Benchmarking Your Human Capital

Over the past month, we’ve introduced and reviewed three key metrics for trucking companies to focus their attention on. These three measures work in conjunction with each other, and Jack Porter (Lead Facilitator of TCA’s Best Practice Groups) has coined the term “Golden Ratio” to define them. As a reminder, they are: 1) Gross Margin (measuring your results after subtracting your variable expenses from your top line), 2) Admin overhead as a percentage of the above Gross Margin, and 3) Fixed Overhead as a Percentage of Gross Margin. The target (or Golden Ratio) for a healthy trucking company should be 25% : 25% : 25%. If you do the math, reaching these targets (or getting close) provides a very healthy Operating Ratio, while also ensuring that your capital is deployed in the proper proportion. Obviously, there can be dramatic changes to these measures on a monthly basis (seasonality, economic ebbs and flows, year-end bonuses etc), however, over a rolling six or twelve month period, these targets should be achievable, and if they seem out of reach, it provides a compass for where to focus your operational attention.

For this post, we are going to focus our attention on the second of the two measures – Admin overhead as a percentage of gross margin. To start, to properly measure this value, some standardization needs to be applied to your financials. This is helpful internally for reporting purposes, but also externally when benchmarking your performance against other companies. First, let’s define exactly what we mean by “Admin”. Based on years of iteration and feedback, TCA’s Best Practice Groups have defined admin overhead to include the following roles in a trucking enterprise: 1) Owners, Executives, GM, 2) Sales/Marketing, 3) Operations, 4) Safety/Risk & Orientation, 5) Information Services/Technology & 6) Finance/Administration. Noticeably absent from these categories is Shop Personnel (including Shop management). For benchmarking purposes, we include Shop Wages/Benefits in the Maintenance category (so, as a result, if you are including, this will provide an immediate improvement to your admin overhead calculation).  Once you have identified, and segmented these roles into the above categories, the next step is to begin capturing the Salaries/Wages/Benefits for these roles and categories separately – ideally on your monthly P&L (we provide all inGauge users with a template P&L to use in this regard).

Now that the proper roles and categories are defined for admin overhead, it is useful to start calculating various measures to determine if you are in line with both your historical results – and that of the industry. Here are some metrics which you should be able to calculate very quickly:

    1. Driver to Non-Driver Ratio – this one is the easiest for companies to calculate. Simply take the number of active drivers and compare to the count of active admin personnel (as defined above, not including your Shop personnel). For the average Dryvan operator, this measure should be above 4:1, and closer to 5:1. Depending on the operating mode, size, Average Length of Haul, and other business-specific factors, this measure can vary dramatically. This reinforces the value of benchmarking this metric versus companies of similar operating attributes. As an analogy, you expect to generate specific revenue targets per truck per week/month/year. You should expect the same type of production/leverage from your admin personnel.
    2. Non-Driver Wages & Benefits (% of Net and Gross Revenue) – although your Driver to Non-Driver Ratio may be in line with your industry peers, that doesn’t automatically mean you don’t have a problem on Admin Overhead. The next step is to calculate your Admin Overhead (Salaries/Wages/Benefits) as percentage of Net (excluding FSC) and Gross (including FSC) Revenue. Typically this value should be around 8% (net) and 7.5% (gross) as a percentage of revenue. But again, this will vary based on your operating attributes and size.
    3. Admin Turnover – Although turnover on the admin side isn’t a pressing industry issue, calculating your turnover for admin staff is something that should be measured consistently. Similar to Driver Turnover, there are both hard and soft costs associated with recruiting and retaining a high-performing admin team. If your managers and staff are constantly training new people, you are not going to get the same degree of leverage from these people over time – which means your admin overhead will be higher than average. Maybe it is not necessary to calculate every month, but probably good idea to calculate at least once per quarter depending on your size. Also, focus on the Short Term Turnover (Admin Personnel Departed hired in last twelve months divided by the Admin Personnel hired in last twelve months). If this result is high, you could have more than a financial issue, it could point to a culture issue (which can have dramatic long term consequences).

Now that you have calculated these important measures, you need to consistently track in order to drive improvement. If you are attending this year’s addition of Workforce Builders (June 12-14 in Kansas City, Missouri), we will be running an interactive presentation/workshop on workforce benchmarking. Angela Splinter of TruckingHR will be joining us to provide her valuable insights and Best Practices based on her many years of studying the Trucking Industry’s HR trends and opportunities.

