Case 4-2 Hardee Transportation (B) Ch 04 (page 138)
APPENDIX 4B
LTL and TL Costing Models
As mentioned in this chapter, understanding costs for costing purposes is critical to a carrier’s ability to price in order to maximize profits. Costing and pricing can be extre- mely complex exercises, depending on the amount and complexity of inputs. However, examining LTL and TL operations, it might be evident that defining their activities for costing purposes can be relatively simple. The purpose of this appendix is to offer basic and simplistic costing models for LTL and TL that can be used to get a feel for the costs associated with a particular move. Obviously, these are not complex models and would need to be adjusted for actual costing purposes.
Operational Activities
The examination of LTL and TL operations might result in the conclusion that they are significantly different in how they operate. Actually, they are very similar. The major difference between the two is in the dock rehandling that is associated with the LTL operations, not the TL. However, to move a shipment, both operations provide a pickup service, a line-haul service, and a delivery service. These three activities, along with dock rehandling for LTL, can be used to begin to break out the appropriate costs associated with a move.
Cost/Service Elements
Within each operational activity, those cost/service elements that will actually be responsi- ble for shipment costs need to be identified. These cost/service elements can be defined as time, distance, and support. The time it takes a carrier to pick up, cross-dock, line-haul, and deliver a shipment will impact its fixed costs, such as depreciation and interest, because these costs are allocated and determined by units of time. The distance a carrier has to move a shipment during these operational activities will affect its variable costs, such as fuel and wages. Support costs, such as equipment insurance and maintenance, are considered semi-fixed and semi-variable because they will exist if no activity takes place but will in- crease as activity increases. Finally, shipment billing can be considered a fixed cost because normally the cost to generate a freight bill is not related to shipment size or distance.
Having identified four operational activities (pickup, cross-dock, line-haul, and de- livery) and three cost/service elements (time, distance, and support), it is possible to develop a costing methodology that will allow the approximation of costs that a carrier could incur for moving a shipment.
TL Costing
This section will present a simplified TL costing model that can be used to approxi- mate the costs of moving a shipment between two points. This model can be used for calculating headhaul costs but does not include an adjustment for a possible empty re- turn trip. However, as will be seen, headhaul costs could be adjusted to compensate for variable costs of an empty backhaul.
The following scenario is used. Shipment and Equipment Characteristics The shipment consists of 400 cartons
at 90 pounds each with each carton measuring 3 cubic feet. Carriers’ trailers have
a weight capacity of 40,000 pounds and 2,880 cubic feet. The shipment weighs 36,000 pounds (90 percent of weight capacity) and occupies 1,200 cubic feet (almost 50 per- cent of trailer cubic capacity).
Equipment Cost Data
Equipment Purchase Price
1. Line-haul tractors 1⁄4 $80,000 2. Trailers 1⁄4 $24,000
Depreciation
1. Tractors 1⁄4 5-year straight line 2. Trailers 1⁄4 8-year straight line
Interest
1. Tractors 1⁄4 10 percent APR for 5 years 2. Trailers 1⁄4 10 percent APR for 8 years
Fuel
1. $2.10 per gallon for diesel 2. Line-haul tractors 1⁄4 6.5 miles per gallon
Labor Cost
1. Line-haul drivers 1⁄4 $0.42 per mile 2. PUD operation drivers 1⁄4 $22.00 per hour
Miscellaneous
1. Insurance cost 1⁄4 $0.03 per mile 2. Maintenance cost 1⁄4 $0.15 per mile 3. Billing cost 1⁄4 $1.95 per freight bill 4. Tractors and trailers are available for use 365 days, 24 hours per day 5. Administrative/overhead cost 1⁄4 10 percent of total cost of move
RouteandTimeofMove TheshipmentoriginatesonJune1,2010,fromPennsylvania State University (located 35 miles from the carrier’s dispatch/maintenance facility). A line-haul tractor and trailer are dispatched from the terminal at 7:30 a.m. (all times are Eastern Standard Time) and arrive at the shipper’s dock at 8:30 a.m. The shipment is loaded from 8:30 a.m. to 12:00 p.m. Driver and tractor remain at Penn State during loading to visit the famous Nittany Lion statue. Driver and vehicle return to the carrier’s terminal at 1:00 p.m. to pick up paperwork.
