Understanding Container Drayage PDF
Understanding Container Drayage PDF
Understanding Container Drayage PDF
OWNER-
OPERATORS
Understanding
Container Drayage
Owner-Operators in
Metro Vancouver
SUMMARY REPORT
Acknowledgements
The Asia Pacific Gateway Skills Table (APGST) would like to thank the many
individuals and organizations who generously gave their time and advice
throughout this project:
The opinions and interpretations in this publication are those of the author and
do not necessarily reflect those of the Government of Canada.
SUMMARY REPORT
Chapter 1 Introduction 6
1.1 Purpose of Project 6
Project Outputs 6
1.2 Methodology 7
INTRODUCTION
1.1 PURPOSE OF THE PROJECT In 2007, Port Metro Vancouver (PMV) instituted a
— moratorium on owner-operators to prevent an over-
As part of the Asia Pacific Gateway Skills Table’s supply of operators that could destabilize the market.
mandate to ensure that Canada’s Pacific Gateway has While this report notes there are low cost barriers for
enough people with the right skills and training to meet owner-operators to enter into the drayage market,
its labour needs, the organization sponsored a project to as long as the moratorium remains in place, it acts
help the 950 owner-operators in the container drayage as a regulatory barrier. This report outlines some of the
industry in Metro Vancouver understand and manage issues and challenges associated with the entry of new
their businesses more effectively. The project was owner-operators into the market and in anticipation that
carried out in partnership with the BC Trucking these challenges will be acknowledged and addressed
Association (BCTA). by policymakers, shippers and other stakeholders before
the moratorium is lifted.
The project objectives were to:
» Develop a better understanding of the local container Project Outputs
drayage business as well as a drayage cost model;
Owner-Operator Toolkit
» Conduct research and interviews with successful
Provides a business resource for drayage operators:
trucking companies and owner-operators to identify
and compile best business practices that could be shared J Overview of the drayage business
with other owner-operators to improve the sector’s
J Getting and operating my vehicle
performance.
J Managing my business and money
The project had two main outputs. One is a toolkit
(separately published) that will provide the basis for Project Report
an online resource for potential and existing owner- Provides a profile of the owner-operator business for
operators to help them better understand and manage trucking companies, governments, industry associations:
their businesses. The second is this report, which J Understanding the drayage owner-operator business
profiles the Metro Vancouver container drayage operating
J Financial aspects of the owner-operator business
environment, including its role in the supply chain, the
nature of an owner-operator businesses, its financial J Best practice findings and recommendations
and cost structures, and industry best business practices.
This information may be used to inform policy decisions,
support education and awareness campaigns, and support
human resource initiatives in the sector.
CHAPTER 1 7
METRO VANCOUVER
DRAYAGE OPERATING ENVIRONMENT
2.1 GATEWAY SUPPLY CHAIN CONTEXT
—
In 2012, Port Metro Vancouver handled 2.7 million 20-foot equivalent units (TEU) of import and export containers shipped
to and from a wide range of domestic and international locations. Approximately 32% of all loaded import containers
arriving at the port are transported by truck to locations in the Lower Mainland and beyond. Some 63% of all loaded
export containers arrive at the container (marine) terminals by truck. The remainder of container traffic is moved to/from
the container terminals by rail. It is estimated that there are about two million truck-trip legs required to handle this volume
of container traffic moving through the gateway.1
The various supply chain participants—importers, exporters, shipping lines, container terminals, drayage companies, off-dock
terminals and other participants, such as freight forwarders—must operate in a highly coordinated manner to meet customer
requirements for efficient door-to-door transportation (see Exhibit 1). The actions of any single supply chain participant may
have significant system-wide effects that impact the efficiency, performance and reputation of the entire gateway.
Principal Assets Cargo owners 8,500 TEU ships typical TSI: Vanterm, Deltaport A fleet of 1,050 company Distribution / transload /
(entity that pays the DP World: Centerm trucks and thousands reload centres, container
transport cost) FSD: Fraser Surrey Docks of chassis storage yards
Business Drivers Each supply chain partner seeks to maximize their own return on investment (ROI). The key business drivers are:
Reliable, cost-effective Market share; Highest possible revenue Revenue trips per shift, Highest possible revenue
end-to-end supply chain environmental stewardship generating throughput revenue per move generating throughput
performance
1) This volume of traffic requires about 800,000 truck gate moves. Based on US research, a gate move typically requires an average of 2.5 truck-trip legs due to the need
for some tractor-only moves associated with container repositioning, resulting in approximately two million truck-trip legs in the region (i.e., 800,000 x 2.5).
CHAPTER 2 9
The export process is driven by the cargo owner (shipper), who acquires a booking number with the shipping line that
serves as a reservation for an outbound container on a specific voyage. The booking triggers several activities, including
the ordering of an empty container by a transload facility, the establishment of a delivery date to the terminal, and an
appointment by the drayage carrier with the container terminal operator to drop off the container.
Manifest
DRAYAGE
Drop off
FIRM
Terminal
TERMINAL
Source:
CONSIGNEE
Drop off
FIRM
2) The manifest is the list of import containers on the inbound ship. It identifies which parties to notify when the container is unloaded and ready to be picked up.
10 CHAPTER 2
Key Requirements to Access PMV issues two different types of licenses under the TLS:
PMV Container Terminals » Full Service Operator (FSO) Licenses These are intended
Three main requirements must be satisfied for drayage
for drayage companies that have direct relationships
companies to access the marine terminals within PMV’s
with cargo interests (shippers, consignees, shipping
jurisdiction: they must have a valid truck license issued
companies and agents), provide a complete dispatching
by PMV; they need a Port Pass as a security measure to
service, and are equipped to provide services in an
access federal port property; and they need a reservation
efficient and ongoing manner.
to pick up/deliver containers, obtained through the
There are two types of FSO licenses:
reservation systems administered by each marine terminal.
Ì Local: A local license allows a truck to pick up and
Each of these requirements is discussed below.
deliver both local and long-haul containers;
Ì Long-Haul: A highway license restricts a truck to
Truck Licensing System
picking up and delivering long-haul movements.
In order for a truck to access a container terminal, it must
be registered under the Truck Licensing System (TLS) » Independent Owner-Operator Permits These are meant
administered by PMV. The TLS was introduced in 2005 to for drayage entities that may be incorporated companies
manage the number of vehicles and drivers. It was later and do not have a significant pool of equipment or access
amended to impose safety and environmental standards to the reservation systems. Owner-operators can only
regarding the condition and age of vehicles serving the access port property through a subcontract with an FSO.
port. The TLS also gives PMV a mechanism to impose
sanctions on operators whose behavior does not meet There has been a moratorium on owner-operator permits
the port’s standards or service requirements.3 since early 2007.4 The purpose of the moratorium was to
prevent an oversupply of owner-operators from destabilizing
the market. At the same time, it allowed drayage companies
that wanted to expand their fleets to invest in company-
owned equipment and employee drivers, since this business
model was deemed to be more stable than the owner-
operator model. One of the unintended consequences of
the moratorium has been the proliferation of small drayage
companies that could be formed with as few as three trucks,
further fragmenting the market and resulting in extreme
competition that puts pressure on profitability in the sector.
