Strategy, Structure and the Sales Budgeting Process for a Multi Mode Freight Transportation Company
Many transportation companies have gone through some difficult changes in the past few years. These companies now need to communicate a strategy to employees for the future. A structure must also be designed to support this strategy.
In many multi-mode transportation companies, each product/service has had its own separate sales force in the past. The strategy of maintaining separate sales forces for different products has unnecessarily increased sales costs. In-house sales training should be required for all salespeople to teach them how to sell all products, as part of a total transportation package. Salespeople must be trained to determine which service or services are desired by each account to satisfy their needs and instruct the customers in how to request each type of service when completing bills of lading and calling in pick-ups. In this way, misunderstandings about service levels requested can be minimized and sale of all products can be maximized.
The current product-oriented structure of many organizations needs to be changed in order to make more efficient use of the functional managers and sales force of the company. A team structure is needed that will encourage all managers to act as integrators of a single-company strategy throughout the company and in turn bring local (and product) concerns to the attention of upper management. In the past, many transportation companies have had separate business silos pushing independent product lines, to meet standard customer needs. Instead, these companies should have a collaborative sales team operating under a single brand, with customized service offerings to serve individual customer’s needs. A change in company structure may be required to ensure information sharing (and effort) to help drive these cross-product sales. This would give these companies advantages related to economies of scope, as well as a single company contact for the customer.
Employees must identify with the parent company, not with a particular product offering or terminal location. A healthy, single company culture should be encouraged in order to make the changes necessary to successfully implement the company’s strategy. Company parties, picnics and outings should be arranged, so that everyone gets to know and better understand the people with whom they work. A company newsletter should be published (on-line), at least quarterly. This newsletter should be sent to all employees and customers. Company-wide contests and recognition awards should be planned to reward the extraordinary efforts of individual workers and customers throughout the system. Annual Sales and Operations meetings should be held, to encourage a cohesive company culture, reward accomplishments and good ideas and to discuss the company’s strategy and goals.
The budgeting process relies on the sales budget being prepared accurately. Obtaining accurate sales forecasts and receiving employee support for achieving results beyond the established goals, can best be achieved through inclusion of employees in the decision-making process. This should be accomplished with an emphasis on rewards for company-wide results. A company-wide profit-sharing plan encourages profitability and limits unhealthy forms of internal competition between individuals, geographic areas and product lines.
Strategy:
I) The Company must gain competitive advantage through an integrated offering of differentiated, profitable services, selling all services as part of a total transportation package. Each of the products must be clearly defined and each individual shipment must be profitable.
II) In order to support this differentiation strategy, the Company must become a superior customer service company that sells all separate products with one cross-trained sales force.
III) The Company must become a company that communicates well across product lines, functions and terminal locations.
IV) The Company must use the proper control and coordination systems to support this strategy. Control should concentrate on measuring output and coordination on inclusion in the decision-making process, with an emphasis on results and a lack of emphasis on managing behaviors.
Proposed Structure:
I) An Executive Committee composed of the President/CEO, the Vice Presidents, the C.F.O., the Functional Department Managers (Upper-level Operations, I.T., Pricing, Customer Service, etc.,) and the Regional Sales Managers should be formed. Monthly meetings of the executive committee should be held to discuss operational issues (conference calls, or webinars) and annual (third quarter, fiscal year) meetings held to discuss strategy. This team will jointly decide strategy, yearly revenue goals, deal with operational challenges/problems and help to determine the budget.
The Functional Managers, Regional Sales Managers and Terminal Managers should be technically equal positions on the organizational chart. Issues should be discussed openly and considered from all relevant perspectives but the President/C.E.O. has the final say in all matters. Decisions should be reached by consensus whenever possible. The Executive Committee thus acts as a node at the center of the network, to coordinate product, functional and geographic information.
