If you were raised in the United States you likely grew up with the ‘mile’ as a primary unit of measure for distances between locations. Our friends to the north (as well as most of the world) grew up with a similar relationship with the kilometer. But don’t worry, this blog isn’t going to play into the ongoing battle between the empirical and metric systems, our goal is to address some key concepts related to distances in our systems (TMS, etc.), pricing functions, and key performance indicators (KPIs). So for our friends to the North, feel free to mentally replace ‘mile’ with ‘kilometer’ in your minds as these concepts are perfectly transferable.
What is a Mile?
As mentioned above we won’t engage in any debate on which measurement system is the best. But we can certainly mention that the unit conversions needed to get to a mile are a bit fuzzy. But in short, a mile is a unit of distance that equates to 1,760 yards, 5,280 feet, 63,360 inches, or an estimated 33 football fields, approximately 52 Blue Whales, or nearly the length of 150 school busses. However, for transportation service providers, a mile represents much more. Even though it is a measure of distance, a mile represents time, effort, risk, and cost. A mile driven is a mile further from home, it is one less mile you can drive with your fuel reserves, and every mile traveled separates you from one market to another. And in short, a mile represents the level of service and requirements you will have to provide to your customers (which are impacted by many variables). But before we dive down too deeply into this rabbit hole, a mile (or series thereto) also represents the market in which you service.
Optimum Mileage Radius & Primary Service Area
So how do you pick which market you will serve? And the best answer to that is with your company's strategic goals. Within those goals you will answer the question of “what kind of transportation provider will I be?”. Will you focus on regional freight? Will you be willing to hit the highway for long hauls to chase those higher rates? But as you have likely found, the answer to these questions is often anything but simple. Start with ‘you’. Plot pin your company's location on a map as well as the location of any companies you work with. Next, pin the cities in which your equipment is kept, your maintenance facilities, and where your drivers live. And as you evaluate these locations, you will also want to review the specific market opportunities (capacity, rates, key players) of all of these regions. You can do this with subscriptions to lane-level research available through load boards like DAT TruckersEdge for both market and spot freight. Check out the pricing and capacity requirements of these markets. With this information handy and plotted, you have identified your primary service area.
Service Radius Fine Tuning
With this basic footprint of your service area drawn, draw a line between your points of origin and destination. Next, you will want to ‘draw a circle’ around all shipping and consignee points that equate to about 100 miles (you can increase/decrease this number as preferred). There are plenty of tools you can use to do this – or you can simply conceptualize this in your mind (or draw it on a crude sketch). But whatever tool you use, your lines and circles will likely start to look like gym equipment (dumbbells). This initial map sketch represents your primary service area. Any freight (that fits your criteria for cargo value, commodity, etc.) that picks up or delivers within this general geographic spread will fall into your primary service range. You have an existing business here, you have drivers that live here, and you likely have maintenance and service locations to support your business. If you have a problem within your ‘bubbles’, it is reasonably convenient to accommodate, recoup, and repair your equipment.
Service Risk Distance
But what about the areas along your ‘lines’ that don’t fall within your circles? Well, these indeed represent a bit of risk. And if the distance of your line between your ‘safety’ bubbles (or concentration of bubbles) is long, you are operating a bit outside of your primary service area and well into this service risk area. If your truck breaks down in those areas, you are incurring a bit more network risk in your business. This risk threshold (how much risk you want to accommodate) may be acceptable based on the opportunity, so the advice here is certainly not to make you squeamish about taking long hauls, but to make sure you have contingency planned into your process. Along this stretch make sure you have identified a variety of emergency maintenance services as well as safe spaces to lodge or rest. Understand the level of risk that your service area distance represents.
With your risk threshold understood, your service areas and gaps identified, and your service radius’ polished, it is time to start growing within your service area footprint. Create a list of cities, postal codes, states, or other geographic identifiers that you service (you may want to pull these into a simple spreadsheet for future reference). Next, reach out to shippers and receivers that exist in these areas and work to fill those trucks along your routes. In the short term, don’t hesitate to partner with a good dispatcher or broker to get you back home. But begin building your connections and expanding your area of operations using the same guidelines identified. Understand the opportunities and risks of each of your respective markets to take full advantage of your existing service areas.
Routing Software & Mileage
Great! You are well aware of the process for using distance to determine your footprint, identify risks, and maximize the opportunity within your service region. And you are certainly well versed in how to calculate the effort between locations. Your organization has likely invested in some navigation tools specifically for trucks. If you have not, this is our first – and most immediate - suggestion. Make sure whatever GPS routing platform you are using takes into consideration the height and weight limitations of your equipment. If you are simply navigating based on your phone's ‘default’ settings, you may find yourself exceeding the weight limitations of a residential area or snuggly nestled under a low bridge. Neither are areas you want to find yourself. There is so much more we can address in regard to routing tools that we will have a separate article to do just that – our emphasis here is on mileage.
Mileage Authority and Tools
We’ve covered that there are a wide variety of tools that exist in the marketplace to calculate miles. But how we include mileage into the process of ‘actually’ calculating distance and ‘pricing’ is anything but clear. Within the industry, there are a few key mileage calculations that you will need to know. The mileage provided or used by your customer, and the actual mileage you will need to drive for your route. For those carriers that have already taken their fair share of freight, you understand this distinction very well. And you also know that at times there are substantial differences between these numbers. The key point of distinction here is that mileage provided by a customer, or ‘customer miles’ is not always a mile driven.
