Joe White
CEO-CostDown Consulting
Increasingly, trucking company owners and CEOs are establishing truck driver pay-for-performance (P4P) programs comprised of defined performance goals and bonus pay when goals are met.
However, P4P is part, and only part, of a bigger program called ‘performance management’ and truck drivers are part, and only part, of a trucking company’s total employees. When a performance management program (PMP) is incomplete in terms of content, employee scope or both; a trucking company has a much greater chance of failure.
The four cornerstones of a successful PMP are:
• Value-focused Job Descriptions
• Performance Goals
• Financial Rewards based on Goal Achievement
• Best Activities Training
Since truck driver pay-for-performance has received most of the recent press, we’ll instead explore the profitability opportunity trucking companies can receive from a PMP for management personnel using a VP of Sales position as our example employee.
A traditional job description for a VP of Sales has as its main focus revenue growth (after all, the word ‘sales’ is in his/her title). But is that the best focus? Is revenue growth the greatest value opportunity of the VP of Sales position?
Consider this…
Freight networks are dynamic and full of costly inefficiencies such as empty lanes, underrated freight and frequent delays. Additionally, a network’s customer portfolio can be dangerously over weighted allowing a handful of large shippers to dictate unprofitable pricing and operating conditions. The geographic reach of the network is also important as it affects home time, hiring regions and driver productivity.
Revenue growth by itself will not fix these issues. Unfortunately, the top sales employee in many trucking companies is often not assigned specific responsibility and goals for addressing similar network cost concerns even though that position has the greatest influence with the customer base.
An effective PMP begins with developing job descriptions that clearly define the responsibilities that provide the greatest value for specific positions within the organization. Even a job title by itself can suggest (and possibly misdirect) a focus of responsibility. If our VP of Sales was instead titled VP of Network Optimization and assigned responsibility for addressing specific network issues and revenue growth, might not he/she add more value?
Our retitled VP of Network Optimization’s revised job description and performance goals could include eliminating deadhead miles (sales for empty lanes), reducing driver detention, improving customer balance, increasing revenue, etc… Once value-based job descriptions and responsibilities are defined, the trucking company owner or CEO would then assign performance targets for those responsibilities and define the pay-for-performance bonus opportunity.
The final cornerstone of an effective PMP is ‘best activities’. A common industry example can be found on the driver side where many trucking companies have no idling policies and teach fuel-sipping driving techniques to support MPG goals.
A best activities example for our VP of Network Optimization might include working with the finance department to identify costliest detention points and developing cost summary business cases to bring to the customers. Another example could be securing Driver Manager approval before bidding on new traffic lanes to ensure network fit.
The goal of a PMP is to provide significant bottom line opportunity by narrowing the performance gap between current and optimal employee performance. This is just as important for the executive group as it is for truck drivers. By redirecting a department head’s responsibilities to increase the value he/she adds to the bottom line you are in effect redirecting the efforts of all the employees assigned to that executive. That provides a powerful opportunity for improved profitability.
PMPs should be developed for many middle managers also; especially those that have a significant influence on cost and profitability. The terminal manager and driver manager employee groups are of particular importance due to their influence on driver performance. Any employee that manages 20 – 50 drivers and makes literally hundreds of decisions a week that impact variable costs and profitability should be on a well-designed performance management program.
A PMP that lacks content will lack results. You can establish a 2,300 miles/week performance goal for drivers and offer quarterly bonuses when met but without driver training and coaching on how to improve productivity (best practices), results will fall short of expectations.
Likewise, a PMP that lacks employee scope will also lack results. Truck drivers may have very specific performance goals but if driver managers are not provided their own PMP with goals and financial incentives aligned with driver performance success, results will fall short of expectations.
Perhaps the most fundamental success factor of any organization is that the higher the employee performance, the more likely it is that the company will succeed. This holds true regardless of the size or type of an operation. Trucking companies that place serious effort into optimizing employee performance through use of a well-designed performance management program will be the most likely to succeed. Those that don’t – won’t.
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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.
By Michael Buck, President MCB Fleet Management Consulting. Mike@MCBConsulting.com; www.MCBConsulting.com
| A few weeks ago, it was reported that two of trucking’s leading economists said the industry’s recovery is well under way and should continue for at least several years. Trucking, they said, has been outperforming the economy, and conditions in the marketplace are far better than financial commentators and politicians have said.