Total time for pickup 1⁄4 5.5 hours
Total distance for pickup 1⁄4 70 miles
The vehicle and the driver depart from the terminal at 1:00 p.m. on the same day for Dallas, Texas. The driver operates from 1:00 p.m. to 11:00 p.m. and travels 450 miles. The driver rests from 11:00 p.m. to 7:00 a.m. (on June 2) in Knoxville, Tennessee, and then operates another 8 hours (7:00 a.m. to 3:00 p.m.) and 375 miles. The driver rests again from 3:00 p.m. to 11:00 p.m. in Memphis, Tennessee. The driver concludes the trip by traveling 450 miles from 11:00 p.m. to 9:00 a.m. (June 3) to the consignee in Dallas, George Bush’s summer home.
Total time for line-haul 1⁄4 44 hours or 1.83 days
Total distance for line-haul 1⁄4 1,275 miles
The trailer is unloaded from 9:00 a.m. to 12:00 p.m. with the driver and tractor remaining at the home to tour the museum dedicated to George Bush’s college base- ball days. The driver and vehicle then go to the carrier’s Dallas terminal, located 45 miles from Bush’s home, arriving at 1:00 p.m. to wait for further dispatch instructions.
Total time for delivery 1⁄4 4 hours Total distance for delivery 1⁄4 45 miles
Cost Analysis Using the equipment cost data and the distance traveled and time elapsed for the shipment, an approximate cost for this move can be calculated. This analysis can be seen in Table 4B-1. In a real costing situation, certain changes might need to be made to the cost data included in this example. Tractor fuel economy, for example, might need to be increased or maintenance cost per mile might need to be decreased. The cost analyst would need to determine the appropri- ate levels for each cost element, depending on the type of equipment and nature of the move.
Pickup As can be seen in Table 4B-1, the pickup operation generated seven types of costs. Depreciation expense per hour is calculated by:
equipment cost/years depreciation/365/24.
This formula gives the hourly cost for depreciation for both the tractor and the trai- ler. Interest expense (includes both principal plus interest) per hour can be calculated using any interest payment calculator. The appropriate formulas can be found in tables in any introductory finance text.
Fuel cost per gallon and tractor fuel economy determine fuel cost per mile. This for- mula is:
fuel cost per gallon/miles per gallon
Labor, maintenance, insurance, and billing costs are given and are relatively easy to calculate. Total pickup costs for this move are $185.46.
Line-haul Notice that the line-haul costs categories for this move are the same as for the pickup operation, except for the billing expense. This is simply because only one freight bill needs to be generated for this move. This will also be seen by the absence of a billing cost in the delivery section.
Also, during the pickup operation, the driver was paid by the hour because waiting time was involved. In the line-haul section, the driver was paid by the mile. Obviously, pay scales for drivers will be determined by company or union policies. Costs in the line-haul section are calculated in the same manner as they were in the pickup section. Obviously, however, the time and distance generated by the line-haul activity are used. Total line-haul costs for this move are $1,393.00
Table 4B-1 TL Costing Example
I. Pickup
1. Depreciation: tractor 5.5 hr @ $1.83/hr 1⁄4 $10.07
trailer 5.5 hr @ $0.34/hr 1⁄4 $1.87
2. Interest: tractor 5.5 hr @ $2.33/hr 1⁄4 $12.82
trailer 5.5 hr @ $0.50/hr 1⁄4 $2.75
3. Fuel 70 miles @ $0.32/mile 1⁄4 $22.40
4. Labor 5.5 hr @ $22/hour 1⁄4 $121.00
5. Maintenance 70 miles @ $0.15/mile 1⁄4 $10.50
6. Insurance 70 miles @ $0.03/mile 1⁄4 $2.10
7. Billing $1.95
TOTAL PICKUP COST $185.46
II. Line-haul
1. Depreciation: tractor 44 hr @ $1.83/hr 1⁄4 $80.52
trailer 44 hr @ $0.34/hr 1⁄4 $14.96
2. Interest: tractor 44 hr @ $2.33/hr 1⁄4 $102.52
trailer 44 hr @ $0.50/hr 1⁄4 $22.00
3. Fuel 1,275 miles @ $0.32/mile 1⁄4 $408.00
4. Labor 1,275 miles @ $0.42/mile 1⁄4 $535.50
5. Maintenance 1,275 miles @ $0.15/mile 1⁄4 $191.25
6. Insurance 1,275 miles @ $0.03/mile 1⁄4 $38.25
TOTAL LINE-HAUL COST $1393.00
III. Delivery
1. Depreciation: tractor 4 hr @ $1.83/hr 1⁄4 $7.32
trailer 4 hr @ $0..34/hr 1⁄4 $1.36
2. Interest: tractor 4 hr @ $2.33/hr 1⁄4 $9.32
trailer 4 hr @ $0.50/hr 1⁄4 $2.00
3. Fuel 45 miles @ $0.32/mile 1⁄4 $14.40
4. Labor 4 hr @ $22/hr 1⁄4 $88.00
5. Maintenance 45 miles @ $0.15/mile 1⁄4 $6.75
6. Insurance 45 miles @ $.03/mile 1⁄4 $1.35
TOTAL DELIVERY COST $130.50
IV. Total cost
1. Pickup, line-haul, delivery $1708.96
2. Administrative/overhead (10%) $170.90
TOTAL TL COST $1879.86
V. Revenue needs
1. Per cwt ($1879.86/360) 1⁄4 $5.22
2. Per revenue mile ($1879.86/1310 miles) 1⁄4 $1.44
Delivery The delivery activity generates the same type of costs as did the pickup activ- ity, except for billing. Again, the time and distance associated with delivery need to be used in calculating costs. Costs for delivery are calculated in the same manner as they were in the pickup section. Total costs for delivery for this move are $130.50.