Functional Department Managers should be located at headquarters. Each functional department will be responsible for all services/products. The Functional Department Managers report to the Vice Presidents, with each V.P. handling assigned functional departments. For instance, the Pricing Manager and Customer Service Manager might report to the V.P. of Sales/Marketing, the Line-haul Managers and Claims Manager report to the V.P. of Operations and the Safety Manager and Loss Prevention Manager report to the V.P. of Human Resources. Other departments will be divided between the Vice Presidents. The I.T. Manager should report directly to the President/CEO.
Regional Sales Managers are responsible for training salespeople in the sale of all products. They may work from home offices. They will also be responsible for National Account sales in their areas. There should be no product-specific sales managers at this level in the company. They report directly to the Vice President of Sales/Marketing.
Regional Sales Managers should act as full-time integrators, who coordinate the communication of executive committee strategy across the company and help to ensure a uniform company culture. Regional Sales Managers also bring questions and problems from the salespeople and customers in the region they serve back to the Executive Committee.
Terminal Managers run local operations. They are responsible for their terminal’s profit and loss. This responsibility includes all aspects of local operations and sales, as well as maintaining a pool of local-area, owner-operators, if needed. Terminal Managers report to the V.P. of Operations. The monthly conference calls/webinars should be run by the V.P. of Operations to consult primarily with the Terminal Managers about operational issues, as well as the issues discussed in the two quarterly Executive Committee meetings.
Operations Managers (both dock and dispatch) are responsible for the aspects of each terminal that are assigned to them. They report to Terminal Managers.
Line-haul Managers are located at headquarters and coordinate movement of freight between terminals throughout the network. They are also responsible for coordinating expedited trucking moves (if that service exists). They report to the V.P. of Operations.
Line-haul Dispatchers are located at headquarters. Line-haul Dispatchers report to the Line-Haul Manager.
Customer Service should consist of local Customer Service representatives at each terminal, and a central Customer Service Unit at headquarters. All Customer Service Representatives report to the Customer Service Manager. They must also consult their Terminal Manager regarding operations capabilities before making commitments. Pick-ups and deliveries may be coordinated at the corporate or local level, but must be entered into the central computer as the pick-up is arranged.
Salespeople sell all company products. They may work from home offices. In-house training by the Regional Sales Managers, at each terminal location in the specifics of selling each product, should be thorough and ongoing. Both group training sessions and one-on-one training should be required. Salespeople report to the Regional Sales Managers. However, they must also consult the Terminal Managers regarding operations capabilities and the Pricing Manager for pricing. If disagreements arise, they are arbitrated by the executive committee, or the CEO. There are no single-product salespeople.
The I.T. Manager is located at headquarters and reports directly to the President/CEO. This is the only functional management position that does not report to a vice president, since the I.T. system is equally crucial to all departments and functions of the company. The Information System should include all functional departments in one, integrated computer network.
The Pricing Manager is located at headquarters. All spot quotes (e.g., volume rates), F.A.K. pricing and high discounts/low pricing must be requested through the Pricing Manager’s office. The Pricing Manager reports to the V.P. of Sales and Marketing. The Pricing Manager, in conjunction with the Revenue Accounting department, will periodically review all outstanding pricing to determine if rates are being used and if each account’s shipments are profitable.
An output control system should be employed, where planned annual profit sharing for all full-time salaried employees is based upon the operating ratio for the company. This encourages profitability and limits unhealthy forms of internal competition between individuals, geographic areas and product lines. This planned profit sharing for all full-time employees goes into effect after the operating ratio reaches a certain predetermined threshold. A certain percent of net income is set aside each year for this program.
Establishing Yearly Revenue Goals:
About three months prior to the start of the new fiscal year, the Terminal Managers and Regional Sales Managers meet with the Vice Presidents at the annual meeting, to begin work on establishing rough goals (and the methods to achieve them) for the upcoming year and to discuss the concerns of each terminal unit and sales region. The Regional Sales Managers then discuss individual goals (and the methods to achieve them) with each salesperson. Each individual is considered separately and goals are determined for each, based upon the nature of their individual market situation and the previous fiscal year’s results.
