Lucrative ideas on how to build a successful Road Transport Business
Create a Unique Value Proposition - offer your shipper the best reason to do business with you!
Despite a common belief that road transport is an extraordinary-high risk, competitive and low-margin business, fraught with difficulties in coping with real-time management challenges, there is still tremendous scope to earn reasonable return on capital employed before interest and tax (ROCEBIT).
Why ROCEBIT, what about profit? Well there are two types of profit. The first is a reference to Profit-on-Sales and the second is Profit-on-Capital Employed. So what is meant by profit on capital employed? Quite simply, this is the ratio which relates the profit generated in relation to the capital employed, or the assets used in its generation. In other words, there is a big difference between having to invest one million rand to make a profit of say R100 000.00 and making an investment of two million rand to make a profit of R100 000.00.
Of course, the point of measuring profit before interest and tax (ROCEBIT) is to remove distortions occurring due to how capital is raised – this is a shareholder issue, and of course - how profit is taxed.
By now those who have been following this series will realise that there is a whole lot more to managing professional carrier operations than simply convincing financiers/shareholders to fund vehicle acquisitions. It requires a unique understanding of how to create attractive risk/return ratios, first on paper, then deliver them in practice. To do this, one must diligently pursue a single objective of servicing capital employed - then apply supporting rationale to create a win-win Carrier/Shipper relationship - sturdier than those available from an over-abundance of smart competitors.
“So why this single objective?”, you might ask. It’s to achieve the highest Value Quotient - Americans refer to it as “Delivering more Bang-for-your-Buck”.
It begins by creating trust between shipper and carrier, then mining the shipper’s operation to uncover scope to enhance rewards for both parties. As we have said, professional carriers must realise that shippers essentially employ them [carriers] to provide a professional service – not a vehicle. The vehicle is only a tool used in delivering the service.
Shippers are very aware that road transport is not their core business and they don’t possess the essential skills and competencies needed to operate road transport as efficiently as professional carriers. So it’s as simple as that!
Some of the essential competencies needed to build a successful client relationship
Remember, anybody can buy a truck – but few have the professional expertise and experience to deliver the greatest service Value at the most economical price. Make this your leading priority – remember you have got to deliver more than just the lowest cpk bid. That’s what we mean by creating a Value-proposition decision.
Value equals function divided by price, which must of necessity, be greater than one. This is straight forward common sense but the trick is to first define the most efficient method to address the function [Showing a strong interest in providing a safe, on-time delivery of your client’s freight], only then can you relate to pricing the best options.
Setting criteria for maximising Value necessitates diligent mining [research] of the shipper’s needs, then turn them into a want in terms of the most efficient service delivery option. This is the precise moment when the transaction moves from a selling to a buying situation. To achieve this, first build a solid relationship, based on trust and integrity, this is where many carriers lose out. Avoid getting into a situation of ‘negotiating the price’. This is a sure sign that you have not moved the customer into making a want decision. In other words, you are making a premature close manoeuvre.
However there is also a third party to consider: this is the shippers’ customer. It could be an internal inter-depot inventory transfer, or delivery of shipper’s freight to a customer but it’s going to cost someone money, so don’t get tricked into quoting before you know all the issues that are likely to affect a “third-party” relationship, long before the first load is delivered. Be careful not to lower the shipper/client delivery standard simply to compromise on the price!
Also remember that shippers don’t buy cpk – they buy a transactional service to move their goods, so always quote the price in relation to the value of the service provided. For example, it makes far greater sense to quote a “price per 1000 bricks delivered” rather than per-ton or simply cpk.
Show the shipper how to reduce the price of moving goods
To address this fundamental selling proposition, we are going to do the numbers on the price per 1 000 bricks delivered. The following is a hypothetical exercise to illustrate how to include the shipper when addressing their road transportation challenges to achieve the most price-effective approach, based on the rationale expounded thus far. This exercise bears no relation to any actual operation, so for obvious reasons, must not be taken as a recommended price.
First, ask yourself what you know about the prospect’s business. This should be done long before pitching. Begin by creating a relationship based on trust as the foundation for mutual benefit – both buyer and seller need to feel they stand to gain from an honest relationship in addressing all the challengers of delivering a positive Value Quotient.
Showing is better than telling
Also bear in mind that the shipper is talking to you as a provider of professional road transport services, upon which the contract will be structured. Don’t take it for granted that the RFQ provides accurate or complete information on which to price the service as it is most likely biased in favour of the prospect.