Total Cost Adding the costs associated with pickup, line-haul, and delivery generates the total cost for this move of $1,708.96. Remember, however, that a 10-percent addi- tional cost is added to make a contribution to the carrier’s administration and over- head, so the total cost for this move is $1,879.86.
Revenue Needs Carriers quote prices in many forms. Two of the more common methods are price per hundredweight (cwt) and price per revenue, or loaded, mile. In this example, although profit has not yet been added, to recover the fully allocated or average cost for this move, the carrier would quote a price per cwt of $5.22 ($1879.86/ 360.00 cwt) or a price per revenue mile of $1.44 ($1879.86/1310 miles).
Once again, this model is a simplified version of those used by carriers. Certain ad- justments and additions would need to be made to this model to make it more reflec- tive of an actual move. However, it does give the analyst some idea of the approximate costs associated with a shipment.
LTL Costing
This section will present a simplified version of an LTL costing model. LTL costing is more difficult than TL costing because it requires arbitrary allocations of common and fixed costs to individual shipments. Although this does not make costing an LTL ship- ment impossible, it does require that the individual using the costs understand that averages and allocations were used. Thus, the resulting costs might not be as accurate as would be desired. However, this model will produce ballpark estimates for the cost of moving an individual shipment. All of the formulas for calculating depreciation costs, in- terest costs, and fuel costs are the same as those used in the TL costing example.
Shipment and Equipment Characteristics The shipment to be costed consists of 15 cartons, each weighing 40 pounds and measuring 16 cubic feet. The carrier’s trailers have a weight capacity of 40,000 pounds and 2,880 cubic feet. This shipment then oc- cupies 1.5 percent of the trailer’s weight capacity and 8.3 percent of its cubic capacity. Because the cubic feet requirement is greater, it will be used to allocate costs in the line-haul move.
Equipment Cost Data
Equipment Purchase Price
1. PUD tractor 1⁄4 $55,000 2. LH tractor 1⁄4 $80,000 3. PUD trailer 1⁄4 $18,000 4. LH trailer 1⁄4 $24,000
Depreciation
1. Tractors 1⁄4 5-year straight line 2. Trailers 1⁄4 8-year straight line
Interest
1. Tractors 1⁄4 10 percent APR for 5 years 2. Trailers 1⁄4 10 percent APR for 8 years
Fuel
1. $2.10 per gallon for diesel 2. PUD tractors 1⁄4 7.5 miles per gallon 3. LH tractors 1⁄4 6.5 miles per gallon
Labor Cost
1. PUD drivers 1⁄4 $22.00 per hour 2. Dock handlers 1⁄4 $20.00 per hour 3. LH drivers 1⁄4 $22.00 per hour
Miscellaneous
1. Terminal variable cost per shipment at both origin and destination 1⁄4 $1.00 2. Terminal fixed cost per shipment at both origin and destination 1⁄4 $1.50 3. PUD equipment maintenance cost 1⁄4 $0.15 per mile 4. LH equipment maintenance cost 1⁄4 $0.15 per mile
5. PUD equipment insurance cost 1⁄4 $0.03 per mile 6. LH equipment insurance cost 1⁄4 $0.03 per mile 7. Billing cost 1⁄4 $1.95 per bill 8. Equipment is available 365 days, 24 hours per day 9. Administrative/overhead cost 1⁄4 10 percent of total cost of move
Route and Time of Movement The shipment is picked up by the carrier’s driver in a PUD city tractor/trailer unit on June 1, 2010, as one of 23 stops made by the driver that day from 7:30 a.m. to 6:30 p.m. The stops covered a total of 60 miles within the Altoona, Pennsylvania, satellite terminal service area. The shipment was one of four handled by the carrier at this particular shipper’s location. Once the pickup vehicle re- turns to the Altoona terminal, it takes 15 minutes to move the shipment from the city unit across the dock to the line-haul trailer.
