by Leo J. Lazarus
For 25 years or longer, operating ratio (the ratio of operating expenses to operating revenue) has been a common measure of profitability and efficiency in the truckload transportation industry. Historically, most truckload carriers have established operating ratio goals ranging from 88% to 92% and have measured financial success based on this one simple indicator of profitability. From a return on investment perspective, this traditional paradigm of a specific operating ratio being profitable, regardless of the characteristics of the operation, is simply not accurate.
In my experience, a typical truckload operation is characterized by tractor utilization of 2,200 to 2,500 miles per week and between two and three trailers per tractor. The historical operating ratio standards of 88% to 92% are based on this typical operating model. Unfortunately, because of its simplicity, operating ratio does not account for the carrier’s comprehensive financial model, especially in situations where the operating model is significantly different from the “typical” truckload operation.
The general paradigm is that the lower the operating ratio, the more profitable and efficient the carrier. For example, a truckload carrier with an operating ratio of 85%, regardless of the underlying business model, is very likely to be considered more profitable and efficient than a carrier with an operating ratio of 89%. The risk with this common interpretation is that a number of critical variables about each carrier’s operation are not taken into account. If the two carriers serve different market segments, different length of haul levels, and different customer requirements, the 89% carrier can easily be even more efficient and more profitable than the 85% carrier.
While I believe a variety of operating and financial variables can impact the accurate interpretation and application of operating ratio, the two most important considerations are weekly utilization (productivity in miles) and the trailer-to-tractor ratio (capital investment). In specialized trucking operations, as is often seen with many dedicated and shorthaul fleets, the operation may have extreme trailer needs or utilization requirements outside those of the typical truckload operation. When a specialized operation requires an extremely high number of trailers per tractor (above average capital investment), the “standard” operating ratio is not appropriate for measuring or pricing the operation. Likewise, when a specialized operation can generate only 1,000 miles per tractor per week (below average productivity), the “standard” operating ratio is again no longer an accurate guideline for the operation.
For all truckload pricing and profitability benchmarking, the operating ratio expectation must be adjusted relative to the characteristics of the operation, particularly investment level and asset utilization. A carrier’s standard operating ratio expectation is likely to provide an accurate guideline for “typical” operations. However, for specialized operations, the correct operating ratio expectation could range from 70% to 93% depending on the requirements of the individual operation.
The most straightforward illustration of the risks of the operating ratio paradigm is seen in the common process for pricing dedicated fleets. All too often, carriers base dedicated pricing on a simple cost-plus approach. For example, the carrier may have a stated goal that all dedicated fleets must achieve an operating ratio of 88.0%. The carrier simply estimates the operating cost of providing the dedicated fleet then computes the revenue necessary to achieve the target operating ratio.
Using a static operating ratio goal and cost-plus approach to price every fleet, regardless of specific characteristics, will often result in one of two critical pricing mistakes. The potentially most costly mistake occurs when a carrier prices an undesirable opportunity too low. The most common mistake of this type would involve a low utilization fleet requiring a high number of trailers per tractor being priced too low. Not only does the underpriced fleet generate inadequate returns, but because of the low pricing mistake, the carrier also stands a good chance of being awarded a fleet that produces poor financial results.
The second mistake occurs when a carrier prices a very attractive opportunity too high, failing to provide competitive pricing for the business opportunity. A common mistake of this type might occur when a shipper requests a fleet of dedicated trucks and drivers but the entire trailer fleet is provided by the shipper, thereby eliminating the carrier’s capital investment in trailers. Carriers that do not adjust pricing and margin downward by the appropriate amount will be priced too high and likely miss out on this financially attractive opportunity.
Because a static operating ratio target is not accurate for all situations, a more sophisticated pricing approach is required. The most accurate way to establish the proper margin and pricing is to apply a more sophisticated, investment analysis approach based on the criteria of Net Present Value and Internal Rate of Return. Instead of a standard operating ratio serving as the primary guideline, the carrier should establish a minimum Internal Rate of Return for each operation and price the opportunity to meet or exceed the required rate of return.
With a minimum required return standard in place, the Net Present Value and Internal Rate of Return investment analysis techniques provide the ideal methodology for evaluating and pricing specialized fleet opportunities. These investment analysis tools will accurately account for the sensitive variables of investment (tractors and trailers) and productivity (utilization) then generate suggested pricing that adjusts the revenue and target operating ratio based on those unique characteristics. These techniques provide a comprehensive analysis of both the operating costs and revenues of the opportunity as well as the upfront capital investment required to undertake the specialized operation, thereby allowing the carrier to consistently price specialized truckload operations to provide the appropriate return on investment.
What is PSP?
In 2010 the Federal Motor Carrier Safety Administration (FMCSA) launched the Pre-Employment Screening Program (PSP).
PSP is available online at http://www.psp.fmcsa.dot.gov/Pages/default.aspx.
Through PSP, enrolled account holders have the ability to search for drivers’ safety histories from the federal Motor Carrier Management Information System (MCMIS) database. A PSP record includes a driver’s:
- Five year crash history
- Three year roadside inspection history
- Violations noted during roadside inspections
- The name of the motor carrier for whom the driver was operating for at the time of an inspection or crash
PSP is the only service that provides a driver’s complete FMCSA history. The PSP record allows you to get a clear snapshot of a driver’s past behaviors and habits – important predictors of a driver’s future performance.