4) In 2009, the moratorium was expanded to include all local and long-haul
license and permit holders and to preclude fleet expansions by existing
3) It should also be noted that trucking company safety oversight responsibilities, licensees. In 2011, the moratorium on the issuance of new licenses and the
such as vehicle maintenance and driver hours of service, are governed by the restriction on fleet expansion were lifted for FSOs only to allow them some
National Safety Code, which falls under provincial government responsibility. flexibility to respond to changing market conditions.
CHAPTER 2 11
drivers will operate within the Port under a Joint Temporary must make a reservation using one of four different
Permit ("JTP") signed by and issued jointly to the hiring TLS reservation systems (one for each of the four different
approved local FSO License holder and a non-TLS approved marine terminals). Reservations are intended to make
owner-operator. terminal operations more efficient by limiting the arrival
of each truck at a terminal gate to a specific time window
Port Passes to reduce “peaking” and truck traffic congestion. In addition
All workers such as truck drivers requiring regular to reducing peaking of traffic during normal daytime
and frequent access to PMV property must have port- operations, the appointment system has been used to
authorized photo identification called a Port Pass5. Failure shift traffic to night or to off-peak gates by restricting
to have a valid Port Pass may result in being refused access the number of daytime reservations available.
to the port. The Port Pass is a means for PMV, through its
marine facility operators, to comply with Transport Canada The appointment system makes the coordination of
security regulations that require identification of all drayage operations somewhat more complex by requiring
individuals on port property. more precise scheduling of truck trips to accommodate
the appointment windows at the terminal gates. There are
Reservation System also reported difficulties in obtaining reservations because
The marine container terminals in Vancouver have had the truck gates of three of the four container terminals are
mandatory appointment systems since 2005. In order to at capacity during the day shift. Firms that do not comply
access a container terminal by truck, drayage companies with their reservations risk reducing their ability to obtain
reservations in future and are subject to penalties issues by
5) BCTA is authorized by PMV to issue port passes to drivers of vehicles over
the marine container terminals, which would effectively
5,000 kilograms and the employees of its member companies. curtail their business opportunities.
12 CHAPTER 2
Examples: Prudential, Indian River, Quantum Examples: KTL, which owns Euro Asia terminal; Examples: Damco (owned by A.P. Moller-Maersk);
Transportation Harbour Link, with an off-dock yard; LEI Cartage CNTL (owned by CN); Canaan Group (integrated
(warehousing); Aheer (large regional truckload carrier logistics, warehousing, customs brokerage,
in the Pacific Northwest, warehousing and storage, air freight and courier service)
brokerage)
6) Source: PMV, as of October 2012. These figures exclude companies registered under the TLS as long-haul carriers, which would bring the total number of companies to
more than 200. Long-haul carriers do not play a large role in local drayage operations.
CHAPTER 2 13
Low entry barriers7 The cost to enter the drayage business as an owner-operator is Peaking of traffic at container terminals may create an incentive
relatively low and can result in a high rate of entry of operators for expansion of owner-operator fleets employed by trucking
into the business. However, there is some evidence that entry companies. This can result in a supply-demand imbalance,
barriers are growing with the increasing cost of obtaining a contributing to instability in the sector.
reliable truck and the implementation of more stringent
standards under the National Safety Code (NSC).
Limited capacity for investment At the owner-operator level, there are limited opportunities Owner–operators have a limited financial capacity or incentive
for scale efficiencies and service improvements. to make investments in technology. This makes the selection,
funding and adoption of technology more difficult to roll out
across the industry even though technology is likely to be a key
factor in improving efficiency and performance.
7) In 2007, Port Metro Vancouver (PMV) instituted a moratorium on owner-operators to prevent an oversupply of operators that could destabilize the market.
While this report notes there are low cost barriers for owner-operators to enter into the drayage market, as long as the moratorium remains in place, it acts as
a regulatory barrier.
14 CHAPTER 3
UNDERSTANDING THE
OWNER-OPERATOR BUSINESS
3.1 WHO ARE DRAYAGE 3.2 KEY BUSINESS ACTIVITIES
OWNER-OPERATORS? —
— The owner-operator business is fairly straightforward.
There are generally two types of truck drivers in the The direct customer of an owner-operator is the trucking
container drayage industry: company drivers and owner- company; the principal activities are indicated in Exhibit 5.
operators. Company drivers are employees of drayage The main truck-trip legs for an owner-operator are outlined
companies and may be union or non-union workers. below. Not all of these moves are necessary for each job. It
Industry observers estimate that approximately 70% or more depends on the nature of the job and the owner-operator’s
of all company drivers are non-unionized.8 Owner-operators activities before and after the job. The owner-operator
act as independent contractors selling their services to generally does not offer other services.
drayage companies as drivers and tractor owners.
Truck trip leg possibilities:
The main difference between company drivers and owner- » To the point of empty chassis pick-up. This is a bobtail
operators is that company drivers are usually paid by move (i.e., no chassis or container attached to the truck)
the hour, as employees do not provide tractors. Owner- from the day’s starting point or the end of the last trip
operators, on the other hand, are normally paid by the to a point at which the owner-operator picks up an empty
trip based on a share of revenue received by the drayage chassis but no container. Such a move would not apply
company from its customers and on existing regulated or if the truck already has the right chassis attached to it at
contractually agreed rates. They are small business people the start of the trip or if the truck has no chassis attached
who take risks like any other small business owners. These because it is picking up a container already on a chassis
risks include the acquisition of the truck and the opportunity at the terminal of origin.
cost of their time working in an environment where there is
» To the terminal of origin to pick up a container.
little control over the business in terms of loads hauled and
This could be a bobtail move to pick up a chassis holding
revenues earned.9 Owner-operators may also be restricted
a container (as noted above) or a move with an empty
in their ability to expand due to limited financial resources.
chassis onto which a container will be loaded at the
terminal.
The terms and conditions for owner-operators vary. Some
» From the pick-up terminal to the delivery terminal.
may work under the regulated rates or achieve only lower
This is the main and often the only paid component of
unregulated rates between off-dock terminals.10 Others
the move. The move may be between a container terminal
may have superior compensation packages that include fuel
and an off-dock terminal (customer) or between two
subsidies, paid waiting time at terminals, or remuneration
off-dock terminals. It could also be between two
for deadhead moves (i.e., a bare-chassis move to pick up a
container terminals, but this would be unusual.
container).
8) There is no available data, however interviews with a small sample of unionized drivers indicated that Canadian Auto Workers (CAW) representation in the drayage
sector is likely less than 300, and that the number of unionized workers in the industry has been declining since 2005.
9) See also Section 3.7 for additional details regarding the impacts of various supply chain participants on an owner-operator’s business.
10) See Chapter 4 for discussion of regulated rates.