After the annual meeting, the VP’s bring the results to the President/CEO to discuss along with the entire Executive Committee. The Executive Committee then discusses company, product, regional and terminal concerns with the CEO and they jointly establish firm yearly revenue goals (and the methods to achieve them) for the products, terminals, sales regions and the total company. The respective Regional Sales Managers, Terminal Managers and Salespeople meet again at the terminal level after these high-level meetings, for a final chance to discuss their goals in-person with the salespeople and plan how to implement their plans before the beginning of the new fiscal year.
These yearly revenue goals are the basis for the sales budget, which is the basis for the entire master budget. This budget indicates the sales levels, cost levels, and the income and cash flows expected for the next year. The master budget is prepared with the estimates agreed upon in the executive committee. Involving all managers (as well as front-line salespeople) in the sales budgeting process, involves more of the company in the decision-making process than may have been the case in the past. This makes employees feel as if their input is valued. I believe that the estimates and quotas set in this way will be more accurate and more widely accepted than if they were simply established by a few members of upper management. The budgeting process relies on the sales budget being prepared accurately and employee support for achieving results beyond the established goals relies upon inclusion in the decision-making process, with an emphasis on rewards for company-wide results.
Wednesday, August 12, 2009
Monday, August 10, 2009
Pat Ryan's Price Elasticity of Demand Mileage-Based Pricing Method
Pat Ryan’s Mileage-Based Tariff Concept
The price per-mile used as a base for an LTL tariff (or any ground-based transportation) can be determined by using a cost formula that is based on an optimal mark-up on cost. This method not only considers all relevant costs, but also takes into consideration the effect of price sensitivity of demand for a company’s service. Additionally, this price-per-mile will not be constant, but should vary depending upon the length of haul. Longer distances than the average have a lower average cost per mile, as the pick-up and delivery costs are averaged over more miles.
Cost:
The operating cost, per-hundred-pounds, per-mile is the relevant cost to be used to compute the price charged for a carrier’s service (MC). The relevant costs to be included in the calculation of this figure are the differential costs. Differential costs include all variable costs (but not all fixed costs). All fixed costs do not need to be included when not operating at full capacity. In the long-run, all costs must be included in the equation, as increasing capacity requires increasing fixed costs. All costs are differential in the long-run.
Using activity-based costing to analyze the breakdown of an organization’s costs, a company can break down the operating cost-per-mile into its component costs. The component costs (drivers) of the operating cost-per-mile can be identified and measured as a percent of total sales, in order to determine the percentage change in each cost category from year to year. In this way, a company can see which costs are increasing the fastest, whether year-to-year cost increases are due to fixed or variable costs, and whether the costs are within their control. Here is an example of the operating costs that should be included in the analysis:
1. Driver/owner operator, P&D costs
2. Insurance cost
3. Fuel cost (Including price increase cost and fuel efficiency deterioration cost)
4. Fleet maintenance cost
5. Equipment capital cost
6. General operating cost
Some cost increases are addressed through surcharges and accessorial fees by most carriers and so do not need to be included in the calculation of class rates. For instance, one cost that is outside of a company’s control, fuel price fluctuations, has been addressed through fuel surcharges. However, other costs beyond a company’s control, such as the recent fuel efficiency deterioration (caused by new environmental emissions regulations) are costs that cannot be addressed by surcharges or accessorial fees and so must be included in the MC figure used in the optimal mark-up on cost formula. Other costs are at least partially under a company’s control, such as driver costs, insurance, fleet maintenance and equipment capital cost. However, these costs still tend to increase every year (especially labor costs) and so should also be included in the MC figure. Knowing what current costs to include in the MC figure (and the projected cost increases) is essential to creating a profitable tariff when using the optimal mark-up on cost tariff. What costs to include in the MC figure must be left up to each carrier to decide.
The Competitive Factor:
Price elasticity of demand (εp) measures the responsiveness of quantity demanded to a change in price. Own price elasticity of demand measures how much business will be lost to another company within the same mode, with a given price increase. Quantitatively, an estimated price elasticity measures the percentage change in quantity demanded (or supplied) resulting from a 1 percent change in the price, other factors constant. Within each mode, each company will have its “own” price elasticity of demand. “Own Price Elasticities of Demand” average (-.5) for North American Trucking.
