Activity-Based Costing Drives Better Business Decisions
Authored by SMC³ on November 16, 2023
The trucking industry has a significant challenge—knowing which customers and accounts are most and least profitable. Having this information can empower carriers to move freight more efficiently and cost effectively, which thereby improves the bottom line. This challenge took center stage at a recent TCA webinar where participants from SMC3 and XTL Transportation Inc. discussed how to make better business decisions through activity-based costing. When asked how carriers do costing today, the vast majority of the attendees said they rely on team member experience and knowledge.
“No carrier has the upper hand when it comes to the future of things. However, using your historical data will certainly improve your chances,” said moderator Justin Springer, director of business development, cost intelligence systems at SMC3. “When trying to improve your profitability, activity-based costing and a cost intelligence system (CIS) is a map that can remove the guesswork and get you to a destination/goal or target.”
The webinar panel consisted of moderator Springer, Dale Yelle, director of truckload support, cost intelligence systems at SMC3,and Dan McKenzie, vice president of pricing at XTL Transportation. They stressed the need to have the right tools that can help carriers improve their bottom lines. They noted that the economic outlook for 2024 is still an unknown with high inflation and high interest rates persisting, but there are signs of optimism with green shoots and inventory levels balancing out. Yet, panelists expect the current economic climate to remain the same through 2024.
“Most of what we’re seeing is out of our control. This is where the market is and where things are going. But we can only control what is in the office and costs,” said Yelle.
Panelists agreed the way forward is managing costs, focusing on profitability, investing in technology to provide analytics, and improving pricing techniques. This is where activity-based costing comes in. It’s the best way to fully understand costs so carriers can make better decisions and push the profitability lever.
What Is Activity-Based Costing?
A standard costing model is a method of assigning a predetermined rate based on the expected level of activity. With activity-based costing, a rate is assigned based on costs associated with actual consumption of resources by each activity.
The latter method increases understanding of overheads and cost drivers and makes costly and non-value-adding activities more visible. It also allows teams to reduce or eliminate non-value-adding activities and provides more accurate data for profit margins. With this more accurate method of costing, carriers can make more accurate pricing decisions.
“The analytics reconciles directly to the general ledger and costs are applied to customers,” said MacKenzie. “This is vital for having detailed costs that can be applied against the customer.”
Activity-based costing drills down to the lowest common denominator of every element that drives cost on a load or shipment—equipment, fuel, tolls, headhaul or backhaul, etc. With this costing method, carriers can analyze costs at the load level, highlight underperforming accounts, and address the root causes of business challenges. In turn, if there’s a price increase or change, carriers have hard data to explain it, which can lead to better conversations with customers. The bottom line is an activity-based costing tool reveals if a carrier has made money or lost money with specific customers.
“With activity-based costing and CIS, you have this data so quickly and the answers right way, empowering carriers to get time back to researching and analyzing the data,” said Yelle.
XTL Transportation, a user of activity-based costing and CIS, affirms its benefits. “I used to come in on a weekend to analyze customer lanes and now we can do 10,000 loads in an hour and we see every load,” said MacKenzie. “You don’t have to do guesswork and it’s leveraging the data you already have.”
Freight Profitability at the Core of Activity-Based Costing
To get a clear profitability picture, carriers need costs tied to the loads: empty miles, round trips, time-basis costs, specialty equipment, costs incurred during stops, tolls, and accessorial charges. The more granular the data, the better.
“If a customer requires trailer pulls, most carriers spread that cost over all loads. Those costs should go against the customer that requires it,” said Yelle. “Same if a customer requires reefer fuel, it should go to the load that requires it.”
Panelists recommended establishing a target operating ratio (OR) for each customer with the goal to meet that ratio by looking at each customers’ lanes and loads. They noted that being well informed by data can also help customers be more productive.
Carriers Are Winning with Activity-Based Costing
Carriers that have migrated to activity-based costing are putting the data to use to become more profitable. XTL, Averitt, Old Dominion, and Cheeseman were called out by the panelists as examples of activity-based costing success.
MacKenzie noted that XTL spent too many years looking at revenue per month (RPM) or revenue per hour (RPH) numbers because they look favorable. However, if operational costs are high, carriers will continue down the wrong path.
“When we finally got to look at OR numbers, that was important. We barely look at RPH anymore—just our OR numbers,” said MacKenzie.
Activity-based costing shifts the focus to OR percentage and margin target versus RPM and changes conversations with sales and operations, he said. It also offers ways to improve the OR percentage on the roundtrip versus a one-way RPM and offsets empty miles.
At XTL, MacKenzie said the sales team values the ability to review monthly results by customers and lanes. Operations understands what impact an operational change is making to the OR. Activity-based costing also dispels the myth of profitability at certain RPM and RPH. In addition, looking at the OR offers visibility into why certain accounts are profitable or unprofitable. Since shifting to activity-based costing, XTL has improved its OR by five percent.
SMC3 CIS Helps Carriers Maximize Profitability
Providing comprehensive insight into the profitability of individual shipments and loads, SMC3’s CIS tool delivers powerful analysis and reporting to help carriers achieve profitability. We have solutions for both truckload and less-than-truckload carriers that are fueled by customer feedback gathered during user group meetings. Intent to stay on the front lines of the supply chain, SMC3 adapts to the changing needs of the industry to help carriers use the latest and greatest tools to analyze costs and streamline their operations.
Learn more here.