THE COSTING OF ROAD TRANSPORT

Road freight transport in Brazil draws attention for billing more than R$ 40 billion and moving 2/3 of the country's total cargo. On the other hand, it stands out for being the scene of several strikes and impasses, almost always with a common reason: the cost of freight.

This is due to the high degree of fragmentation in this sector, which operates with more than 350 self-employed transporters, 12 transport companies and 50 own cargo transporters.

Among the reasons for this dispersion, the relative ease of entry for competitors in the sector, due to low regulation, stands out. This ends up having repercussions on the increase in the offer of road transport services and, thus, competition causes prices to be reduced as much as possible, often reaching values ​​below their cost price.

To allow this comparison between price and cost, this text will deal with some conceptual aspects that involve the definition of fixed and variable costs, and describe a costing methodology. Next, some issues related to the cross-subsidy of costs will be discussed. Finally, possible opportunities for cost reduction will be explored.

FIXED AND VARIABLE COSTS

Before dealing with costing itself, it is important to formalize the concepts of fixed and variable costs, which, although present in our daily lives, are sometimes used incorrectly.

The classification of fixed and variable costs must always be made in relation to some comparison parameter. Normally, in an industrial company, fixed cost items are considered those that are independent of the level of activity and variable cost items are those that increase according to the growth of the activity level.

From a transporter's point of view, this classification is usually made in relation to the distance traveled, as if the variable unit were the mileage. In this way, all costs that occur independently of truck displacement are considered fixed and costs that vary according to the distance traveled are considered variables. It is important to note that this form of classification is not a general rule. In this article, the concept of fixed and variable will always be related to the distance traveled.

It is worth highlighting two important considerations regarding the concept of fixed and variable costs. The first is that this concept only makes sense in short-term analyses, since in the long term capacity can be variable. For example, in the long term, certain assets can be acquired or sold, as well as personnel hired or fired, thus changing the fixed cost structure. It can be said that in the long run all costs are variable.

The second consideration is that a variable cost can become fixed as a given level of service is compromised a priori. For example, if a bus company undertakes to offer a certain frequency of trips, all variable costs (eg fuel) of these trips necessarily become independent of the number of passengers, or of any other variable. Then these costs are considered fixed.

 

COSTING STEPS

The costing process can be divided into 4 steps:

1. definition of cost items;
2. classification of cost items into fixed and variable;
3. calculation of the cost of each item;
4. costing of delivery/collection routes;

1. Definition of cost items

The main road transport cost items are listed below. Later, in the step of calculating cost items, more detailed information will be provided.

• depreciation – from a managerial point of view, depreciation can be thought of as the capital that should be reserved for replacing the asset at the end of its useful life.
• return on capital – concerns the opportunity cost of capital immobilized in the purchase of assets.
• personnel (driver) – both salary and charges and benefits must be considered;
• vehicle insurance;
• IPVA/ mandatory insurance;
• administrative costs;
• fuel;
• tires;
• lubricants;
• maintenance;
• Toll.

It is important to note that return on capital – which is an opportunity cost – and depreciation must be considered as independent items.

If the company has a complementary transport operation, such as an escort, or specific equipment in the vehicle, such as a refrigerator, other cost items must be added to the model to ensure its cost effectiveness.

2. Classification of cost items into fixed and variable

This classification between fixed and variable, as already mentioned, will be done in relation to the distance traveled. Thus, all costs that vary according to mileage will be considered variable, while the others will be considered fixed.

Fixed cost items are: depreciation; return on capital; staff (driver); administrative costs; vehicle insurance; IPVA / compulsory insurance.

Variable cost items are considered: tires; fuel; lubricants; washing; lubrication, maintenance and toll. The toll should not be allocated according to mileage like the others, but should be considered according to each route, since the toll value is normally not proportional to the size of the route. For example, on a trip from Niterói (RJ) to Fortaleza (CE) almost 4.000 km are traveled without any tolls, while on a trip from São Paulo to Igarapara, near the border with Minas, the truck driver pays 8 tolls in a journey of less than 800 km.

It is worth remembering that this classification between fixed and variable depends both on the company's operation, as well as on the way some bills are paid. In Brazil, the driver receives a monthly salary, so this cost item is classified as fixed. In the American literature, however, driver remuneration is considered as a variable cost item, since in the USA it is customary for drivers to be remunerated according to mileage.

3. Calculation of the cost of each item

To pay for delivery or collection routes, it is interesting to calculate the unit cost items for each type of vehicle used. Thus, if the company works with a fleet composed of trailers with a capacity to transport 28 tons and trucks with a capacity of 12 tons, a common worksheet must be created, where the fixed and variable unit costs of the trailers and trucks will be calculated according to of the respective parameters (i.e. fuel consumption, number of tyres, driver salary, etc.). As all items, except administrative and maintenance costs, are direct in relation to the vehicle, this calculation becomes relatively simple and is not very subject to the subjectivity of apportionments.