Next week, we will focus on the third key measure: Fixed Overhead – making sure you are properly segmenting your fixed expenses, and ways to improve on the final component of the Golden Ratio.

 

 

Needs and Wants

I heard a phrase the other day, and it set my mind to digging deeper into the thought. The individual I was with was talking about his wife’s shopping addiction. He said that she was a ‘want person’ and not a ‘need person’. Sometime back I actually did some research on the internet on this subject of compulsive shoppers and found that there is actually evidence that suggests that a small amount of endorphins and dopamine is released into the brain when something is obtained or purchased; a feeling of accomplishment that is felt by most of us. Unfortunately, some of us enjoy the feeling so much and it is so short lived that they get hooked on it and become compelled to have the feeling over and over again. It can be very destructive.

Hearing that phrase immediately sent me to a flash back situation. I was at a truck dealership some time ago and while there, I began talking to a driver who was out shopping for a truck. This fellow, just new to the industry as a licensed AZ driver, was determined to become an Owner Operator ASAP. As we chatted, I noticed he was eye balling a year old conventional that was tricked out the wazoo. Beside the beautiful beast was a more conservative aerodynamic truck that was obviously going to be a far cheaper  to operate and had much less ‘bling’.

Having been through the ‘bling’ time of my life when it comes to large cars, I felt compelled to impart my years of wisdom and inform the newbie in no uncertain terms what the best decision would be for him at this point in his career. I went so far as to suggest that the net profit of the more aerodynamic vehicle, with less chrome, would pocket the same net dollars in four years that it would take him to earn in five years in the bling mobile, if he was lucky.

As I have said in the past, I am no sales person. I do not have that skill and I admire those that do. I mention it because this person endured all of the things I could throw at him that were designed to shed light on this decision. I went at him with things like 20% better MPG, ease of maintenance with less bling and less unnecessary repairable gadgets, less capital expenditure, better cash flow and a lighter vehicle that will allow more payload. He looked at me and said: ‘Ya but I have a young son and I’d like to enter into some of the show and shine events with him this summer’. What could I say? I wished him well, that I hoped he would have great success as an Owner Operator and I went on my way. This person knew what they wanted; the fact that it was way more than they needed meant nothing to them.

So what type of person are you: a need or a want person? Let’s look at the famed Psychologist Abraham Maslow’s hierarchy of needs; he designed a five tiered pyramid. You start with food and shelter, then move up to things related to safety and security and then onto belonging, esteem and finally self-actualization.

It is an interesting flow of thoughts here as I overlay this line of thinking onto the current situation of driver turnover. It seems to me that many companies with high turnover struggle to simply supply what a driver of today needs in tier one.

Let’s break it down a little. According to Maslow, the base of his hierarchy pyramid is the need for food and shelter. To me, that means a steady income. With that steady income a driver buys food and shelter for his family. It’s not too complicated, if you don’t give me work or miles, I don’t stay here because you can’t satisfy my basic needs. The next level is safety. Can you provide a safe vehicle for me to drive and a safe work environment for me to work in with lanes, customers, fuel spots terminal etc.? If I don’t feel safe and secure, I’m out of here! Why stay? I have options that won’t put me in harms way, that pays the same as this or better.

If your company does not have the first two driver needs nailed down and nailed down hard, then you are likely a company that has very high turnover. I would guess that it is likely over two hundred percent! You over promise and under deliver, you don’t pay at minimum market rate and your safety record is in question. Also, your trucks are likely being pulled over regularly by DOT because of it.

It is the next few steps that I believe eludes the majority of trucking companies. The next step is Social Needs or Belonging. Does your company make folks feel like they belong to a community? How do you create that sense of community? Do you communicate through newsletters, social media etc. and what do you communicate? Do you try and involve the driver’s family? Do you have functions and opportunities for them to participate in? If you do, I’m going to guess that you feel your turnover is manageable. You feel like this because your turnover rate is at or around the published industry average.

If you’re a company that has mastered the first three steps and are also valuing your people and recognizing them on a regular basis, I’m betting that you’re on the low side of the turnover equation. If you’re past this point and actually assisting your folks to be everything they can be in their careers, lives and relationships, then you’re likely best in class. Your employees and your entire management team have built a company whose strategic advantage in the marketplace is it’s people. Congratulations to you and I’m sure that your dealing with best in class numbers; about 20% and lower would be my guess.