Start by insisting that, as far as feasible, all data and information is based on researched facts. Avoid assumptions: the most critical of which are those used in measuring time and distance. This is where most mistakes occur in pricing transportation; fundamentally both influence the price. Most estimates address fixed and variable costs and a mark-up. Rightly so, but what is their relationship based upon? Essentially, fixed costs relate to TIME-BASED expenditure, while variable costs relate to DISTANCE-BASED expenditure. It’s the relationship between these two expenditures that is so critical and so frequently ignored!
Another way of viewing it is that fixed expenditure is not recoverable until the “wheels turn”. So the relationship between the time that the wheels turn and are stationary, is an important clue to pricing the service. Logically this means researching the operation to establish when the wheels turn, and are stationary; as this is paramount in reducing the risk of under/over-pricing fixed costs. For instance, it’s one thing to talk about deploying a high-performance truck to gain a few km/h but, what is the overall average speed gain, if detention time or loading and off-loading times are factored into the equation? Furthermore how does an increase in variable cost, due to increasing the average road speed, affect the price?
Let’s begin by fully understanding the operation
Following time spent on gaining the client's confidence and trust, the operation reveals that a six-axle articulated vehicle is the most efficient configuration to accommodate urban delivery of 80 thousand bricks per shift within a radius of 35 km. The target of 20,800 000 bricks a year [Cell B31] is set for the vehicle accommodating a maximum payload of 30 000 kg, comprising 20 pallets at a mass of 1500 kg per pallet.
We begin Table 1 by relating the vehicle configuration and maximum permissible mass, relative to payload capacity in the application as well as the shipper's agreed operating parameters. These parameters will form a base upon which the contract is structured. They will also set criteria for carrier achievement against which both service delivery and financial performance can be closely bench marked and monitored.
The shipper's Value Quotient is price per 1 000 bricks delivered and the carrier's Value Quotient is ROCEBIT.
Note: these parameters must be based on actual researched data gathered from live field tests that substantiate feasibility in achieving the targeted Value Quotients for both shipper and carrier.
We have related this RESEARCHED information to Option 1 and an additional 4 Options to assess the effect of round trip AVERAGE SPEED and ASSET TURN , on (ROCEBIT) and The PRICE per 1000 bricks delivered.
IDENTIFY THE CHALLENGERS
Begin by identifying the challenges in this operation with your customer. Straight away, Cell B53 highlights a major problem due to low urban average speed as well as loading and off loading times. Asset [vehicle] utilisation is only 41,76% resulting in a potential forfeiture of 109 200 km a year. Furthermore, empty back hauls, Cells B35 and C35 show productive ton-km down to only 30,30 %.
Strong dialogue is need with the shipper at this critical stage so both parties are fully aware of the major issues affecting the price/1 000 bricks delivered. For instance, this price is based on a full load of 20 pallets. Obviously the price/1 000 bricks delivered will increase proportionately, relatively to any reduction in the number of pallets loaded AND THIS MUST BE INCLUDED IN THE TERMS AND CONDITIONS OF THE CONTRACT.
Furthermore it is obvious that round trip distances will vary due to the variety of haul distances [longer and shorter] than Cell B49 [75 km] the average on which this proposal is structured, however, it was agreed that it would be near impossible to adjust the price based on each trip distance, for every load delivered. Nevertheless the aggregate distance of 75 km should be accurately monitored and adjusted at quarterly intervals.
Moving to Table 2 [Trip analysis] highlights the dynamics of road transport relative to the operation, as it includes the effect of vehicle on-road time and those of vehicle standing time, loading as well as off-loading time, over which the carrier has no control, yet must bill the shipper. In pricing this operation the carrier must provide the shipper with accurate information over which only the shipper has control.
Here Hub-Time is only 75 minutes per trip i.e. 41,67 % of total trip time, while total vehicle stationary time is 105 minutes, or 58,33 % of total trip time. Cell B68 shows the net effective haulage rate is down to 25 km/h.
In this example the kilometre rate is burdened by the carrier having to bill the shipper with fixed cost for over half [58,33%] the total trip time due to the vehicle being stationary. In other words, at 60 km/h the vehicle could cover 60 x 3 = 180 km, which would then reduce the fixed cost per km by more than half .