As fixed costs are constant from month to month - except for price and/or wage variations -, they are calculated in relation to the month (BRL/month).

Variable costs, on the other hand, since they depend on the distance, must be calculated according to the mileage (R$/Km).

The calculations of fixed cost items are explained below, whose formulas can be seen in table 1 and the results in table 1.

The depreciation value will be equal to the difference between the acquisition value and the residual value of the vehicle, divided by its useful life (in months) in the company. The acquisition value should consider expenses with licensing fees and vehicle freight, while the residual value represents its future sale price, net of taxes. It is worth mentioning that this depreciation should not be the same as the accounting one, since under the accounting system the vehicle is fully depreciated in 5 years, a time incompatible with the operational reality. When a cart is made up of a horse and a trunk, the trunk can be included in the horse's depreciation account, as well as creating another cost item for its depreciation.

Return on capital is not an expense, but an opportunity cost. That is, by immobilizing capital in the purchase of an asset, such as a truck, the company is giving up investing that capital in a project or in the financial market, which would certainly bring income. To calculate this cost item, just multiply the purchase price of the vehicle by the company's monthly opportunity rate (it doesn't matter if part of it has already been depreciated). The opportunity rate represents the company's return on capital, which normally varies between 12% and 20% pa and must be calculated on a monthly basis, since the objective is to calculate this monthly cost.

The cost of personnel must consider the cost of salary, overtime, charges and benefits. In the case of using the truck in more than one shift, the expenses related to the other drivers must be taken into account.

IPVA / compulsory insurance and vehicle insurance are annual expenses, which must be divided by 12 when considered.

Administrative costs deserve special care, as they are indirect costs in relation to the vehicle, and therefore will need to be apportioned. Thus, the company must apply the apportionment criterion that seems fairer. The simplest thing to do is to divide the monthly administrative cost by the number of vehicles, which for the vast majority of situations is a fairly fair formula. It is important to be careful when using the information on this cost item to support certain decisions, as the fact that it is apportioned by vehicle does not guarantee that it will be eliminated, or even reduced, if the size of the fleet is reduced. Before explaining the variable cost calculations, whose formulas and results can also be found in Table 1 and Table 1, it is worth remembering that these items must be calculated in the R$/Km unit.

The cost of fuel is the classic example of a variable item. To calculate it, simply divide the price per liter (R$/l) of fuel by the vehicle's performance (km/l). Note that the lower the consumption, the lower the cost of fuel per kilometer driven.

The cost of tires is calculated as if it were a depreciation per kilometer instead of time. Just divide the price of a set of tires (unit price of the tire times the number of tires on the vehicle) by the useful life in kilometers of the tires. To consider the retreading, the price of their respective retreadings must be added to the price of each tire, multiplying the result by the number of tires, and then dividing it by the useful life of the tires considering the retreadings.

The maintenance cost can be considered in two ways. The simplest one is based on its standard cost, in R$/Km. Another possibility is to create a cost center and calculate the average maintenance cost per kilometer.

The cost for oil is calculated in a similar way to tires. The price of one liter of lubricant must be multiplied by the capacity of the reservoir and divided by the interval between oil changes.

4. Costing of delivery/collection routes

Once the unit values ​​of all cost items have been calculated, it is enough to group them (R$/month) and divide the result by the utilization (number of hours worked per month) to arrive at the fixed cost per hour (R$/hour ). Variable costs must also be grouped (BRL/Km). Thus, the cost equation for a route can be set up:

The time to consider is the total route time considering the loading and unloading activities, with their respective queues, in addition to the travel time.

The route cost formula can be broken down to cost routes according to three basic activities: loading, travel and unloading.

Note that the loading and unloading costs are independent of the distance traveled, while the travel cost is directly proportional to the size of the route, since when the distance traveled increases, travel time increases in addition to mileage.

FACTORS THAT INFLUENCE THE COST AND PRICE OF TRANSPORTATION

Between weight and cubage, choose the one that limits the capacity of the vehicle. For example, weight in the case of transporting steel, or cubage in the case of transporting tires. In addition to these and the distance, which are the most remembered factors, the following can be highlighted:

• The ease of handling the product – represents the ease of loading and unloading the vehicle. One way found to speed up loading and unloading is palletizing, which significantly reduces loading and unloading times.
• Ease of accommodation – pieces with very irregular shapes or with a large extension often impair the use of space in the vehicle, making it difficult to consolidate and fully use it.
• Cargo risk – flammable, toxic or even targeted theft products are risk factors that influence freight costs.
• Seasonality – effects such as the grain harvest significantly affect the demand for freight, making freight prices during this period higher than those during the off-season.
• Traffic – deliveries in large urban centers with traffic and time windows for loading and unloading also influence the cost and respectively the price of transport.
• Return cargo – the non-existence of return freight means that the carrier has to consider the return cost to compose the freight price.
• Specificity of the transport vehicle – the more specific the vehicle is, the less flexibility the carrier has, so refrigerated trucks or tank trucks end up having a higher freight price than a bulk cargo vehicle.