CHAPTER 3 15
Loaded import marine containers holding primarily consumer goods from Asia are
moved from container terminals to off-dock warehouses and distribution centres,
A: Equipment
where they are unloaded for local distribution or transloaded into larger domestic The only essential equipment required for an owner-
containers for movement by truck or rail to locations outside Metro Vancouver.
operator is a 10-wheel tractor of appropriate vintage
EXPORT MOVES to meet PMV’s requirements for accessing container
Loaded export containers holding mainly forest and grain products are moved
terminals. For the typical owner-operator, a reliable used
from transload centres and other shipper facilities to container terminals. truck in the Vancouver market costs about $50,000 to
EMPTY CONTAINER MOVES
$60,000. Less expensive trucks are available, but would
require some knowledge about vehicles or the right
Empty containers account for a significant level of activity in order to reposition
containers between empty container storage yards, container terminals and the contacts outside of British Columbia to acquire. PMV has
large number of off-dock terminals located throughout Metro Vancouver. specified conditions and age limits on trucks allowed to
become part of the TLS.11
Engine retrofits or replacements can be used to meet » Take and pass the commercial road test.
emission standards regarding age exemptions. The PMV The test has three parts:
requirements for future years are evolving. By 2017, trucks Ì A pre-trip inspection test, including an air brake
must be 2010 and newer to meet TLS requirements, or 2007 pre-inspection;
or newer and already in the TLS. PMV’s goal beyond 2012 Ì The road test itself;
is to have all trucks in the TLS meet the federal 2007–2010 Ì Driver’s medical exam.
emission standards.
To operate vehicles equipped with air brakes, a driver
Secondary equipment includes a two-way radio for must also obtain an air brake endorsement by completing
communications with drayage company dispatchers and an air brake course, pass a knowledge test, and pass a pre-
a mobile telephone for general communications. A number inspection test. A driver may be exempt from an air brake
of owner-operators carry smartphones, but are reluctant training course with proof of sufficient air brake experience.
to use them to communicate with dispatchers; they prefer
two-way radios because the exchanges can be heard by C: Other License Requirements
other parties, creating a communications record. Owner-operators should obtain a local business license
from the municipality where the business is registered and
B: Commercial Driver’s License Requirement must obtain a truck license from the Insurance Corporation
To qualify for a Class 1 commercial license, a driver must: of British Columbia (ICBC). In addition, two other require-
» Hold a BC driver's license (Class 5 or 6) or an ments are needed to access federal port property: a Port
out-of-province equivalent; Pass and a truck license under the TLS that costs $300 a
» Have an acceptable driving record with less than four year (see Section 2.2 for more details).
penalty point incidents in the past two years and no
motor vehicle-related criminal convictions within the D: Commercial Vehicle Inspection Requirements
past three years; and All commercial vehicles with a licensed gross vehicle
weight greater than 8,200 kilograms are subject to the
» Be at least 19 years of age.
Province of British Columbia’s Commercial Vehicle Safety
and Enforcement (CVSE) regulations. This generally
The necessary steps to acquire a Class 1 commercial
requires an inspection by a shop accepted by CVSE as a
driver's license are:
Designated Inspection Facility (DIF). A trucking company
» Study Driving of Commercial Vehicles. The driver must
that maintains its own fleet may get its shop approved as a
study the BC government publication Driving Commercial
Preventative Maintenance Facility that can inspect its own
Vehicles.
fleet. Most owner-operators use a DIF for such inspections.
» Take the commercial vehicle knowledge test. The driver
must pass a knowledge and road signs test and meet
medical standards.
» Practise to gain adequate skills. Upon passing the know-
ledge test, the driver is issued a commercial learner’s
license. The driver must practice under this license until
his skills are adequate to pass the road test.
CHAPTER 3 17
Selection of a Drayage Company Senior owner-operators generally do not work night gates.
to Work For Some junior owner-operators will work night gates as a
Owner-operators generally choose drayage companies second shift to earn revenue as long as they remain within
based on word-of-mouth information. The choice of which the 14-hour on-duty time in a day permitted under National
company (or companies) to work for is critical because it Safety Code trucking hours of service regulations.
affects shift schedules, the types of loads that are assigned
to the operator, and ultimately the owner-operator’s Examples of working hours based on selected industry
revenue stream. Some of the key factors in selecting a interviews are:
company to work for include: level of compensation, » One company operating primarily as a freight forwarder,
payment terms, the opportunity for double-ended moves, with its own trucks and agreements with owner-
driver turnover rate, and how long the company has been operators and trucking companies, is open from 7:00 a.m.
in business. to 4:00 p.m.
» A drayage company with a small storage yard for
Drayage companies use a similar word-of-mouth approach
containers is open from 6:30 a.m. to 9:00 p.m. weekdays
to hire new owner-operators. Nevertheless, some
and on Saturdays and Sundays as required.
companies that advertise for owner-operators have
» A company with about 70 CAW owner-operators under
received large volumes of responses. Based on industry
contract maintains that shifts should be 6:00 a.m. to
interviews, a “good” owner-operator possesses several
6:00 p.m. or 5:00 a.m. to 5:00 p.m. to give drivers a
qualities, including a focus on safety; mechanical aptitude;
reasonable quality of life.
the ability to see the “big picture”; and the ability to
understand and manage stress.
For unionized owner-operators, seniority dictates work
assignments. The first move in the morning—considered
Selection of Loads and Work Schedules
to be the best move of the day—is generally given to
Owner-operators typically do not have much say in the
operators with greater seniority. As an example, we
selection of loads they move because the dispatcher of the
interviewed an experienced CAW driver who has been
company for which they work generally specifies the work
driving with his current trucking company for only one
based on customer demand and on the marine container
year. Even though he has been in the industry for several
terminal reservations the company has been able to obtain
decades, he is low in seniority relative to the work
for a particular day. A typical work schedule for an owner-
assignments received. The seniority issue makes switching
operator begins at 5:00 a.m. to pick up the first job of the
among trucking companies an unattractive proposition for
day. The working day usually ends between 4:00 and
unionized owner-operators with long tenures.
5:00 p.m., when the marine terminal gates close. Including
travel time to and from the first and last jobs, operators
typically put in 12- to 13-hour days. In addition, some three
hours or so are required each week to handle administrative
aspects of the business.
CHAPTER 3 19
3.6 KEY BUSINESS DRIVERS be more productive, increase revenues and lower operating
— costs by reducing unproductive travel. Reduced travel also
Given that owner-operators have only a limited degree of helps decrease road traffic congestion and lessens the
control over their workloads and revenue streams once environmental impact of trucking.
they have selected a company to work for, their profit-
ability critically depends on productivity and the utilization There are no reliable data regarding double-ended move-
of their truck. Their truck is the principal asset in the ments. Discussions with various operators revealed a wide
business. These factors, discussed below, explain why range of performance. Some carriers achieve more than
owner-operators look at the number of turns per day as a 50% of their total moves as double-ended moves, while
key metric in performance evaluation. A rule of thumb in others may achieve only 10–15% or less. Anecdotal
the industry is that a minimum of three round-trip revenue evidence based on consultations carried out for this report
moves a day are needed for a driver to make money. suggest the industry average has deteriorated from about
30% double-ended moves in 2005 to around 20% today.
