Follow the LeaderBy Edward Cone | Posted 2002-10-10 Email Print
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The freight company has been tracking every action its workers perform to avoid the potholes that have sidelined its competitors.
Follow the Leader
In the less-than-truckload business, where labor makes up about two-thirds of total costs, the industry leaders all have adopted some form of activity-based costing. "You could categorize a fair amount of the general processes we use to understand our cost-per-ton, per-shipment, as ABC," says Mike Smid, an executive vice president at Yellow Freight. "Our ability to do well over the last 18 months has a lot to do with our ability to make more costs variable." For example, the Overland Park, Kan., company has manpower planning tools to help forecast workloads and overtime. "The timing of labor in relation to freight flow is the key to optimizing," says Smid.
Arkansas Best declined to be interviewed about its own cost strategies. But its costing model "is 23 years old, and it has been an extremely valuable tool for pricing effectively for new and existing customers," analyst Moore says. "Consolidated, on the other hand, was many years late in developing a costing model and really just started it."
Vendors including SAP and PeopleSoft support ABC analysis as a feature of their enterprise planning suites. Oros, a product created by ABC Technologies, now part of SAS Institute, is the leading stand-alone ABC analysis tool (see "The Few, The Proud," p. 42). But at the partial-load trucking companies, including Roadway, much of the ABC infrastructure is homegrown, leveraging the talents of in-house programmers and database architects.
A key tenet of activity-based costing is that assigning indirect costs is as important as measuring direct costsand that arbitrary allocations produce misleading results. Rather than allocating an administrative function such as human resources to a department based on the headcount, for example, ABC would look at which departments really put the greatest demands on the personnel office. Ultimately, direct and indirect costs are consolidated into an ABC model that goes beyond departmental boundaries to show the cost of delivering a specific product or service to a specific customer.
At Roadway, the key activities are not just "move shipment across dock" and "load shipment on truck," but also indirect ones such as "settle claims for damaged freight." Instead of spreading the cost of freight claims across all shipments, Roadway works to identify which customers and shipment types are associated with the most claims. In fact, since beginning a concerted effort to reduce freight claims in 1998, Roadway has cut the ratio of claims to revenue by 33%a savings worth "tens of millions of dollars" a year, according to Obee.
Not only truckers are boosting margins by understanding the costs associated with specific activities or policies. At Henkel Consumer Adhesives, the makers of Duck Tape brand duct tape, ABC techniques helped managers identify customers that cost more to serve because they placed many small orders. That let Henkel adjust prices for small customers and give discounts on larger orders.
"If you don't know your costs, you're going to push products that are going to lose you money when you think they're making you money," says Raj Aggarwal, a member of Henkel's board of directors.
One of the most important applications of Roadway's ABC data has been in pricing. Since Roadway created an Oracle data warehouse for its costing information in 1997, some of the biggest users have been a few dozen pricing analysts who advise the sales force. In the summer of 2001, those analysts took the most useful of the reports they had created, using the Business Objects data analysis tools, and published them to a broader audience. Now instead of coming to the analysts for the data, sales managers and regional operations managers were able to run the reports themselves.
Opening up the data warehouse coincided with an improvement in revenue per ton at Roadway, in contrast to the performance of its rivals. In every quarter of 2001 and the first half of 2002, Roadway improved the yield from its less-than-truckload operations, while most competitors were struggling to sustain their prices. Roadway's revenue-per-ton was up 4% for 2001, and has continued to gain even as competitors have watched prices slip in the face of the economic pressures. In the first quarter of 2002, for example, Roadway eked out a 1.1% improvement while the change was -0.6% for ABF, -4.5% for Consolidated, and -2.1% for Yellow Freight. In overall dollars, however, Roadway is still chasing ABF, which got $434.60 per ton in the second quarter to $428.11 for Roadway.
The third-quarter results released as this issue was going to press showed Roadway reaching $432.20 per ton, an increase that effectively offset another decrease in LTL tonnage. During the earnings announcement call, CEO Michael W. Wickham said Roadway will benefit from the collapse of Consolidated Freight, but added that whatever business Roadway picks up "has to be priced better than it was at CFotherwise, we'll be in the same boat."
Roadway has rethought the way its business has traditionally worked, says Peter F. Swan, a business logistics professor at Pennsylvania State University. "Cutting prices is historically what people did (in trucking) to get more business, but the real key is not necessarily to get more business," Swan says. "The truth is you're better off passing business up if it's not at the right price."
And that, indirectly, can even drive rivals into the ground. Says Cunningham, "We committed to a decline in business in those instances we felt pricing was way too weak. In some cases where Consolidated was the competitor, we were not reluctant to let the business go. We are not going to take on business that doesn't cover variable cost; it makes no sense."
The data warehouse has taken Roadway's cost-consciousness to new levels, but it goes way back in the company's culture. Founded in 1930 to haul tiresonce Akron's signature industryRoadway focused on operating efficiency under cofounder Galen Roush. The Oracle data warehouse used for activity-based costing followed an earlier effort to model costs on the mainframe database used by Roadway's operational systems. In particular, Roadway focuses its attention on the labor-intensive process of moving freight across its docks, since labor and associated expenses account for about 60% of operating expenses.
Before a trailer is pulled up to a breakbulk dock, managers consult the QuikStrip Trailer-Door Optimizer, an application that analyzes the assortment of shipments on that particular trailer to determine which doors those shipments will be re-sent from.
If an incoming trailer contains a high percentage of shipments bound for, say, New York, it should be parked as close as possible to the outbound trailer to New York. The difference between the best unloading zone and the worst could be an hour or more.
Time is, of course, money, in both labor hours and freight-transit schedules. By sending freight directly to one retail customer's West Coast distribution center instead of to its own nearby terminal, Roadway reduced the ratio of operating expenses to revenue on that account by 15%, saving about $520,000 per year, according to Obee.
The death of Consolidated will provide a near-term boost for Roadway and its fellow survivors. But the big picture is cloudy. The long-haul, less-than-truckload freight business "is in secular decline," says Thom Albrecht, a securities analyst at BB&T Capital Markets.
And unionized carriers like Roadway Express face the greatest challenges. "Consolidated's demise helps the long-haul outlook for a couple of years, but the long-term question remains about what to do with three-day to five-day deliveries,'' says Albrecht. Companies such as Roadway "cannot usually cut their costs fast enough to keep pace with the revenue decline. Innovative (technology) isn't going to save them from erosion in their core services."
Roadway's latest corporate structure, the Roadway Corp. holding company established in 2001, is meant to spur growth as an acquisition vehicle. Last year, Roadway Corp. purchased the parent company of New Penn, which gave it a stake in the faster-growing market for regional less-than-truckload shipments. But the effective management and pricing of the core long-haul business will remain critical for years to come.
At the time of its 1996 spin-off, Roadway's pricing toolsand the underlying understanding of its activitiesstill had far to go. At an offsite meeting, Cunningham, chief executive Michael Wickham, and a senior sales executive made the decision to upgrade the costing and pricing systems. "Our goal was to improve the margins on the freight we were handling," says Cunningham.