Total time for pickup 1⁄4 11 hours Total distance for pickup 1⁄4 60 miles Total dock time 1⁄4 15 minutes
The line-haul tractor/trailer departs from the Altoona terminal at 11:00 p.m. on June 1 and arrives at the Cleveland break-bulk terminal, which is approximately 200 miles from the Altoona satellite, at 4:00 a.m. on June 2. The shipment moves from the line-haul trailer across the dock to a PUD city tractor/trailer unit in 15 minutes.
Total time of line-haul 1⁄4 5 hours Total distance for line-haul 1⁄4 200 miles Total dock time 1⁄4 15 minutes
The shipment is delivered to the Cleveland consignee by the PUD driver in a PUD city tractor/trailer unit on June 2 as one of 16 stops made by the driver over the period from 7:30 a.m. to 6:00 p.m. The stops covered a total of 45 miles in the Cleveland area. This shipment is one of three delivered to this particular consignee by the driver.
Total time for delivery 1⁄4 10.5 hours Total distance for delivery 1⁄4 45 miles
Cost Analysis With the equipment cost data and route and time of movement, an in- dividual LTL shipment can be costed. This analysis can be seen in Table 4B-2. Once again, the calculations for depreciation, interest, and fuel costs are the same as they were in the TL example.
Pickup In this example, a PUD tractor and trailer were used in the pickup operation. This is specialized equipment that really has no alternative uses in the line-haul opera- tion. As such, when this equipment is done with the PUD operation during the day, it will normally sit idle at the satellite terminal. This explains why a full day’s deprecia- tion and interest are charged to both the PUD tractor and PUD trailer, even though they were only utilized for 11 hours during this particular day. Some arguments might exist that this places an excessive cost burden on these shipments through fixed-cost al- location. This might be true. However, the cost analyst must make the decision as to where fixed costs will be recovered. If not through this allocation, then fixed costs must be covered by some other method so debt can be serviced and plans for equipment re- placement can be implemented.
The fuel, labor, maintenance, and insurance cost calculations are relatively straight- forward. Total route costs for this move are $353.18. Remember, however, that this cost is for all shipments picked up and delivered by the driver during the day. This calcula- tion is for the cost of only one shipment. To do this, first divide the total route cost by the number of stops made by the driver. This results in a route cost per stop of $15.36. Second, divide the per stop cost by the number of shipments at the shipper’s location that had the individual shipment. This results in a route cost per shipment of $3.84. Both the stop cost and the shipment cost are averages that assume that each stop is basically the same and each shipment is the same. Adjustments could be made to these figures to more accurately reflect the time and distance actually used for the individual shipment. Remember, however, the per-shipment-route costs used in this example are averages.
Shipment costs are those assigned to each individual shipment that are not generated by the PUD operation. Billing, terminal variable cost, and terminal fixed cost are not dependent on shipment size but are allocated to each shipment. The shipment took 15 minutes for its cross-dock operation resulting in the dock charge of $5.00.
