Better costing is the key to profitability

A recent webinar hosted by SMC³ and the Truckload Carrier’s Association focused on cost clarity as a critical factor for making better business decisions. While cost clarity comprises many related ideas, at root, it’s about developing an increasingly granular understanding of what your costs really are—and through that process, improving your profitability.

The conversation featured Justin Springer, Director of Business Development at SMC³,

Dale Yelle, Director of Truckload Support at SMC³, and Derrik Ford, Manager of Pricing at United Petroleum Transports. The trio explored cost clarity from a variety of angles, emphasizing three main points:

1. Carriers who know their historical data will be able to make better business decisions.
2. Activity-based costing (ABC) and costing intelligence removes the guesswork from these decisions.
3. The right tool for providing data points will enhance your ability to move freight more efficiently and profitably.

Getting a sense of costing

While costing is superficially a simple matter, as a carrier business scales up, it begins to involve more and more complex variables. These include empty miles, round trips, time-basis costs, costs incurred during stops, specialty equipment and additional costs such as tolls or other accessorials. Often, many of these costs are bundled into the general ‘overheads’ part of a ledger, but this coarse strategy doesn’t allow carriers a lot of visibility into what specifically is incurring these expenses.

“Tolls, tank washes, special permits, damage claims, trailer pools at customer facilities—these are all costs,” said Yelle. “They shouldn’t just fall into overhead, spread over all your shipments. They should be allocated to the shipments that create those special expenses.”

Yelle noted that even one of these variables can represent significant costs for carriers, making it even more important to get granular by lane, customer, and other parameters.

“We have a client with tolls exceeding $300,000 per month. That’s huge,” Yelle said. “Prior to having a costing system, they were putting that amount in overheads—but getting to the specific load is important in knowing what that load is actually costing you against the revenue.”

Knowing your customers

Behind the question of costing lies another question: how well do you know your customers? Having a detailed and in-depth grasp of which customers are the most profitable and which are the least, and why, is the foundation of more efficient costing. Carriers can answer this question by getting a firm grasp on their historical data.

This question becomes especially important given the current backdrop of economic uncertainty. By all accounts, trucking is currently in a slowly recovering recession, making margins tighter than ever for carriers. But whatever the current macroeconomic reality, carriers can take from the uncertainty an evergreen lesson: they need to be prepared to deal with changing market dynamics. Springer put forward three strategies for doing so:

1. Manage your costs—which basically means understanding your costs
2. Focus on profitability—meaning efficiency and refined pricing techniques
3. Invest in data and analytics technology

The importance of ABC

To hit on all these strategies, Springer recommended activity-based costing (ABC). Standard costing assigns predetermined rates based on an expected level of activity. This expectation can be set by data but often is also determined by less scientific measures—like individual intuition. Conversely, ABC assigns rates based on the actual resources consumed by each activity. 

With good ABC, carriers can account for their costs right down to the load level, allowing them to calculate their costs along all kinds of parameters, such as equipment type used, sales territory, etc. With an accurate cost model in place, businesses can have more productive conversations with unprofitable customers that get into specifics rather than a general sense of, ‘this isn’t working’.

Before ABC, Yelle noted, “you used to have to use gut feeling. It’s helpful to have historical information—you need actual specific data that can substantiate, or in some cases refute, that gut feeling.”

Implementing ABC with Cost Intelligence System (CIS)

While ABC is an important principle of better costing, using the right system to incorporate it is critical—and not all of these systems are created equal. SMC³’s Cost Intelligence System (CIS) helps carriers of all modes and sizes utilize ABC to gain clarity to their cost and enhance profitability.

Speaking for United Petroleum Transport, Ford stated how implementing a CIS has helped his company gather much more accurate data, allowing them to become more profitable.

“Historically, we did blanket rate increases,” he said. “But getting into costing has allowed us to target lanes and take a more surgical approach.”

SMC³’s CIS was put forward as a proven solution for carriers looking to get more accurate costing. By leveraging cutting-edge data collection methods and incorporating a constant feedback loop of customer input, SMC³’s CIS is a powerful tool for carriers looking to analyze their costs and streamline their operations.

While keeping costs low in an uncertain economy always involves a few unknowns, implementing ABC with a good tool, like CIS is one-way carriers can make sure their data is creating more efficiency and profitability.