The equation below will yield the average price per-hundred-pounds, per-mile that optimizes profit, given the company’s costs and price sensitivity of demand. We can use this average price per-pound, per-mile for the price of the average shipment (average length of haul, freight class and weight), extrapolating from this average optimal price to all other pricing. We will use the NMFC classification system’s relative values to extrapolate from the average price to all weights and freight classes, while using the equation below to supply the average base price per mile used as input for the price per mile of the average shipment.
The equation for computing the profit-maximizing price based upon cost and the firm’s own price-elasticity of demand is:
1
P= MC (1 + 1/єp)
For the purposes of this illustration, we’ll estimate the operating cost, per-hundred-pounds, per-mile to use in the equation below (although this figure is usually known) in order to compute the optimal price that should be charged per hundred pounds, per mile for our average shipment (at average class and average level of discount). I estimate that the operating cost per hundred pounds, per mile is close to 1 cent. However, this figure would not be an estimate if I had the shipment information that already exists in most company’s records. I also estimate the price elasticity of demand for an imaginary company to be -.7 for the purposes of this illustration. The reason for this higher price elasticity of demand might be due to the fact that the carrier has a limited coverage area and/or an extra call has to be made in order for the shipper to use the carrier’s services.
The calculation below is based upon two estimates. Usually, the price elasticity of demand is the only figure that is estimated.
___1___
P= .01 (1 + 1/-.7) = .023 cents, per-hundred-pounds, per mile.
This converts to .23 cents, per mile. So, the average (1,000 pound-class 70?) shipment, moving 750 miles=$172.50. The average shipment handled by any company is easy to determine, using historical records. This price is probably low when compared with a competitor’s rates for the same shipment. The same shipment moving 2,000 miles= $460.00. The rate for the 2,000 mile shipment is probably high when compared to a competitor’s rates.
The reason for this is that a static price-per-mile cannot produce consistently competitive rates over different lengths of haul. Longer distances than the average have lower average cost per mile, as the pick-up and delivery costs on each end are averaged over more miles. Similarly, shorter hauls than the average have higher average cost per mile. Adjustments can be made to reflect this reality, while making sure that the average rate per mile equals the optimum. In this way, you can both retain your profitability on the short-haul freight and price competitiveness on the long-haul shipments. If we gradually adjust the base rate per mile downward by some percentage from the optimal price as mileage increases from the average length of haul and upward as mileage decreases from the average length of haul, we will produce a tariff that works.
The price per-mile used as a base for an LTL tariff (or any ground-based transportation) can be determined by using a cost formula that is based on an optimal mark-up on cost. This method not only considers all relevant costs, but also takes into consideration the effect of price sensitivity of demand for a company’s service. Additionally, this price-per-mile will not be constant, but should vary depending upon the length of haul. Longer distances than the average have a lower average cost per mile, as the pick-up and delivery costs are averaged over more miles.
Cost:
The operating cost, per-hundred-pounds, per-mile is the relevant cost to be used to compute the price charged for a carrier’s service (MC). The relevant costs to be included in the calculation of this figure are the differential costs. Differential costs include all variable costs (but not all fixed costs). All fixed costs do not need to be included when not operating at full capacity. In the long-run, all costs must be included in the equation, as increasing capacity requires increasing fixed costs. All costs are differential in the long-run.