The basic need in driver retention is income and safety; these are the hard things. Transitioning from here to fulfilling the totality of needs, belonging, esteem, and finally self-actualization is where the game is won by best in class companies.

Increase Your Gross Margin by 58% with Only an 8% Increase in Revenue

In last week’s article, we presented a way to segment your financial statistics to provide a clearer picture of your gross margin, the key functions of your success (or under performance), and ultimately your profitability (or lack thereof).

Further, we provided a ratio which will provide a quantitative target to improve your performance. As quick review, we (TCA’s Best Practice Groups) calculate Gross Margin using the following formula:

(Linehaul Revenue no FSC + Accessorials)

MINUS

(Driver Wages & Benefits + Purchased Transportation + Net Fuel Expense + Maintenance + Equipment Financing Expense + Insurance Expense + Variable Driving Expenses)

= GROSS MARGIN

*Each of the above items can contain many things, depending on your operation. If your interested in figuring out which expense and revenue items to include, please email Chris Henry ([email protected]) to get more information on our QuickStart data survey.

Using the above formula, and two separate components of your fixed expenses (Admin or ‘Non-Driver’ Expense, and Fixed Overhead), we have developed the ratio, which we call the Golden Ratio:

The Golden Ratio

25% Gross Margin :

25% Admin as a Percentage of Gross Margin :

25% Fixed Overhead as a Percentage of Gross Margin

If you do the math, reaching these targets equates to a very healthy Operating Ratio (compared to historical industry results), and also provides a great rule of thumb for evaluating existing customers and new opportunities. For this week, and subsequent weeks, we will be focusing on ways to improve on each of the components described above.

For this week, we will be enlightening some readers on a way to increase Gross Margin by 58% with only an 8% growth in Revenue.

To start off, let’s look at the following revenue and variable statistics for a sample load:

BEFORE
1. Rate/Mile                  $1.66
2. Miles                           1,000
3. Loaded Revenue      $1,660
4. Avg. Op Cost/Mile   $1.43
5. Load Cost                   $1,430
6. Gross Profit $            $230
7. Gross Profit %           13.86%
8. Paid Deadhead          $0
9. Total Gross Profit     $230 (13.86%)

Now, the above is a pretty simplistic example of a ‘sample load’, however the purpose of this exercise is to reinforce the power of small changes. These small changes should be within the control of your Fleet Managers, and these valuable people should be incentivized to make (and test) these changes routinely with the loads they are responsible for, and within the confines of the contractual shipper terms.

In keeping with the purpose of this exercise, look how simple it is to grow your Gross Margin by 58%, with only an 8% increase in Revenue:

BEFORE                                                                 CHANGE                                      AFTER
1. Rate/Mile                   $1.66                                +8%                                                $1.79
2. Miles                            1,000                                                                                        1000
3. Loaded Revenue       $1,660                                                                                       $1,790
4. Avg. Op Cost/Mile    $1.43                                                                                         $1.43
5. Load Cost                    $1,430                                                                                      $1,430
6. Gross Profit $             $230                                                                                         $363 (+58%)
7. Gross Profit %             13.86%                                                                                     20.28%
8. Paid Deadhead           $0                                                                                              $50
9. Total Gross Profit      $230 (13.86%)                                                                       $413 (23.07%)

In review, the only differences between the first and second scenarios was: 1) A 8% increase in rate per mile, and 2) $50 of paid deadhead. All other items remained unchanged, your variable operating expense did not change (it’s the same load), but your total Gross Profit improved from 13.86% to 23.07%. On the revenue side, these are just two examples on maximizing revenue per load. There are undoubtedly additional accessorial charges that are typically not tracked or properly applied to many of your loads, which is effectively an opportunity cost you want to eliminate (or greatly reduce).

The above reinforces the value of a quality and detail-oriented Fleet Manager to maximize your revenue per load. From a strategic point of view, taking care of the pennies will result in more dollars flowing to your bottom line.

Next week, we will focus on implementing the proper processes to maximize revenue capture per load. The following week, we will discussing ways to incentivize your Fleet Managers to improve Gross Margin.

