LTL (less truck load) and TL (truckload) Costing Models

LTL (less truck load) and TL (truckload) Costing Models 
Effective transport costing relies on the following fundamental: 
  • Understanding what creates cost in your business. The most important influence on cost in your business are time and equipment utilization.  
  • Having the ability to collect cost information about your business. This information comes primarily from the internal performance measurement process you set up. 
  • Having a costing model 
  • Having the ability to manage the way your customers interact with your operations 
  • Having their freight ready on time so you ar not paying drivers to wait 
  • Having their freight efficiently palletized so that they are not causing poor vehicle utilization. 
  • We need a Zoning structure for our service if you have a wide delivery offer.  
  • We also need to confirm a number of assumptions: 
  • Cube conversion 
  • Change Unit equivalents  
  • To ensure you can always measure the expected yield for a load, you need a common measure. The standard approach is to convert volume into weight based on a conversion ratio. 
  • Ratio a distribution 
Understanding costs for costing purposes is critical to a carrier’s ability to price in order to maximize profits. Costing and pricing can be extremely complex exercises, depending on the amount and complexity of inputs. The purpose of this paper 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 TLS 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 handling rehandling or cross docking 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 from TL, can be used to break out the appropriated costs associated with a move. 
Cost/Service elements 
Within each operational activity, those cost/service elements that will actually be responsible for shipment costs need to be identified. The 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 cost, 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 those 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 costs because they will exist if no activity takes place but will increase 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 delivery and three cost/service elements: time, distance, and support, it is possible to develop a costing methodology that will allow the appropriate cost that a carrier could incur for moving a shipment. 
Truck Load Costing  
This paper will present a simplified TL costing model that can be used to approximate the costs of moving a shipment between two points. This model can be used for calculating head haul costs but does not include an adjustment for a possible empty return trip. However, as will be seen, head haul costs could be adjusted to compensate for variable costs of an empty backhaul.
 Shipment and Equipment Characteristics 
Route and Time of Move 
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. 
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. 
Delivery the delivery activity generates the same type of costs as did the pickup activity, except for billing. Again, the time and distance associated with delivery need to be used in calculating costs. 
Total Cost Adding the costs associated with pickup, line-haul, and delivery generates the total cost for this move. 
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 
 LTL Costing  
This paper 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 shipment 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, interest costs, and fuel costs are the same as those used in the TL costing. 
Shipment and Equipment Characteristics 
Route and Time of Movement 
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 operation. 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 depreciation 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 allocation. 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 replacement can be implemented Line-haul Depreciation and interest for the line-haul equipment are 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.
Delivery the calculations for delivery costs are the same as those used for pickup costs. 
Total Shipment Cost 
Revenue Needs Although prices are quoted in many different forms in the LTL industry, one popular form is in price per cwt. 
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 shipping costs. Thus, the advantage of these costing models is their simplicity and ease of calculation. Their disadvantage is that they use general data, allocations, and averages to determine shipping 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. 
Source: Transportation management Cengage