Table 4B-2 LTL Costing Example
I. Pickup
A. Route Costs
1. Depreciation: PUD tractor 1 day @ $30.14/day 1⁄4 $30.14
PUD trailer 1 day @ $6.16/day 1⁄4 $6.16
2. Interest: PUD tractor 1 day @ $38.40/day 1⁄4 $38.40
PUD trailer 1 day @ $8.88/day 1⁄4 $8.88
3. Fuel 60 miles @ $0.28/mile 1⁄4 $16.80
4. Labor 11 hr @ $22/hr 1⁄4 $242.00
5. Maintenance 60 miles @ $0.15/mile 1⁄4 $9.00
6. Insurance 60 miles @ $0.03/mile 1⁄4 $1.80
SUBTOTAL $353.18
# Stops 23
COST PER STOP $15.36
# Shipments at stop 4
ROUTE COST PER SHIPMENT $3.84
B. Shipment Costs
1. Billing $1.95
2. Terminal variable cost $1.00
3. Terminal fixed cost $1.50
4. Dock 0.25 hr @ $20/hr 1⁄4 $5.00
INDIVIDUAL SHIPMENT COST $9.45
C. Total Pickup Cost Per Shipment $13.29
II. Line-haul
1. Depreciation: LH tractor 5 hr @ $1.83/hr 1⁄4 $9.15
LH trailer 5 hr @ $0.34/hr 1⁄4 $1.70
2. Interest: LH tractor 5 hr @ $2.33/h. 1⁄4 $11.65
LH trailer 5 hr @ $0.50/hr 1⁄4 $2.50
3. Fuel 200 miles @ $0.32/mile 1⁄4 $64.00
4. Labor 5 hr @ $22/hr 1⁄4 $110.00
5. Maintenance 200 miles @ $0.15/mile 1⁄4 $30.00
6. Insurance 200 miles @ $0.03/mile 1⁄4 $6.00
TOTAL LINE-HAUL FULL TRAILER $235.00
% capacity occupied by shipment 8.3%
SHIPMENT LINE-HAUL COST $19.51
III. Delivery
A. Route Costs
1. Depreciation: PUD tractor 1 day @ $30.14/day 1⁄4 $30.14
PUD trailer 1 day @ $6.16/day 1⁄4 $6.16
2. Interest: PUD tractor 1 day @ $38.40/day 1⁄4 $38.40
PUD trailer 1 day @ $8.88/day 1⁄4 $8.88
3. Fuel 45 miles @ $0.28/mile 1⁄4 $12.60
4. Labor 10.5 hr @ $22/hr 1⁄4 $231.00
5. Maintenance 45 miles @ $0.15/mile 1⁄4 $6.75
6. Insurance 45 miles @ $0.03/mile 1⁄4 $1.35
SUBTOTAL $335.28
# Stops 16
COST PER STOP $20.96
# Shipments at stop 3
ROUTE COST PER SHIPMENT $6.99
B. Shipment Costs
1. Terminal variable cost $1.00
2. Terminal fixed cost $1.50
3. Dock 0.25 hr @ $20/hr 1⁄4 $5.00
INDIVIDUAL SHIPMENT COST $7.50
C. Total Delivery Cost Per Shipment $14.49
IV. Total Cost Per Shipment
1. Pickup, dock, line-haul, delivery $47.29
2. Administrative/overhead (10 percent) $4.73
TOTAL COST PER SHIPMENT $52.02
V. Revenue Needs
1. Per cwt ($52.02/6) $8.67
Total shipment cost for this move is $9.45. Combining the route cost per shipment and the shipment cost results in a total pickup cost per shipment of $13.29.
Line-haul Depreciation and interest for the line-haul equipment is charged only for the actual time the shipment is on this equipment. This is the same as in the TL example. Unlike the PUD equipment, this assumes that the line-haul equipment has alternative uses and is 100 percent utilized. Again, actual utilization rates can be used to adjust the allocation of depreciation and interest charges.
As previously mentioned, the shipment occupied 8.3 percent of the cubic capacity of the line-haul trailer. This is the basis used for allocating line-haul costs in a line-haul cost per shipment of $19.51. This allocation method assumes that all shipments in the line- haul trailer have approximately the same pounds per cubic foot requirement and that the trailer would probably be cubed out. The analyst might want to make adjustments for this based on the known average weight and cube per shipment in the carrier’s system.
Delivery The calculations for delivery cost are the same as those used for pickup costs. For route shipment cost, 16 stops and 3 stops per shipment are used to deter- mine the average route cost per shipment of $6.99. Shipment costs are also the same, ex- cept that billing cost is not included, resulting in a shipment cost of $7.50 and a total delivery cost per shipment of $14.49.
Total Shipment Cost Combining the pickup cost of $13.29, the line-haul cost of $19.51, and the delivery cost of $14.49 results in a total cost per shipment of $47.29. Remember, like the TL example, a 10 percent cost is added to cover administrative and other overhead expenses, resulting in a total cost for the shipment of $52.02.
Revenue Needs Although prices are quoted in many different forms in the LTL in- dustry, one popular form is in price per cwt. Taking the total shipment charge of $52.02 and dividing it by 6 cwt results in a price per cwt of $8.67. Remember this price does not yet include an allowance for profit for the carrier.
Conclusion
Determining the cost for a particular shipment can be a very complex and time- consuming task.
Detailed data requirements and knowledge of a carrier’s operations are necessary inputs to developing accurate costs. However, a simplified approach can be taken to shipment costing that does not need these complex requirements and results in approximate shipment costs. Thus, the advantage of these costing models is their sim- plicity and ease of calculation. Their disadvantage is that they use general data, alloca- tions, and averages to determine shipment costs. The analyst must trade off these characteristics to determine the level of complexity needed for costing and whether these models will provide a sufficient level of cost detail.