Using activity-based costing to analyze the breakdown of an organization’s costs, a company can break down the operating cost-per-mile into its component costs. The component costs (drivers) of the operating cost-per-mile can be identified and measured as a percent of total sales, in order to determine the percentage change in each cost category from year to year. In this way, a company can see which costs are increasing the fastest, whether year-to-year cost increases are due to fixed or variable costs, and whether the costs are within their control. Here is an example of the operating costs that should be included in the analysis:
1. Driver/owner operator, P&D costs
2. Insurance cost
3. Fuel cost (Including price increase cost and fuel efficiency deterioration cost)
4. Fleet maintenance cost
5. Equipment capital cost
6. General operating cost
Some cost increases are addressed through surcharges and accessorial fees by most carriers and so do not need to be included in the calculation of class rates. For instance, one cost that is outside of a company’s control, fuel price fluctuations, has been addressed through fuel surcharges. However, other costs beyond a company’s control, such as the recent fuel efficiency deterioration (caused by new environmental emissions regulations) are costs that cannot be addressed by surcharges or accessorial fees and so must be included in the MC figure used in the optimal mark-up on cost formula. Other costs are at least partially under a company’s control, such as driver costs, insurance, fleet maintenance and equipment capital cost. However, these costs still tend to increase every year (especially labor costs) and so should also be included in the MC figure. Knowing what current costs to include in the MC figure (and the projected cost increases) is essential to creating a profitable tariff when using the optimal mark-up on cost tariff. What costs to include in the MC figure must be left up to each carrier to decide.
The Competitive Factor:
Price elasticity of demand (εp) measures the responsiveness of quantity demanded to a change in price. Own price elasticity of demand measures how much business will be lost to another company within the same mode, with a given price increase. Quantitatively, an estimated price elasticity measures the percentage change in quantity demanded (or supplied) resulting from a 1 percent change in the price, other factors constant. Within each mode, each company will have its “own” price elasticity of demand. “Own Price Elasticities of Demand” average (-.5) for North American Trucking.
The equation below will yield the average price per-hundred-pounds, per-mile that optimizes profit, given the company’s costs and price sensitivity of demand. We can use this average price per-pound, per-mile for the price of the average shipment (average length of haul, freight class and weight), extrapolating from this average optimal price to all other pricing. We will use the NMFC classification system’s relative values to extrapolate from the average price to all weights and freight classes, while using the equation below to supply the average base price per mile used as input for the price per mile of the average shipment.
The equation for computing the profit-maximizing price based upon cost and the firm’s own price-elasticity of demand is:
1
P= MC (1 + 1/єp)
For the purposes of this illustration, we’ll estimate the operating cost, per-hundred-pounds, per-mile to use in the equation below (although this figure is usually known) in order to compute the optimal price that should be charged per hundred pounds, per mile for our average shipment (at average class and average level of discount). I estimate that the operating cost per hundred pounds, per mile is close to 1 cent. However, this figure would not be an estimate if I had the shipment information that already exists in most company’s records. I also estimate the price elasticity of demand for an imaginary company to be -.7 for the purposes of this illustration. The reason for this higher price elasticity of demand might be due to the fact that the carrier has a limited coverage area and/or an extra call has to be made in order for the shipper to use the carrier’s services.
The calculation below is based upon two estimates. Usually, the price elasticity of demand is the only figure that is estimated.
___1___
P= .01 (1 + 1/-.7) = .023 cents, per-hundred-pounds, per mile.
This converts to .23 cents, per mile. So, the average (1,000 pound-class 70?) shipment, moving 750 miles=$172.50. The average shipment handled by any company is easy to determine, using historical records. This price is probably low when compared with a competitor’s rates for the same shipment. The same shipment moving 2,000 miles= $460.00. The rate for the 2,000 mile shipment is probably high when compared to a competitor’s rates.
The reason for this is that a static price-per-mile cannot produce consistently competitive rates over different lengths of haul. Longer distances than the average have lower average cost per mile, as the pick-up and delivery costs on each end are averaged over more miles. Similarly, shorter hauls than the average have higher average cost per mile. Adjustments can be made to reflect this reality, while making sure that the average rate per mile equals the optimum. In this way, you can both retain your profitability on the short-haul freight and price competitiveness on the long-haul shipments. If we gradually adjust the base rate per mile downward by some percentage from the optimal price as mileage increases from the average length of haul and upward as mileage decreases from the average length of haul, we will produce a tariff that works.
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