COMPARISON BETWEEN CALCULATED COSTS AND PRACTICE PRICES

When comparing the cost, calculated by the costing methodology, with the prices practiced by the market for closed loads, of large volume and low added value, it is noticed that the practiced price is systematically lower than the cost. This situation would even be acceptable if there was idle capacity, the price covered at least marginal costs (that is, variable costs) and if this were a short-term policy. However, it has been noticed that this situation has been dragging on for some years.

Thus, to make the operation viable in this market, with prices below cost, the carriers subcontract the service of self-employed drivers, the aggregates. These, in turn, work only covering the most immediate variable costs, without realizing that one day they will have to replace the vehicle and that they should still be remunerated for their investment. The result of this is a fleet with an average age of over 15 years and often traveling without conditions of use.

In the fractional freight market, where lower volume loads are handled, with higher added value and fragmented delivery, the situation is a little different. The relationship between price and cost depends on the carrier's load consolidation capacity. The scale of the operation makes it possible to cover all costs and still generate a satisfactory margin, on the other hand, the lack of scale compromises cargo consolidation, compromising the profitability of the operation. To guarantee this scale, the focus of transporters on specific regions has been fundamental. In addition to scale, the success of this sector depends above all on the planning and coordination of the operation.

CROSS SUBSIDIES WHEN BILLING CUSTOMERS' ACCOUNTS

In the event that the freight price is included in the value of the good, costing must be carried out to verify whether the margin generated by each customer really supports their delivery costs. To get around cases of unprofitable deliveries, supplier companies can establish minimum delivery batches differentiated by region and/or change the delivery frequency for certain customers, as well as establish days of the week for deliveries in certain regions in order to consolidate cargo.

In the case where the supplier charges its customers for freight for part of the value of the goods, it is essential that there is no cross-subsidy between them, that is, that certain customers are not benefited to the detriment of others. When comparing the costs resulting from the cost of delivery routes with the freight prices charged by suppliers, two types of subsidies stand out.

The first is related to the distance from the destination square, which occurs when loading and unloading times and costs are not properly considered. For example, if for a load of 25 tons, a price of R$ 2,50/Km was charged for any length of route, in a route of 50 Km, the freight value would be R$ 125,00 while the cost would be approximately R$ 180,00; whereas, for a route of 2.000 km, the freight cost would be R$5.000,00 while the cost of this route, even considering the return, would be less than R$3.600,00. Thus, customers close to the supplier would benefit to the detriment of customers further away. This distortion occurs because loading and unloading costs are dependent on the route distance, since they only depend on loading and unloading times. Thus, on short routes the influence of these costs is proportionally greater than on long routes.

The second subsidy is based on volume, when economies of scale are not considered. In this case, prices per ton are not differentiated according to the capacity of the truck, nor are closed loads privileged.

In the long term, customers who are harmed by the subsidy end up taking on the responsibility for freight, realizing that they can perform this service at a lower cost. On the other hand, customers who receive the subsidy tend to continue leaving the responsibility to the supplier, who will end up bearing the difference between cost and price.

COST REDUCTION OPPORTUNITIES

The focal point for reducing the cost of freight should be the level of fleet utilization, that is, running as much as possible with each truck loaded in order to have a smaller number of trucks without jeopardizing the level of service. This significantly reduces fixed costs, which usually correspond to around 50% of the total costs of a vehicle. Below are some actions aimed at increasing fleet utilization

• improve transportation planning – know in advance the total amount of cargo to be shipped to each plaza;
• schedule departures and arrivals – to reduce the queue time, which in most cases is longer than the loading and unloading time itself, due to the concentration of vehicles at certain times of the day;
• decrease the variability of shipped volume – shipments concentrated at the end of the month, or on certain days of the week, generate queues for loading and unloading on peak days and idleness on low days;
• increase fleet utilization – when going from one to two work shifts, transportation costs are reduced by around 15%, while when going to three shifts they are reduced by up to 20%.

 

CONCLUSION

The use of an appropriate methodology for costing freight can contribute greatly to the formation of fair prices, together with the carrier. From the customer's point of view, this type of tool can be used not only to calculate the freight price, but also to help analyze customer profitability and define the level of service. In addition, the development of a simple costing tool can enable a series of analyzes and help identify cost reduction opportunities.

Finally, it is worth remembering that the cost of transportation cannot be seen as being borne by one of the companies in the supply chain. Since its correct management will leverage the offer of products in increasingly distant markets and this is the fundamental objective of cargo transportation.

 

BIBLIOGRAPHY

Coyle, JJ; Bardi, EJ; Novack, RA. Transportation. St. Paul, MN: West Publishing Company, 1994.

Fleury, PF; WANKE, P; FIGGUEIREDO, Kleber; Business Logistics the Brazilian Perspective. São Paulo, Atlas, 2000.