Distinguishing Difference

By Edward Cone  |  Posted 2002-10-10 Print this article Print

The freight company has been tracking every action its workers perform to avoid the potholes that have sidelined its competitors.

Distinguishing Difference

Information technology "is the distinguishing difference in this industry, determining what you can do and can't do," says Cunningham. A strong "technology base is as important—or more important—than the ability to just move the freight."

Arkansas Best Corp., for example, got started decades ago on its own cost-analysis systems. Now, it boasts the best margins in the industry, recording net profits of seven cents on the dollar last year. Meanwhile the market leader in terms of revenue, Yellow, is on the fourth generation of its costing tools.

Roadway needs to do some catching up, at least to Arkansas Best. In 2001, Roadway Corp., the parent company of Roadway Express, had $2.8 billion in revenue. Roadway Express, which accounted for 87% of that revenue, had net margins of 1.2%, less than half the 2.5% industry average. Operating expenses edged up to 97.9% of sales in 2001, from 96.8% in 2000. By comparison, the industry average is 94.5%. And Arkansas Best's ABF Freight unit last year came in at 93.7%.

But even though affected by the economic slowdown, Roadway is getting results from its cost-identification effort. Largely because of it, Roadway Express can make more money shipping fewer goods, if it so chooses.

For instance, Roadway Express shipped 12.6% less freight last year than it did in 2000—a decline of more than one million tons to 7.2 million. That is a level last seen in 1987.

But a third of that drop-off happened by design, says Cunningham. "One-third of the decline we chose, because we didn't desire to do that business," he says. "We knew what it would cost us, and in a competitive pricing environment it didn't make sense for us.''

Better understanding its costs has helped Roadway shift its ratio of fixed cost to variable costs, so that today only 20% of costs are fixed, down from 25% five years ago.

"Roadway is doing as good a job—if not better—than anyone else on the pricing front," says Dan Moore, a securities analyst at Stephens Inc. in Little Rock, Ark. "They have done a superb job of managing through the economic downturn, while in previous downturns they have not."

One of the biggest reasons is the use of activity-based costing, supported by a data warehouse and business intelligence tools. The project started in 1997, after Roadway Express was spun off from holding company Roadway Services. The motivation was tight operating margins and the need for a system of tying actions to costs that both a sales force and terminal managers could understand and trust.

"Today we have real-time access to the information we need," says Cunningham. "The system has contributed to maintaining margins."

Activity-based costing has existed as a discipline since the 1980s. But it has attracted interest recently as a component of efforts both to manage relationships with customers as well as to measure performance. The idea is that you can't determine what it really costs to produce a particular product or serve a particular customer by looking only at the numbers generated for standard financial reports issued by a company as a whole, or even at the more detailed internal reports organized by department. For a company such as Roadway, the key is not to assign costs to the company or a department, but to a package and a particular customer.

"Costing information at the facility level was good for identifying and managing costs, but we needed a better handle on assigning those costs to individual freight transactions," says Cunningham.

This activity-based costing analysis traces activities across departmental boundaries in search of the total cost per product or per customer.

This includes interviewing workers to get a foreman's-eye view of what they actually do. Then, information systems can crunch the data obtained by observing operations closely, such as how much time it takes to load scattered boxes from one manufacturer as opposed to well-packaged pallets. This defines how activities on behalf of individual companies affect the overall work of the company—and how costs differ by an individual customer's requirements.

Thus, the data-collection terminals used by Major at the dock produce time-stamped records, as the goods associated with a particular waybill move through a breakbulk facility. Roadway analyzes this data, along with studies of the time required to perform each activity that must be completed to move a shipment across the nation.

Perhaps the most crucial activities revolve around movement across the dock—unloading a trailer, sorting shipments and loading onto outbound trucks. While Roadway would not disclose the individual costs of each of these activities, its operating expenses as a percentage of sales—now at 97.9%—means it still needs to do a better job. Otherwise, its revenue for each shipment will be eaten up by dock costs, transportation and administrative overhead.

Take the cost difference between freight shipped on skids that can be moved with a forklift, rather than as loose cartons that have to be handled individually. The freight handling-cost difference is typically 25% to 35%, although in extreme cases (say, loose shoe boxes) it could be much more.

The cost of the activity starts with direct labor—the number of dock workers involved and the time it takes them, factored against their salary and benefits. But that's only the beginning. Understanding the true cost of the forklift method means weighing the time savings for using the equipment against overhead costs like depreciation and maintenance. This aspect of figuring the cost of activities guards against false economies, where a savings in one area may be outweighed by an expense elsewhere.

Although Roadway encourages its customers to organize their shipments better when they load a trailer, Obee says many of the computerized logistics systems in use today are primed for reducing the expense of picking products from within a shipper's warehouse—which tends to scramble the order in which they're loaded on a trailer. So Roadway also has worked to identify shippers for which this is an issue and change its procedures for unloading their trailers.

One response: A worker inside a trailer rolls bar-coded cartons down a conveyor belt to a second worker on the dock, who sorts them. While the final cost savings from this procedure only boils down to 1.5% to 2% of revenue on one of those shipments, "in our business, that can mean the difference between being profitable or not," Obee says.

Dock transfer costs for a $200 shipment of many small cartons would be roughly $80 in this example, assuming an average of 2.5 dock transfers. Saving time on the initial unloading at the terminal closest to the origin of that shipment could shave the cost to perhaps $77.

Senior Writer and author of the Know It All blog

Ed Cone has worked as a contributing editor at Wired, a staff writer at Forbes, a senior writer for Ziff Davis with Baseline and Interactive Week, and as a freelancer based in Paris and then North Carolina for a wide variety of magazines and papers including the International Herald Tribune, Texas Monthly, and Playboy. He writes an opinion column in his hometown paper, the Greensboro News & Record, and publishes the semi-popular EdCone.com weblog. He lives in North Carolina with his wife, Lisa, two kids, and a dog.

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