The driver’s PSP record may only be accessed during the hiring process. Once a driver is employed, the employer may not request that driver’s PSP record for any reason. To protect a driver’s privacy, a driver must provide their consent using FMCSA’s PSP consent form before the PSP record is accessed.
FMCSA takes drivers’ privacy seriously. With that in mind, FMCSA has implemented PSP audits. On a regular basis, PSP account holders are randomly selected for a PSP audit. The audit entails providing driver consent forms that are requested at random. The consent form demonstrates that the driver has permitted a company to request their PSP record once. Review the driver consent compliance suggestions to learn more and adopt the established best practices.
Who may use PSP?
Inter- and intrastate motor carriers may use PSP to review a potential driver’s safety history. Drivers may also access their own PSP record at any time.
In early October, FMCSA announced an expansion to the PSP program. Now, any company that is directly involved in the hiring of commercial drivers may access PSP records. This includes driver screening companies and similar entities working on behalf of a driver or a carrier to access PSP records (with the driver’s consent).
How is PSP data collected?
Enforcement officials collect data during roadside inspections and crashes. This data is added to the FMCSA MCMIS database. The information is different than the driver’s state motor vehicle record because PSP includes violations and other details about the crash or inspection – not just state convictions. PSP offers motor carriers a more comprehensive picture of a potential employee’s past performance and work history.
On a monthly basis, the PSP database is populated with the latest MCMIS snapshot. The data snapshot includes the most recent data updates for drivers’ crash and inspection histories.
Why use PSP?
Thousands of motor carriers are using PSP to ensure they are only hiring the safest drivers. Motor carriers use PSP for a variety of reasons. Some motor carriers use the PSP data to develop a personalized training plan for each driver that addresses the areas that demand extra attention. A personalized training approach ensures that a driver’s time is well spent and keeps training costs to an effective minimum. Carriers also check the PSP report to see what carrier the driver was operating for at the time of a crash or inspection. Prospective employers can cross reference the carrier names that appear on the PSP report with the list of previous employers supplied by the driver.
The PSP report is different than a state motor vehicle record. Using the reports together shows a clear picture of a driver’s activities. For more details review the PSP and MVR comparison.
How do I use PSP?
PSP is entirely web-based, available 24 hours a day, and returns drivers’ PSP records instantly.
First, a company must enroll in the program to receive PSP access credentials. To start, download the enrollment packet. The enrollment process typically takes two to three business days. Once enrolled, simply search for a driver’s record by entering the driver’s name, date of birth, license number(s) and license state(s). PSP records are returned instantly in PDF format, and can be saved or printed for the driver’s qualification file. In addition to the web site, the PSP application is available via iTunes for the iPhone and iPad. The PSP app is free and makes it easier to review drivers’ histories on the go.
There is a fee to use PSP. Most PSP account holders pay an annual subscription fee of $100. Smaller carriers, with fewer than 100 power units, qualify for a discounted subscription fee of $25. Each PSP record transaction costs $10. A single monthly invoice is provided to carriers for convenience.
Information on enrollment and questions about the PSP service can be found on the PSP FAQ page. The customer support team is ready to answer questions. Simply email PSPhelp@egov.com or call toll-free 1-877-642-9499 between 8 AM and 6 PM ET, Monday – Friday. You can access PSP updates by subscribing to the PSP Twitter feed by following @PSP_help.
It’s important that motor carriers know what information to expect in the PSP record, how to evaluate that information, and that the carrier must obtain the driver’s consent before requesting his or her PSP record.
Creating and maintaining a safe and productive fleet starts before a driver is hired. We can help you navigate PSP, including understanding how the PSP record can best fit into your individual hiring practices.
It’s that time of year when we all face increased hazards caused by weather. In addition, many of our clients are in their peak season. Now is the time many of you are operating at full capacity, in the middle of the worst weather of the year.
Some proven, basic rules for safe driving in winter weather:
- Make sure drivers are prepared. Mentally prepared, alert and awake. Physically prepared, dressed for the weather and rested. Make sure that the truck is stocked with some food and water, as well as cold weather clothing and gear.
- Make sure your vehicles are prepared. Tires lose pressure in cold weather. If chains are required, make sure they are carried. Batteries fail in cold weather – test them now. Make sure heaters work and ducts are not blocked. Landing gears on your trailers are often overlooked – it’s not fun cranking a stiff landing gear in cold weather at 2 AM.
- Fuel – never let trucks run low in the winter.
- Make sure your drivers watch their mirrors for wet roads that suddenly stop throwing spray – that water just turned to ice. With a keen ear, drivers can tell by tire noise on the pavement when roads start to freeze over.
- In reduced traction conditions, every movement should be slow, well planned, and deliberate. Braking, acceleration, gear changes, steering – all should be very smooth and slow.
- Watch the other guy – people do the craziest things around big trucks. Always assume the worst from the other driver – and then you can be pleasantly surprised when it does not happen.
