward with a new price or not," McGinley says.

To view this video in its entirety, click here.

Whether purchased or developed in-house, McGinley says, these systems generally work the same way. "You start with actual costs and then write mathematical formulas to turn those into allocated costs," he says. The "tricky part," he says, is writing formulas that drive costs down to the freight-bill level as accurately as possible, so that each freight bill reflects its contribution to overall corporate costs. "Once all freight bills are costed, if you want to know what an individual customer's costs look like, just add up all the freight bills for that account."

These systems are a form of activity-based costing, so it is important to identify the activities that drive costs, McGinley says. In the less-than-truckload industry there are five primary categories of cost drivers. McGinley outlines these: pickup costs or the costs of driving to an account and loading the freight; delivery costs or the cost of moving the freight from the dock to the consignee and off-loading it; transfer costs or handling costs on the dock; linehaul costs; and overhead costs.

Carriers use the results of such analysis to determine pricing, but pricing decisions involve more than costs, McGinley says. "In reality, many factors go into that decision - the competitive nature of the business environment, current economic conditions, how well the customer pays, claims history and exposure, and even the credibility of the sales representative and of the customer.

Additionally, a company must attempt to look at how an account will operate in the future under a new pricing program and how that will impact the trucking company's profitability or operating ratio. "All these go into determining whether to go forward with a new price or not," McGinley says.

To view this video in its entirety, click here.