With careful analysis of critical input provided by accurate assessment and recording of data, we are now in position to assist the shipper to understand and appreciate the circumstances that create the carrier's Pricing structure.
Accepting that ROCEBIT is the primary Value proposition for the carrier, Table 3 Cells B72 and B73 begin with clearly identifying the average Capital Employed in the ASSET [vehicle] for the financial period. Also, accepting the notion that due to the accepted risk/return criteria, ASSET TURN is set to a minimum of 1,00.
After calculating the Cost of Sales Cell B75 it is deducted from the average Capital employed Cell B72 to arrive at the Target Profit before Interest and Tax of R420 000.00 [Cell B77] or, Profit on Sales of R420 000.00. The Profit on Capital Employed before Interest and Tax (ROCEBIT) [Cell B77] equals Profit on Sales x ASSET TURN = (R420 000.00 x 1,00) or 21,00%. The PRICE quoted is R96.15/1000 bricks delivered.
In setting the required ROCEBIT carriers should realise that, being the last and most important consideration, it is reduced to fund any losses encountered, before shareholders receive dividends.
ADOPTING A NEW APPROACH
We now come to something novel in Table 4 which was mentioned previously. Conventional vehicle costing practices are mostly based on Fixed and Variable cost estimates, where fixed cost includes both vehicle, and an apportionment of establishment cost; to which a markup is added, referred to as "Profit" and presented as a price per km, ton-km or simply per ton delivered. Frequently, carriers fail to distinguish whether they are including profit before or after interest and tax. In some instances Asset Turn, with reference to ROCEBIT, is not considered for inclusion in the reckoning. Disclosure of just how the "negotiated price" is arrived at is never provided, especially to the client.
In some instances associations publish "industry guidelines" based on member's "experience" and some carriers use supplier's OCEs structured on manufacturers' guesstimates, to which margins are negotiated to score business on being the lowest cpk bidder.
As we have pointed out earlier, every customer [shipper] has a unique set of circumstances that determine haulage rates and therefore it is ABSOLUTELY essential to realise that what might well create a fair deal for both shipper and carrier IN ONE OPERATION can rapidly change into conflict and or exploitation by either party.
Coming back to what we presented as a win-win shipper/carrier relationship, we advocated that carriers provide shippers with a highly professional service based on both parties benefiting from playing open cards. In this regard we recommend that carriers should look to offering a unique service from which they derive a margin to adequately service ROCEBIT. In doing so they should offer a unique Value proposition to clients by way of passing on Variable expenditure at COST.
This moves the onus on shippers to have a say in saving money. It also affords shippers the opportunity to structure their deliveries more effectively and so benefit from managing wasted km due to poor routing and scheduling of their fleets.
Reference to Cell B87 shows Variable cost/1 000 bricks is R40.88. This affords shippers an opportunity to apply the information as an indispensable guide to them managing the Variable cost component in the price/1 000 bricks delivered, especially regarding less than the full payload capacity of the vehicle.
SELLING PROFESSIONAL SERVICES
Based on providing 260 shifts/year
Table 5 details the absolute core COMPONENT provided by a Professional Carrier. It's the principal justification for shippers to out source their road transport requirements. This is also where Professional Carriers can differentiate their service expertise, much like the medical surgeons do.
Starting with Cell B92, this is what shippers actually buy; structured around the cost of hiring highly professional road freight SERVICE PROVIDERS. Could any shipper doubt, or even question, paying an average of R368.53/hour for these services?
Furthermore it provides both shipper and carrier with the clear cost of managing all four functions [Cells B94 to B97] , relative to the price, so that they can intervene where necessary by using this information for bench marking purposes.
Moreover, Cell B100 provides a SERVICE CHARGE of R55.28/1 000 bricks delivered, which together with the Variable price, brings the total PRICE to R96.15/1 000 BRICKS DELIVERED WITHIN A RADIUS OF 35 km OR TOTAL TRIP DISTANCE OF 75 km.
It is important to note that this Pricing is based on an annual contract for delivering 20 PALLET LOADS within a a radius of 75 km from the plant, shorter or longer trip distances are therefore accommodated and monitored quarterly, so that the kilometres are maintained within the annual contract distance of 78 000 km.
The effects of the other 4 Options showing the effects of slower average speeds and changes in Capital employed will follow soon.
Tables 6 and 7 provide further information based on the outcome of the above pricing/1 000 bricks delivered