By the numbers: Becoming gross margin focused

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A weekly review of the Key Performance Indicators (KPIs) that all trucking companies should be tracking on a daily, weekly and monthly basis. These standardized KPIs are the foundation of the TCA Profitability Program’s inGauge Benchmarking Platform  - the largest (and only) online benchmarking platform for the North American Truckload market.

Establishing a strategy for growth is the foundation for any sustainable business and for a culture of continuous improvement. In trucking, regrettably, many companies start and end their strategy with ‘truck count’.

Truck count is, unfortunately, the primary measure of success in this industry – at least on the surface. When I speak to many executives about benchmarking, inevitably the conversation leads to a statement something like “Yes, but I only want to compare myself against carriers with X number of trucks. I have nothing in common with the smaller carriers”. This statement, in my opinion, is misguided. Sure, there are economies of scale to be gained based on size (e.g. buying power, capacity etc.). However, based on the data we collect from 207 (and growing) trucking company profiles in North America, there is no direct correlation between size and profitability. 

Changing the focus from truck count to profitability will not only change the economics of individual trucking enterprises, it will also have a beneficial affect on the supply / demand balance (which as you are all well aware, has caused a roller coaster on rates in the last 24 months). Becoming profit or gross margin focused, takes discipline and creates many more ‘tough decisions’ for the executives in those businesses. To reinforce this statement, a public example of a profit-focused trucking business is Heartland Express. Despite, a significant acquisition in the last twenty-four months, Heartland’s truck count actually declined over that period – when you read their sec filings, it is clear to the reader that truck count is not a primary focus. Heartland is willing to sacrifice “subpar revenue” for higher net returns. This week, we will focus on the foundational Key Performance Indicators of Profit-focused trucking companies – Gross Margin.

Within the TCA Profitability Program, we use three methods of computing Gross Margin, each with different use cases and targets, these are:

  • Gross Margin

  • Gross Margin (Net Fuel, Excluding Depreciation)

  • Gross Margin (Gross Fuel, Excluding Depreciation) – Great measure for Customer Scorecarding and Network Optimization

Gross Margin: Definition and Formula

Calculating Gross Margin should be easy for most motor carriers, assuming you’ve laid the proper groundwork at the general ledger level. For example, it is imperative that carriers segment their Driver, Non-Driver and Shop Wages and Benefits separately. This not only includes base wages and salaries, but all health insurance, payroll taxes and workers comp. Further, segmenting your revenue and expenses into activity types – Company Fleet, Owner Operator Fleet and Brokerage provides advantages for establishing a clear picture of the internal performance of each of these groups. Here is the is the TPP Gross Margin calculation, including an example (using a sample load):

Gross Margin Calculation

Gross Margin Example

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Gross Margin is, in our opinion, the most important KPI in trucking. Further, it can be expressed in hundreds of different ways. For example, it can be expressed on a per mile basis, per truck per week, per active on-duty hour. The key to this article is to strongly encourage readers to start tracking this valuable metric on an ongoing basis, and eventually start comparing your performance (via benchmarking) with other trucking operators with similar attributes. 

To dive a bit deeper into Gross Margin, and our popular Gross Margin Framework: The Golden Ratio, please see this article by my colleague and TPP Managing Director, Jack Porter.

How does your Gross Margin stack up against similar companies? Find out, by booking a demo here.