Productivity
From the owner-operator’s perspective, productivity Truck Utilization
corresponds directly to the number of revenue-generating The truck (tractor) is the largest capital expense in an
moves completed in a working day. Productivity is a key owner-operator’s business. Buying one is a fixed cost that
factor impacting an owner-operator’s income, because is incurred whether or not the truck is operating. Therefore,
compensation is typically calculated per trip and not on an increasing the use of truck equipment enables fixed costs
hourly basis. Therefore, the number of revenue moves per to be allocated across more revenue-generating trips,
day that a driver can complete will directly dictate how decreasing fixed costs per trip. These savings, in turn,
much income the driver earns. This differs from company result in increased revenue and profitability.
employee drivers, who are typically paid on an hourly basis
and whose compensation is therefore independent of the Given the limitations on operating hours permitted by
number of moves completed per day. safety regulations, increased truck usage can only be
accomplished by adding a driver to existing truck
A key factor impacting container drayage productivity equipment. But owner-operators typically have little
(and thus owner-operator income) is the ability to achieve incentive to bring in a second (relief) driver because they
double-ended moves. A double-ended move occurs, for want to maximize their own activity on the day shift and
example, when a truck is able to deliver an export container there are limited opportunities to work evening shifts.
to a terminal and pick up another import container on the Few drivers want to work for the limited number of
same visit. Double-ended moves allow owner-operators to moves available on a second shift.
20 CHAPTER 3
Marine Terminals The primary role of marine container terminals is to provide throughput » Surges in import/export container volumes increase wait times at
of containers. The focus is on reducing the time that containers wait in the terminal and lead to increased truck-turn times
the terminal. The terminals only have operational relationships with » Longshore labour productivity has a major impact on terminal
drayage companies. operations
» A terminal operator can ban an owner-operator or trucking company
from accessing the terminal and there is no appeal mechanism
Degree of impact – HIGH
Railways Railways contract with shippers and shipping lines to transport » Trains can block road intersections and increase truck wait times
containers by rail to/from marine container terminals. Inbound » Rail activity impacts labour availability in the marine terminals and
containers arriving in Vancouver by rail from central/eastern Canada therefore truck productivity at terminal gates
are a major user of trucks for transport to final destinations in local » Railways dictate the location for storage of empty containers at
markets. marine terminals that can take up to 40% of terminal capacity
Degree of impact – MODERATE
Importers / Exporters Cargo owners ultimately pay the transport costs. They contract with » Can influence the selection of drayage companies
(Cargo Owners) shipping lines, drayage companies and railways to move cargo from » Impacts timing of available loaded and empty containers
domestic/foreign origins to foreign/domestic destinations. The focus is for truck transport
on end-to-end supply chain reliability and cost.
Degree of impact – LOW to MODERATE
Trucking Companies Trucking companies have direct relationships with cargo owners, and » Trucking companies directly influence the selection of work
contract drayage work to owner-operators based on both customer (type and number of trips), shift schedules and ultimately the
demand and the marine container terminal reservations that the owner-operators’ revenue stream
company has obtained for a particular day. » Impacts the compensation level and payment terms
Degree of impact – HIGH
Port Metro Vancouver PMV leases terminals to marine terminal operators under long-term » PMV effectively dictates the terms of access to the container
(50-year) leases and administers the Truck License System (TLS). terminals that are located on federal port property
» TLS costs owner-operators $300 a year
» PMV is requiring the use of newer vehicles that are relatively more
expensive than used trucks. Unless owner-operates achieve much
better productivity, the business case for acquiring newer trucks is
hard to justify
Degree of impact – MODERATE
22 CHAPTER 4
Although the regulated rates include a fuel surcharge One carrier stated that up to 80% of import containers go
component that provides a small offset for rising fuel costs to an off-dock location once their import cargo is unloaded
(the surcharge is only about 6% applied to the total Ready in the Metro Vancouver area. On the export side, the figure
rate), the Ready rates have not changed since August 1,
may be lower, perhaps in the 30–40% range. The level of
200615 despite changing market and cost conditions. The
compensation for an off-dock movement varies widely
rates are prescribed on a per-trip basis for different origins
depending on company policy (see also Appendix 2 for
and destinations in Metro Vancouver to provide a
theoretical rate floor (see Appendix 2). commentary on the Ready rates).
Exhibit 7: Fixed and Variable Drayage Cost Elements » Trip Cost Analyzer. Develops the full costs (including
wages and allocated fixed costs) and a profit contribution
VARIABLE COSTS FIXED COSTS of a particular trip from start to end. It provides the
» Driver* » Tractor (truck) depreciation**
structure of overall costs and an estimate of the costs
» Fuel » Licenses (provincial government, TLS)
» Maintenance and Repairs » Overhead and financing costs*** of the trip against which owner-operators can compare
» Tires
their trip revenue. The trip cost analyzer can be used to
» Miscellaneous
determine whether or not to accept a particular container
* Includes wage cost for driving, ** Since owner-operators do not generally movement job or to evaluate the adequacy of remune-
the cost of waiting time for own chassis, the focus is on tractor
loading /unloading, and overhead costs. ration paid to an owner-operator by a drayage company.
costs (annual vacation, Workers’ ***Vehicle insurance (drayage company
» Pro Forma Financial Tool. Evaluates the business from
Compensation, etc.). typically pays cargo insurance),
administration, working capital. start to either a future “steady state” or its termination.
It includes estimates of revenue and expenses over a
number of years (including income taxes and inflation),
Truck Cost / Financial Model
owner-operator capital requirements, loan draws, loan
A consistent theme that emerged from the industry
repayments and interest, sale of assets at the end of
consultations is the need for owner-operators to identify
the business, and some measures of financial return
and better understand the costs of operating their
(e.g., return on capital, return on equity, discounted
businesses. The most successful owner-operators in the
cash flow). The principal use of the pro forma tool by
industry are keenly aware of and closely manage their
an owner-operator is to address questions such as:
costs. This is critically important because every dollar
Ì How much capital do I require?
in cost savings goes directly to the bottom line.
Ì What annual returns can I expect?
Ì Do I really want to get into this business?
The truck cost/financial model consists of three analytical
Ì What financial information is needed in a business
tools as the most practical way to identify, manage and
plan that I could take to a financial institution to
benchmark an owner-operator business. These tools are
obtain a loan to finance my business?
based on best business practices to help owner-operators
improve their financial performance:
» Profit Estimator. Assesses an owner-operator’s profit-
ability for any defined period of drayage activity (per day,
week, month, etc.) based on three simple inputs: revenue,
distance driven and hours worked. The profit estimator
can be used to evaluate the profitability of any type of
drayage activity in Metro Vancouver. It can be useful to
evaluate multiple trips that may involve double-ended
moves such as those engaged in by successful operators.
The result is simple—the total return to the owner-
operator per activity (trip, day, etc.), per kilometre and
per hour. Of these, perhaps the most useful is the return
per hour, since it can be compared with wage income.