But those same economists also cautioned prudence in the matter of keeping costs under control and warned that a serious driver shortage is developing. They also said that while fuel prices are dropping a bit, it’s still relatively expensive and equipment prices are on the rise.
Transportation is a leading, not lagging, indicator, and economic cycles and fluctuations – positive or negative – tend to have an immediate effect. In the end, your trucking operation’s success will be predicated, not on what analysts say, pro or con, or what Wall Street does tomorrow or next week but on your own strategies for controlling variable costs, executing the plan and staying firmly on course.
Keeping variable costs in check is an extremely difficult task unless you have the proper controls in place. There are six basic ways a trucking company can cut costs – and you won’t like the first five:
- Cut staff
- Cut wages
- Cut benefits
- Cut customer services
- Cut equipment maintenance
OK, you can’t totally cut maintenance without pulling the plug on your business, but you can put it off for as long as possible.
Take heart, though, because the sixth method is both the least traumatic and the most effective:
- Improve productivity with defined processes and/or the use of technology.
Technology’s role in cost control doesn’t need lengthy explanation in the age of handheld computers. And “defined processes” simply means establishing and using systematic steps, including capturing the transportation industry’s best practices, to achieve a specific end – and then making sure everyone in the company does his or her part consistently.
A defined process can be as simple as figuring out the best way to sharpen a pencil or as complex as creating and implementing the industry’s most comprehensive preventive maintenance program.
In addition to reduced costs and improved services, the results of such a program include a work environment in which every job, companywide, is performed with ease and minimal stress. That process captures the employee buy-in needed to ensure the success of the initiative and creates a loyal and fulfilled workforce eager to ensure a long-term solution through all business cycles, regardless of economic conditions.
Done properly, these processes increase the bottom line without robbing Peter to pay Paul. For example, despite popular belief to the contrary, low maintenance cost and high asset utilization can coexist.
The unfortunate reality is that the first reaction to thin profit margins is the aforementioned method No. 5 – deferring maintenance. But that inevitably equates to more-frequent breakdowns, higher costs and disastrously poor scores on the Federal Motor Carrier Safety Administration’s new Compliance, Safety, Accountability program.
Instead of overreacting and setting the company up for failure, start building a foundation that enables effective processes. Begin developing superior cost controls by using your senior leadership’s knowledge. With some quick analysis and consensus by the leadership team, the low-hanging fruit should be readily evident with a few simple questions:
- What are the high cost drivers?
- What controls or emphasis could be put in place to reduce each cost driver?
- Is the right team in place for managing this cost driver?
- What controls and metrics are in place to proactively monitor and control this cost driver?
- What are the expiration dates on the contracts or service agreements affecting this cost driver?
- Can – and should – they be negotiated prematurely?
- Do you have an experienced individual qualified to negotiate the contracts or service agreements affecting this cost driver fairly?
With the information this analysis provides, you easily can assemble a team to develop a process for gaining control of the respective cost drivers impeding your bottom line.
Here are some tips for implementing this type of initiative – and some mistakes to avoid:
- At first, go slowly to go fast. People don’t handle too much change at one time very well, good or bad. Start off by casually mentioning in passing the upcoming initiative and watching closely to determine who will rise above the throng and qualify for the leadership team.
- Decide whether those who aren’t good team players should even remain part of the organization. Are they consciously or – to give them the benefit of the doubt – subconsciously running covert actions that impede the success of the leader or the organization? Do they sense the need to remain profitable? Do they embrace the organization’s culture?
- Even if solutions are evident to senior leadership, help the team reach them by asking probing questions, no matter how long it takes.
- Have the team develop the method and metrics to monitor progress.
- Use an unbiased, unintimidating facilitator.
- If necessary, use a third party.
The most obvious result of turning to cross-functional teams is their immediate and positive effect on profitability. The underlying benefit, however, is their effect on camaraderie and morale throughout your organization as they reduce stress, improve productively and produce nonquantifiable, but beneficial, improvements to the bottom line – and to customer satisfaction.
Economies inevitably wax and wane, and when times are good, the next dip may be around the corner. But with reliable processes in place and a fully engaged workforce, you are prepared to weather any financial storm. |