The Golden Ratio: Succeeding with Gross Margin

In my previous life as a Truck Dealer, I habitually tracked our Gross Margin on both the Sales as well as the Parts/Service side (it was our lifeblood). Further, through my participation in benchmarking within the Dealer market, it reinforced the value of:

  • Identifying and measuring your fixed and variable expenses relative to each other
  • Always striving to increase Gross Margin (Revenue minus Variable Expenses)

When I entered the trucking industry via my role as Lead Facilitator with TCA’s Best Practice Groups, one of the biggest surprises early on was the number of trucking companies tracking their gross margin (it was almost zero). For many years, I heard many reasons why gross margin had no place in the trucking industry. It’s too complicated! Too difficult to isolate variable expenses! Seasonality!

However, using the aggregated financial data from Best Practice Group members, I was able to isolate the continuously high performing fleets from the rest of pack. When I dove deeper, low and behold, my good friend Gross Margin emerged as one of the key determinants of long term success in a trucking operation. The next step was introducing the concept to those Best Practice Group participants who were unfamiliar with the concept. Over the course of years, we’ve been able to provide a simplified formula for calculating Gross Margin, and as a result a key ratio emerged, which I will talk about down the page.

The first step in any benchmarking program is developing consensus and standardizing the data and metrics. Using this process, we were able to utilize existing data points to arrive at a formula for determining Gross Margin:

(Linehaul Revenue no FSC + Accessorials)

MINUS

(Driver Wages & Benefits + Purchased Transportation + Net Fuel Expense + Maintenance + Equipment Financing Expense + Insurance Expense + Variable Driving Expenses)

= GROSS MARGIN

*Each of the above items can contain many things, depending on your operation. If your interested in figuring out which expense and revenue items to include, please email Chris Henry ([email protected]) to get more information on our QuickStart data survey.

After we were able to calculate Gross Margin for all group members, it was determined (no surprise) that Gross Margin had the highest correlation to profitability than any other metric we were calculating. Further, once we were able to separate Variable versus Fixed expenses for all group members, two further relationships emerged. Those with higher continuous profitability also maintained consistent Admin and Fixed Overhead values relative to their gross margin results. Because of this new information, we have developed something I like to call the Golden Ratio (25/25/25):

The Golden Ratio

25% Gross Margin :

25% Admin as a Percentage of Gross Margin :

25% Fixed Overhead as a Percentage of Gross Margin

We’ll let this concept percolate for a week. Next week, we’ll start talking about ways to hit these targets!

 

 

 

 

 

 

 

 

What to Look for in a Telematics Solution

We have all heard about the ELD mandate that’s coming and we pretty much are certain that this is going to happen. Are you still working with cell phones and trip itinerary sheets? Are you using a basic ELD and are looking to get a little bit more but are not sure where to start? Let’s take a look at a framework to help guide you.

First of all, what do you currently have – nothing, cell phones, a basic logging evict that maybe has some GPS capabilities? Are you currently on a contract? Finally, did you just expense the items or are they still on the books and depreciating each month? These are a few of the items that your Controller or CFO are going to look at as a baseline to see what sort of income statement impact this project is going to have on your organization.

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TCA Annual Convention – Recap #1

You could feel the energy at this year’s annual convention. Most carriers I spoke to (of all operating modes) are optimistic about business conditions for the remainder of 2017. The weight of last year’s challenges appear to have lifted. This was magnified by the buzz created by the strategic direction outlined by TCA President John Lyboldt. (more…)

When Status Quo is ‘Ok’ in Business

It’s not OK! Now that we’ve cleared that up, go watch this video:

When Status Quo is ‘Ok’ in Business

It’s not OK! Now that we’ve cleared that up, watch this video:

Managing People Effectively by Ray Haight

I had an epiphany about 10 years ago when I, along with the other members of the senior executive of the company I was working with, took a training course titled “Management by Responsibility”. This eight-week course opened my eyes to both human behaviour and my own behaviour to the point that it literally changed the way I look at the world. I know that the other managers enjoyed the course but I don’t think any of them were affected to the extent that I was by the material. (more…)

Scorecarding Drivers – Leveraging Your Telemetrics Investment

Many of us have invested in in-cab satellite or cellular based devices that give us critical features like GPS positioning, two-way messaging, act as an EOBR, and possibly provide in-cab scanning and printing. These provide mission critical (or regulatory) functions, but are you taking advantage of the data that many of these devices can give you? (more…)