26 CHAPTER 4
Methodology and Key Assumptions The Trip Cost Estimator and Profit Estimator allow the user
The initial database used for the container drayage truck to modify the following inputs in order to analyze any type
cost/financial model is derived from Ray Barton and of container drayage operation in Metro Vancouver:
Associates (Barton), who have prepared periodic surveys » Average annual tractor utilization (in kilometres),
of trucking costs in Canada for Transport Canada for which is part of fixed-cost allocation
a number of years.17 Barton uses several data sources,
» Average speed
principal among them surveys of trucking companies,
» Tractor financial parameters, including new or used
and prepares costs for Canadian regions and for different
vehicle, capital cost, vehicle life and residual value
kinds of tractor and trailer combinations.
» Trucking distances to cover all likely moves (i.e., to point
The Barton model provides a credible framework for the of empty chassis pick-up, pick-up and delivery at terminals
drayage financial model. However, in order to better reflect and to the point of empty chassis drop-off)
the cost characteristics of the Metro Vancouver container » Waiting time at terminals or off-dock locations
drayage industry, the Barton model was refined in a » Profit as a percent of total cost
three-step process.
» Ready rate origins and destinations
First, the costs were indexed to bring them to 2012 levels, The Pro Forma Financial Tool allows the user to adjust the
since the Barton model used 2010 values. The second step following inputs:
refined the Barton model based on select data obtained » Capital expenditures for equipment other than the tractor
from Metro Vancouver trucking companies and owner-
» Working capital and loans
operators.18 Several adjustments were made to reflect
local drayage operating and cost conditions. The main » Trip characteristics based on annual averages
adjustments made to the Barton model are: increased driver » Annual revenues, costs and escalation factors to allow
costs to reflect longer wait times at container terminals; for five-year business projections
lower tractor ownership costs due to the use of older, less
costly trucks; higher maintenance, repair and tire costs; All three models allow users to choose between model
and lower overhead and administration costs. The third default values or enter their own estimates for the
step was to refine the model to allow user inputs for several following operating costs:
major cost items. These are hourly driver wage rate, fuel
» Fuel (the default value is per kilometre, but the user
cost per kilometre, maintenance cost per kilometre,
can enter specific estimates of fuel consumption,
administration cost per year, tractor capital cost, and
annual tractor utilization. such as litres/kilometre, as well as fuel price per litre)
Exhibit 8 highlights the primary data sources and key » Maintenance cost per kilometre
assumptions used in the truck cost/financial model. » Administration cost per year
17) Ray Barton and Associates, Logistics Solution Builders Inc. and The Research
and Traffic Group, “Final Report Operating Costs of Trucking and Surface
Intermodal Transportation in Canada,” Transport Canada RFP File # T8080
– 100234, March 15, 2011.
18) Note that the scope of this study did not permit an extensive data
collection survey.
CHAPTER 4 27
Driver Wage User input The default value used in the model is $25.00/hour plus a 15% wage burden for CPP and workers’ compensation.
The driver wage covers the cost of driving plus wait times at pick-up and delivery points.
At the end of the day, the wage rate is what the owner-operator hopes to make from the business and may be compared
to other employment opportunities an operator may have. If a value of zero is used in the model, then the profit for the trip
(or trips) in any given time period is equal to the driver’s income.
Fuel User input or default The Barton default value is $0.548/km. Since fuel is one of largest variable cost items, accounting for approximately 22% of
value from Barton total variable costs, the model provides the option to input a specific fuel consumption rate in miles per gallon and current
confirmed through price per litre. An owner-operator pays about $40,000 a year for fuel if he drives 70,000 km/year at a cost of $0.548/km.
consultations
Maintenance User input or default Barton cost is $0.081/km for a new truck, or $0.121/km for a used truck, at the user’s discretion. The used truck cost is
& Repairs value from Barton assumed to be 50% higher than the new truck cost. The user can choose to enter his own estimate of maintenance and
confirmed through repairs in dollars per km. Maintenance and repair costs are about 5% of total variable costs.
consultations
Tires Barton $0.028/km, or about 1% of total variable costs. This assumes the cost for a set of 10 new tires that last for 2 years is
about $5,000.
Miscellaneous Barton $0.015/km, or about 0.5% of total variable costs. This cost category includes items such as small tools and equipment,
truck cleaning, communications equipment, etc.
FIXED Fixed costs comprise about 20% of total operating costs, or $0.60/km (the cost per km is sensitive to annual truck utilization).
Tractor User input or default The default value in the model is $60,000 for a typical used tractor. The user has the option of substituting any value to reflect
Ownership value based on a specific vehicle (newer vehicles can cost $90,000 to $140,000). A key factor for ownership cost is the annual vehicle
consultation results utilization rate that is used to allocate this cost over time. Truck utilization varies widely among owner-operators. Depending
and industry best on the nature of the drayage operation (i.e., pure drayage, or shunting at a major customer, or more highway moves from rail
practices intermodal terminals), truck utilization ranges between 25,000 and 120,000 km a year. The tractor cost and assumed use have
a major impact on tractor ownership costs and represent 40% to 50% of total fixed costs.
Licenses Barton $2,400/year, representing about 6% of total fixed costs.
Insurance Barton $8,000/year, representing about 20% of total fixed costs.
Administration User input or default The default value is $10,000/year based on best practices and covers general administration and bookkeeping, accounting
value based on and legal fees. General overheads are assumed to be 45 minutes per working day. The user of the model has the option of
consultation results and using any other value stated as an annual cost.
industry best practices
28 CHAPTER 4
Sensitivity of the Model to Changes activity, and limits the number of paid container moves that
in Productivity can be handled in the day. Under this scenario, the net
The Profit Estimator provides a powerful tool to evaluate return to the driver is $20.30/hour.
the financial impacts of different drayage operating
scenarios. For example, it could be used to assess the In the second scenario, the operator achieves four revenue
impact of improving productivity by increasing the number trips per day and is able to reduce unproductive driving
of double-ended moves, reducing wait times at container activity from 30 kilometres in the base case to 10 kilometres
terminal gates, or improving travel times associated with due to double-ended moves. This reduces both the total
infrastructure improvements, such as the South Fraser distance driven and unproductive time. The result under
Perimeter Road. It could also be used to evaluate the this scenario is to improve the net return to $32.29/hour,
potential impacts of policy changes, such as promoting the a gain of 60%. Under the third scenario, five revenue trips
use of newer trucks in order to reduce the environmental are made in the day, and additional double-ended moves
footprint of port-related activities. and reduced queuing time at the terminal improve
productivity even further. The net return increases to
Exhibit 9 illustrates the impact of improving truck $38.95, a gain of 92% over the base case.
productivity on owner-operators’ returns. In the base case
scenario, the owner-operator makes three revenue trips These scenarios demonstrate the high degree of sensitivity
per day, and has to travel 20 kilometres to the terminal to of owner-operator returns to changes in productivity.
pick up the container as well as another 10 kilometres from Productivity improvements are one of the most critical
the delivery terminal to position for the next revenue load. aspects in improving operating conditions in the drayage
This results in a total of 30 kilometres of unpaid driving sector.
* Excludes driver wages. Driver compensation is shown in this example as the net
return after covering all other variable costs such as fuel, tires, maintenance and
repairs.
