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Thinking Ahead–Letter from Chaille: Transportation & Logistics – Headache or Opportunity?
Regardless of your focus, rising transportation and fuel costs are something that companies cannot avoid. Many pallet and lumber companies are passing along these costs through fuel or transportation surcharges that are tied to national indexes.

By Chaille M. Brindley
Date Posted: 7/1/2007

   Like it or not, transportation and logistics are becoming a more important part of most businesses, especially pallet and lumber companies. While some people see hassles, others envision opportunities.

   Beyond Just-In-Time (JIT) delivery, there are a number of things that smart companies can do to offer value-added services. This includes dispatching, trucking, freight brokering, reverse logistics, warehousing, etc. Transportation and logistics are a crucial piece of all of these activities.

   Regardless of your focus, rising transportation and fuel costs are something that companies cannot avoid. Many pallet and lumber companies are passing along these costs through fuel or transportation surcharges that are tied to national indexes.

   Most surcharges are based on the average retail price of diesel fuel in the region where the load starts. This information is reported every Wednesday at http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp. Subtract the benchmark price you use for figuring a surcharge from the regional average cost per gallon. Benchmarks vary depending on what your local market will bear. I have heard of benchmarks as low as $1.10 to as high as $2.50 per gallon. You might call some other companies in the area to find out what is common in your market. Then calculate your mile per gallon efficiency (miles driven divided by gallons of fuel used). Divide your miles per gallon figure into the increased cost per gallon, which gives you the per mile surcharge. Multiply this per mile surcharge times the total miles driven to calculate what should be passed on to the customer.

   According to the American Trucking Association (ATA), motor carriers consume about 38 billion gallons of diesel fuel each year. For most trucking operations, fuel is the second highest cost after driver wages and can account for up to 25% of total operating expenses.

   Beyond just higher fuel costs, new regulations are going into effect later this year that require trucks to run on ultra-low sulfur diesel. Some critics claim this fuel formulation is less efficient than what trucks currently use.

   Long-term, the market shows no sign of major fuel cost decreases. It is largely a case of supply and demand as well as limited processing capacity in the United States. The situation is only likely to get worse as China and India increase their consumption while oil production peaks in many parts of the globe. 

   Another issue impacting trucking operations is the number of hours a driver is allowed to operate, commonly known as hours of service. Congress issued new, tougher restrictions in 2005. Private groups have challenged the new standards in court, particularly the 11-hour driving limit and the 34-hour restart rule. A decision is expected later this year. The hour of service issue may not be as important for short haul situation, such as most pallet runs. But it certainly affects overall driver availability and trucker morale.

   Maximizing the effectiveness of trips and resources helps companies improve transportation efficiencies. That’s why a good dispatcher can be an overlooked member of your team. Recycling expert Clarence Leising covers the ins and outs of dispatching in his article on page 32.

   There are a number of options when it comes to acquiring a truck fleet. Companies can lease vehicles and trailers or buy them outright. Matthew Harrison reviews the pros and cons of various options and reveals the story of Stewart Pallets and Trucking. This pallet company has successfully expanded into trucking and freight brokering. See the article on page 36.

   Getting a handle on the little costs can make all the difference.  Consider the following cost areas associated with trucking: vehicles, trailers, asset depreciation, insurance, labor, licensing/permits, tolls/taxes, major event maintenance, preventative maintenance, and tires. Little things like excessive idling can quickly mount up.

   Knowing and getting control of your costs are the keys to making a good profit versus losing your shirt. Most companies calculate truck charges based on cost per mile (CPM). To figure your CPM, divide your total costs by the number of miles you run. For example, if you spend $60,000 on trucking-related expenses, and you run 120,000 miles, your cost per mile is 50 cents.

   Typically, one of the biggest components of cost per mile is the truck payment. If a truck payment is $21,600/year, and you run 100,000 miles, your CPM for the truck is 21.6 cents. Then, you have to add all the fixed and variable costs to the equation. This is the hardest part of the process and easiest done if you already have a budget covering all expenses.

   Peterbilt offers a CPM tool on its Web site at http://www.peterbilt.com/index_our_too_cst.asp

   Trucking may sound like a headache that you will want to leave to others. But if the driver shortage gets worse in the future, companies without internal trucking operations will be at the mercy of motor carriers. Having your own fleet allows you to be sure that you will always have trucks when you need them. Plus, you will be able to keep tabs on costs and save money, especially if you are doing any significant volume of business. The ATA forecasts a potential truck driver shortage of 111,000 workers by 2014 if current trends continue.

   No matter what strategy you follow, pallet and lumber companies have to become knowledgeable about transportation and logistics costs. Quick estimates and guess work are a poor way to manage. For many pallet companies, logistics and transportation costs are a key driver to profits and new business opportunities.

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