But before we get defensive and presume that another party is trying to short-change us, just know that this is likely being done systematically and without bias or malicious intent. You may undoubtedly find customers that use ‘true’ miles (the actual mileage driven by the truck) within their pricing, but most in the industry will use routing or mileage applications to calculate the distance driven. And there are significant differences within these platforms based on the settings used (we will get to this shortly).
The first lesson here is to make sure you know the mileage platform the customer is using to calculate their distance, as well as the version and parameters of the software offering. Many in the industry refer to this as either the ‘mileage platform’ or ‘mileage authority’. But in short, these are simply the tools used for detailed and systematic mileage calculations.
One of the most common derivatives of mileage calculations by these tools is the calculation of distances from the original zip code (or postal code) to the destination zip code. These calculations oftentimes rely on a ‘center’ location setting that picks one single spot within the whole postal code as the basis for distance. With some cities spanning several miles in all directions, it is easy to see that ‘actual mileage’ can differ from ‘customer miles’. If your customer is using this methodology, keep track of their miles and your miles for it to be factored into your pricing (we will address that shortly).
Practical Vs Short Miles
Within tools such as PC Miler, there are options for routing that can help you ‘avoid tolls’ and even mechanisms to calculate ‘practical’ miles (which are more indicative of truck routing) and ‘short’ miles (which would be the shortest possible distance travelable by land). These settings are very common and are often times communicated by customers. But if it is unclear, know to ask for these specifics when quoting on long-term contract freight.
There are several other parameters that could be used to impact the mileage driven on your route, including commodity-specific requirements. If you are traveling with a hazardous product, oftentimes there are even more restrictions placed on which roads you can use. In these situations, residential areas may be off-limits. If you are transporting pressure-sensitive products (such as bags of potato chips), you may be advised to take ‘low altitude routing’, which could significantly increase the mileage on your trip. So the lesson here is to pay attention to the terminology used by your customers, and to again calculate and compare the ‘customer miles’ to your ‘actual mileage’.
Mileage, Pricing, and Fuel Surcharges
As a carrier, you know your costs and margin for every lane. We will use a theoretical lane here, as well as theoretical costs.
You are hauling a load shipping from ‘X industries’ to ‘Y receiving facility. The customer mileage on this load provided to you is 300 miles. Upon running your own distances, you find that the actual miles driven for your equipment will actually be 315 miles. This is a pretty significant difference in mileage between your customer's mileage and your own. But you are not concerned about this because you know you will be charging about $900 total for this load. Seems pretty cut and dry, right?
In this situation, your customer has asked you to provide them a rate represented as ‘cost per mile’. In addition, the customer uses an established fuel surcharge program that at the current EIA DOE value is about $.30/mile. As you can see from this story problem, the difference in the customer mileage and your own requires a bit more consideration.
So for these situations, you will need to perform two layers of calculations. Similar to you capturing ‘customer mileage’ and ‘actual mileage’, you will need to break down, calculate, and compare ‘actual fuel’ to ‘customer fuel’. This comparison is pretty simple and you can use your 315 miles and fuel consumption * cost to do so. For the customer miles, you would multiply the 300 by their FSC. In addition to this comparison, you will want to break down your ‘$900’ rate into your cost and margin components separately, as you will need to factor these into your process.
You won’t be able to convince a customer to change their fuel surcharge program nor will you be able to adjust their expectations on mileage. So, the only logical solution here (since you won’t be operating at a loss) is to bake any residual differences between the customer's payment and your expectations into your base rate. The result of this whole process will be a number that is ‘very close’ to your expected $900 rate in total, but you will be calculating the customer FSC in this process.
To put this into comparative numbers, if you simply operated on your expectations for mileage and fuel consumption, you may come up with some numbers that are substantially different from the cost basis requested by the customer.
In this situation and parameters, if you didn’t account for the fuel program compensation difference along with the mileage difference, you could be looking at a significantly different total dollar amount at the end of the calculation. And if you were paying attention to the fuel and simply managed to miss the 15-mile difference, this difference in expectation could be smaller, but it could cause other issues. The other advantage of using a mileage authority in conjunction with advanced routing and transportation management tools is that these tools can ‘pre’ and ‘post’ audit carrier invoices. If you are over/underbilling by smaller amounts, you may inadvertently trigger the customer's system to ‘hold’ payment due to a calculation discrepancy. The last thing you want is to hold up receiving funds.
The underlying message here is to ‘know your miles’ (all of them), and to properly account for and perform the necessary calculations for conversions, cost, and use. In the transportation industry, we hold our ‘miles’ very near and dear to our hearts, so we have to be good stewards of them and know when our miles might not exactly be miles.
It should be clear by now that starting, growing, and accelerating your trucking business takes a definitive plan. If you feel drawn to the idea of starting your own trucking business, and if you feel you have the inner drive to drive, Soshaul can help! Please check out our free and for-purchase resources, templates, and in-depth courses available on our website.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC - Copyright 2023 - does not assume responsibility for any omissions, errors, or ambiguity contained herein. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.