CHAPTER 5 29
The discussion begins with a focus on the customer value proposition and is followed by the key factors that drayage
companies look for when contracting an owner-operator, the factors owner-operators should consider when selecting
a drayage company, and finally what can be done to improve the overall performance of the drayage sector.
5.2 COMPANY CRITERIA: SELECTING From an owner-operator’s perspective, the key questions
GOOD OWNER-OPERATORS to ask when selecting a company to work for are:
— » How long has the company been in business?
A common theme that emerged from the interviews is an The longer the better.
emphasis on safety. Several companies indicated that
» What is the company’s driver turnover rate? The lower
owner-operators must have a clean safety record and
the better, because high driver turnover may indicate
comply with National Safety Code (NSC) standards
poor working conditions.
regarding drivers and vehicle maintenance.
» Does the company provide a signed contract with clearly
defined terms of the business arrangement?
The main skills/attributes used by companies to identify
and select good operators include: » What do discussions with other owner-operators who
work for the company indicate about the company and
» Good reputation in the industry for reliability;
its working conditions?
» Sufficient driving experience;
» How does the company compensate its owner-operators
» Positive attitude, willingness to learn and an under-
in general and what are its detailed compensation terms?
standing of the gateway container supply chain
» Will it be possible to get double-ended revenue-
“big picture”;19
generating moves?
» Dependable and flexible—able to handle frequently
» Does the company pay for waiting time at marine
changing work requirements;
terminals and subsidize fuel costs?
» Responsible and to have developed a business plan,
» How long does it take to get paid after hauling a load?
business systems and a regular preventative truck
maintenance program; » Does the company have established arrangements with
a repair shop that can help owner-operators with truck
» Understands and manages stress (self-awareness);
repairs under the company umbrella?
» Mechanical aptitude.
This last point can be extremely valuable because it helps
5.3 OWNER-OPERATOR CRITERIA: reduce delays in getting unexpected repairs completed,
SELECTING A GOOD COMPANY thereby minimizing downtime in the event of mechanical
TO WORK FOR problems with the vehicle that is the owner-operator’s
— chief source of income.
As noted previously, there are some 160 local drayage
companies of varying sizes in Metro Vancouver. Owner-
operators contract out their equipment and services to one
or more of these companies. The choice of which company
(or companies) to work for is critical because it affects
workload, shift schedules, quality of life and income.
Cost Control » Understand and manage all costs, fixed and variable
Reducing costs by just 5 cents/km will save » Focus on minimizing the most significant cost items, such as fuel and tractor purchase
$3,500 a year for an owner-operator who » Implement a preventative truck maintenance program to keep costs under control and minimize revenue lost to
drives 70,000 km per year—these savings equipment breakdowns.
go directly to the bottom line.
Truck Assets » Consider acquiring a new truck that offers the following potential benefits:
An owner-operator’s truck is the most Ì May be more reliable than an older, used vehicle
important asset—having a safe, reliable, Ì Less costly due to fewer mechanical issues
cost-effective vehicle(s) is critical for success. Ì Repairs covered under warranty
Ì Complies with PMV age/emission standards, which are becoming more stringent to improve port standards
Recommendations for Other Stakeholders maintenance, driver training and other aspects of safety
Some of the key challenges identified above are already management. Insufficient compensation to drayage
being addressed through other initiatives, for example operators increases the risk of sector instability, reduces
those led by the Container Drayage Leadership Team owner-operators’ financial means to invest in newer truck
and Port Metro Vancouver, particularly with regard to equipment, and can be an impediment to attracting a
the development of a more integrated planning and sufficient number of quality drayage operators to service
operations environment and the collection of data on projected gateway container traffic volumes.
drayage operations and activities in the region. Technology » Develop a drayage cost index that can be used to
also has a significant potential role to play in the solutions. identify and track operating costs in the industry on
an ongoing basis. The index would provide a useful
The following five recommendations are advanced for other bench-mark for owner-operators and drayage companies
stakeholders to improve the performance of the drayage to advocate for rate increases and help transition away
sector in Metro Vancouver. The objective of these recommen- from the existing regulated rate regime to a market-based
dations is to create a more stable and sustainable drayage system.
sector and to improve knowledge and understanding within » In order to address the challenge of limited knowledge
the industry: and understanding of the financial management aspects
» Develop a communications protocol, in cooperation with of the drayage business, consideration should be given
the BCTA and PMV, as a means to increase the general to developing an education and awareness program for
knowledge and understanding of owner-operators owner-operators. The goal is to provide basic information
working in the drayage sector and communicate the and the fundamental principles of business management
steps that industry and governments are taking to and financing to help existing and potential new owner-
address structural challenges in the industry. operators better understand best business practices.
» Develop a shipper education campaign to increase » Consider creating a drayage sector ombudsman to act
awareness and understanding of the impact of shippers’ as a credible, empowered and more unified voice for
decision-making on the drayage sector in general and the industry in order to address operational issues and
on owner-operators in particular with respect to vehicle communicate progress on these issues.
34 CHAPTER 5
Toolkit Recommendations
The toolkit is the other main output for this project. It is
a separate resource for owner-operators that highlights
successful business practices and the skills required to
improve business performance. It is recommended that an
online version of the toolkit be developed as the best way
to disseminate the information and promote its use.
MY TRUCK GLOSSARY A – Z
Getting & Operating My Vehicle
» 2.1 Financing Options
» 2.2 Getting Bank Financing
» 2.3 New vs. Used
» 2.4 Importance Of Maintenance
» 2.5 Safety
» 2.6 Fuel Efficiency
» 2.7 Practical Terminal Information
APPENDICES
36 APPENDIX 1
APPENDIX 1
INTERVIEW QUESTION GUIDE
1. What is the nature of your business and who are 11. Is there a driver shortage in the Lower Mainland?
your key customers (import, export, transload, etc.)? If so, what should be done to address it?
2. What services do you provide and what are 12. Do you currently have a driver training program?
your customer requirements? » What are your needs in this area?
» What resources would be helpful to improve driver
3. What is the typical work schedule? training?
4. What are the most critical factors impacting this 13. How are your drivers paid (own drivers versus
schedule (terminal issues, road congestion, reliability owner-operators)?
of drivers, etc.)?
14. Are the Ready rates current with respect to
5. What is the proportion of company drivers to market conditions?
owner-operators in your business?
» What is the revenue split with owner-operators for
» What factors determine this? Ready rate moves?
» What issues dictate the choice between » How do Ready rates vary from the non-regulated
company drivers and owner-operators? drayage market?
6. Are your drivers unionized? If so, what is the proportion 15. What tools/resources would you find the most useful
of unionized drivers in your business and to what unions to improve the performance of your business?
do they belong?
16. What are the key factors affecting your profitability,
7. How does your dispatch system work and what does it both within and outside of your control?
cost to operate?
» Are there any lessons in it for owner-operators? 17. Would you find value in having real-time information to
operate your business? What would be most valuable?
8. What equipment do you need for your business
(tractors, chassis, hardware, software, communications, 18. Regarding owner-operators:
GPS, etc.)? » How do you select owner-operators?
» What qualities define a “good” operator?
9. How was this equipment financed and what does
» Is there a high turnover of owner-operators at your
it cost to purchase/lease?
business and in general? If so, why?
10. What is the average age of your own tractor fleet? » What is the typical age of their tractors?
» How many kilometres a year does your average » What is a typical tractor utilization in kilometres
tractor operate: for drayage and for long-haul? (or hours or other)?
» How suited are their tractors to container drayage,
and what are the issues?
APPENDIX 1 INTERVIEW QUESTION GUIDE 37
APPENDIX 2
READY RATE SCALE
Schedule 1: Rates in Effect from Date of Return to Work
Surrey North (North of 72, West of 152, FSD) $110 $110 $90 $110 $100
Surrey South (includes White Rock) $120 $110 $110 $135 $110
Port Kells (North of Highway, West of 208) $120 $130 $100 $115 $90
Surrey North (North of 72, West of 152, FSD) $120 $120 $100 $120 $110
Surrey South (includes White Rock) $135 $120 $120 $150 $120
Port Kells (North of Highway, West of 208) $135 $145 $110 $130 $100
» A trucking company with about 60 non-union owner-operator tractors pays for container movements according to the
Ready MOA. The company also pays drivers an additional amount to compensate for their time handling empty chassis
moves. The compensation for this additional work is based on mileage at a predetermined scale.
For example:
Ì For a five-kilometres repositioning move, the driver would receive $75.
Ì For a 20-kilometre repositioning move, the driver would receive $85.
» An operator of a major import distribution centre that operates an in-house drayage company to serve its clients pays
its owner-operators based on the MOA plus a percentage of the Ready rates if an empty chassis move is involved.
» One company stated that it pays its owner-operators for container moves based on the MOA and must do so because
of audits. This company has adjusted the rates it pays for inflation but only at some 2% a year. If there is a mix-up at
a marine terminal that results in an unavailable container, this company will pay owner-operators, typically at 50% of
the Ready rate. The company pays 100% of the Ready rate for certain kinds of delays or lack of container availability.
» Unionized owner-operators mentioned that some non-unionized owner-operators undercut the Ready rates. They also
mentioned that “cash back” refunds occur. These involve owner-operators invoicing trucking companies at the Ready
rates to support audits, after which—following payment of invoices—the non-unionized owner-operator rebates in
cash a portion of the amount paid, resulting in a rate that is effectively below the Ready rate.
APPENDIX 3 41
APPENDIX 3
PRO FORMA FINANCIAL MODEL INPUTS
The pro forma model input worksheet has several The components of the model and key assumptions
sections, as follows: are outlined below.
Profit and Loss Statement Assumptions » Income taxes are calculated at the 13.5% rate applicable
The structure of the operating costs is similar to that of to small incorporated businesses in 2012 and probably
the trip cost model but there are some differences. in subsequent years. On the assumption that this is an
The costs are built up as follows: incorporated business, taxes apply only if profit before
taxes is positive; otherwise taxes are zero. Losses can
» All variable cost items except driver waiting time are
be carried forward to write off against future profits, but
calculated on a per-kilometre basis. The annual cost is
this provision is not built into the pro forma model. If the
the rate per kilometre multiplied by the annual tractor
owner-operator business is not going to be profitable, it
kilometres.
may be better to operate it as an unincorporated business
» The cost of driver operating time is calculated as annual
to allow write-off of losses against other personal
operating time multiplied by the hourly rate input by the
income. The main taxation benefit of an incorporated
user plus a 15% burden. The cost of driver waiting time is
small business is the ability to retain profits in the
calculated as annual waiting time multiplied by the same
company at a modest tax rate and to engage in income
hourly rate.
splitting (over time for the owner-operator and perhaps
» Driver operating and waiting times are treated in the pro among members of his family).
forma model as expenses, which would be the case if
the owner-operator withdrew these salary-like amounts The bottom line is profit after tax. This flows to the cash
each month. The owner-operator could also make flow statement.
periodic draws through the year and sort out the
allocation of these draws to driver time and other items Strictly speaking, the straight-line depreciation used in
at the end of the year. Inserting these items as costs in the pro forma model for tax calculations should be replaced
the pro forma model provides a better overall picture of by declining-balance depreciation under the Capital Cost
the tractor business. Allowance (CCA) rates and rules specified by Canada
» Depreciation is calculated on a straight-line basis as Revenue Agency (CRA). While the CCA amounts specified
(tractor cost minus residual value, if any) divided by by CRA result in more rapid asset write-offs, the impacts
life and other capital expenditures divided by life. on this simple and short-term pro forma evaluation will
Note that depreciation remains constant in spite of be minor.
inflation because it is based on the historical cost of
assets and their lives.
» Interest is calculated as the average loan balance
in a year multiplied by the interest rate.
» Licenses, insurance and administration are treated
as fixed annual costs.
44 APPENDIX 4
USER INPUTS
Average Annual Truck Utilization (km) 60,000 Revenue Assumptions (user input) *Based on Ready Rates
Average Truck Speed (km/h) 40 Pick Up Terminal: Vanterm/Centerm
Tractor Financial Parameters Delivery Terminal: Delta North, Tilbury
New or Used Used
Acquisition Price of Tractor $60,000
Life (years) 5
Resale Value (% of Acquisition Price) 0
Trucking Distances (km)
To Point of Empty Chassis Pickup
To Terminal to Pick Up Container 20
From Pick-Up Terminal to Delivery Terminal 27
From Delivery Terminal to Chassis Drop-Off 10
Total Trucking Distance 57
Calculated Travel Time (Hours) 1.43
Truck Waiting Times (Hours)
At Pickup Terminal 0.50
At Delivery Terminal 1.00
Other Queuing 0.50
Total Waiting Time 2.00
Total Time (Hours) 3.43
Revenue (A) 143.10 2.51 41.78
Truck Costs Per Trip Per Km Per Hour
Variable Costs
Fuel 31.22 0.55 9.12
Repairs & Maintenance 6.92 0.12 2.02
Miscellaneous 0.85 0.01 0.25
Tires 1.58 0.03 0.46
Total Variable Costs (B) $40.58 $0.71 $11.85
Fixed Tractor Costs
Capital Recovery Charges (Ownership) $15.04 $0.26 $4.39
Licenses 2.27 0.04 0.66
Total Tractor Fixed Costs $17.31 $0.30 $5.05
Overhead Costs
Insurance $7.60 $0.13 $2.22
Administration $9.50 0.17 2.77
Total Overhead Costs $17.10 $0.30 $4.99
Total Fixed and Overhead Costs (C) $34.41 $0.60 $10.05
Total Trip Costs (Variable + Fixed) $92.30 $1.61 $21.89
Net Return to Owner-Operator (A-B-C) $68.11 $1.19 $19.89
* Note that these results are for a single trip with low productivity. Depending on the number of double-ended revenue generating moves the owner-operator is able to achieve,
the returns for a longer period (such as a day/week/month) would be greater than shown above.
46 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS
GENERAL INPUTS
Average Truck Speed (km/h) 40
Tractor Financial Parameters Driver Compensation and Payroll Cost
New or Used Used Driver Wage ($/hr) $25.00
Acquisition Price of Tractor $60,000 Non-Voluntary Wage Burden (%) 15%
Life (years) 5 Driver Payroll Cost ($/hr) $28.75
Resale Value (% of Acquisition Price) 0
Other Capital Expenditures
Office Equipment and Tools $5,000
Life (years) 5
Start-Up Year 2013
Corporate Income Tax 13.5%
Working Capital Parameters (Days)
Accounts Receivable 45
Accounts Payable 30
Loan
Interest Rate 6%
Term (Years) 5
TRIP CHARACTERISTICS AND REVENUES
Trucking Distances per Trip (km) 2013 2014 2015 2016 2017
To Point of Empty Chassis Pickup
To Terminal to Pick Up Container 20 20 20 20 20
From Pick-Up Terminal to Delivery Terminal 30 30 30 30 30
From Delivery Terminal to Chassis Drop-Off 10 10 10 10 10
Total Trucking Distance 60 60 60 60 60
Calculated Annual Utilization (km) 45,000 45,000 45,000 45,000 45,000
Calculated Travel Time (Hours) 1.50 1.50 1.50 1.50 1.50
Truck Waiting Times (Hours)
At Pickup Terminal 0.50 0.50 0.50 0.50 0.50
At Delivery Terminal 1.00 1.00 1.00 1.00 1.00
Other Queuing 0.50 0.50 0.50 0.50 0.50
Total Waiting Time 2.00 2.00 2.00 2.00 2.00
Total Time per Trip (Hours) 3.50 3.50 3.50 3.50 3.50
Revenue Basis
Working Days per year 250 250 250 250 250
Daily Number of Trips 3 3 3 3 3
Revenue per Trip $150 $150 $150 $150 $150
Calculated Annual Times (Hours)
Travel Time 1,125 1,125 1,125 1,125 1,125
Waiting Time 1,500 1,500 1,500 1,500 1,500
Total Time 2,625 2,625 2,625 2,625 2,625
Escalation Rates (% / Annum)
Revenue 2.0%
Operating Cost Indices
General (CPI) 2.0%
Fuel 3.0%
Tires 3.0%
48 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS
Other
COSTS
Variable Costs
Driver Operating Time $32,344 $32,991 $33,650 $34,323 $35,010
Overhead Costs
Insurance $8,000 $8,160 $8,323 $8,490 $8,659
Working Capital
The Working Capital section shows the calculation of accounts receivable and accounts payable to estimate net working
capital other than cash. In general, net working capital increases slowly in line with inflation. If the volume of activity
(such as working hours per year or trips per day) increases, working capital also rises.
Accounts payable are calculated from out-of-pocket costs such as fuel, maintenance and insurance. They exclude
depreciation (because these are non-cash items) and interest (because there are scheduled payments). Owner-operator
compensation, i.e., driver time pay, is also excluded on the basis that the owner-operator draws the amount within the
month in which it is earned. Accounts receivable and accounts payable appear in the balance sheet. Net working capital
appears in the cash flow statement. Table 5 summarizes the calculation of non-cash working capital.
The net of the three above items is net cash flow. This flows to the Cash and Cash Equivalents account of the balance sheet.
Table 6 presents the Cash Flow Statement.
Balance Sheet
The Balance Sheet provides a snapshot of the business’s financial position at the end of each year (see Table 7). At start-up
in 2012, the company has $10,000 in cash and $65,000 in fixed assets. It also has owner-operator equity of $30,000 and a
loan of $45,000. The sections of the balance sheet are:
» Current assets. These are cash (and cash equivalents) and accounts receivable.
» Fixed assets. These begin with fixed assets at cost and subtract accumulated depreciation to arrive at net fixed assets.
» Current liabilities. Only accounts payable are shown.
» Equity. This is the value of the company to the owner-operator. It consists of initial equity plus retained earnings.
The company at the end of five years has equity of -$125,000, down from the initial $30,000. If the owner-operator were to
wind up the company at this point, he would lose money. The tractor and other fixed assets are assumed to have essentially
no residual value.
Financial Ratios
The simple financial ratios in Table 8 illustrate: 1) the liquidity of the owner-operator business as a measure of its ability
to withstand financial shocks; and 2) debt service to illustrate its ability to meet loan obligations. The ratios are:
Liquidity
» Current Ratio (current assets/current liabilities)
» Acid Ratio (cash/current liabilities)
First, the overall financials of this evaluation do not work at all. The company is illiquid and unprofitable, does not generate
positive cash flows or pay off the loans, and provides little income to the owner-operator.
Table 9 provides an example of an evaluation that a potential owner-operator could conduct to compare his situation with
and without the trucking business. It begins with the cash flows an owner-operator would experience with the trucking
business as set out in the pro forma financial evaluations above. In this case, he puts up $30,000 in equity capital, receives
about $75,000 a year in before-tax income (in constant 2013 dollars), may receive dividends (but not in this particular case,
since the business is not profitable), and at the end, loses about $125,000.
Is this an attractive proposition? No. However, a key question is the owner-operator’s opportunity cost in other employment.
In this example, a value of $25 per hour is applied to the time spent working in trucking as a measure of opportunity cost.
The result is that the trucking business generates a negative before-tax internal rate of return (IRR) on the initial equity
investment of $30,000. The results, however, vary with the assumptions; two other scenarios are discussed below.
*Opportunity cost in other possible employment = $25.00 per hour multiplied by 2,620 hours a year or $65,625 in 2013.
54 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS
Scenario 1: Scenario 2:
Lower Driver Compensation Factor Higher Revenue Level
Driver compensation was reduced to $15 per hour from Revenue per move was increased until the business
$25 per hour (plus burdens in each). There is some evidence became profitable and just met cash flow needs. Table 10
to suggest that driver wages can be as low as $15 per hour. summarizes this case. Its parameters and results are:
When this lower rate is used, the model results indicate » Required revenue is $190 per move.
(financial statements not shown):
» The owner-operator business becomes profitable in 2015.
» The business is marginally profitable from 2015; cash
» There is sufficient cash flow to meet loan repayments.
flow is adequate to repay the loan; and the cash item of
» There is almost enough initial cash to meet working
the balance sheet remains positive.
capital needs (it is slightly negative in 2013).
» The $15 per hour is much too low a compensation level
» If the owner-operator terminates the business at the end
for an owner-operator who is following best practices.
of five years, he contributes $30,000 to the business at
There may, however, be owner-operators who will accept
the start, receives compensation of $25 per hour plus
such low compensation either because they have few
payroll burdens over five years, and receives a residual
other employment options or they do not understand
value of about $30,000.
their business.
» The owner-operator should be able to achieve business
continuity. At the end of five years, the residual value
of the business could provide a contribution to the
acquisition of another tractor to continue the business.
This case shows that the revenue per move required for
an owner-operator business that has marginally acceptable
financials and provides adequate compensation to the
owner-operator exceeds the revenues earned based on
the Ready rates.
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