UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The assessment of motor carrier lane profitability : methods and implementation Cheung, Che Keung 1977

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1977_A4_6 C48.pdf [ 4.48MB ]
Metadata
JSON: 831-1.0093963.json
JSON-LD: 831-1.0093963-ld.json
RDF/XML (Pretty): 831-1.0093963-rdf.xml
RDF/JSON: 831-1.0093963-rdf.json
Turtle: 831-1.0093963-turtle.txt
N-Triples: 831-1.0093963-rdf-ntriples.txt
Original Record: 831-1.0093963-source.json
Full Text
831-1.0093963-fulltext.txt
Citation
831-1.0093963.ris

Full Text

THE ASSESSMENT OF MOTOR CARRIER LANE PROFITABILITY: METHODS AND IMPLEMENTATION by CHE KEUNG, CHEUNG B.B.A., University of Hawaii, 1974 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE (Business Administration) (Faculty of Commerce and Business Administration) i n THE FACULTY OF GRADUATE STUDIES We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1977 Che Keung Cheung, 1977 In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f the r e q u i r e m e n t s f o r an advanced degree at the U n i v e r s i t y o f B r i t i s h Co lumb ia , I a g ree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s tudy . I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y purposes may be g r a n t e d by the Head o f my Department o r by h i s r e p r e s e n t a t i v e s . It i s u n d e r s t o o d tha t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i thout my w r i t t e n p e r m i s s i o n . Department o f Commerce & Business Administration The U n i v e r s i t y o f B r i t i s h Co lumbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date September 14, 1977 - i i -ABSTRACT The t r a f f i c moved between two c i t i e s by a long-haul c a r r i e r i s commonly termed a lane. The purpose of t h i s study i s to demonstrate methods to assess the p r o f i t a b i l i t y of i n d i v i d u a l lanes. To tackle the problem of lane p r o f i t a b i l i t y , one needs to have accurate and v a l i d data of revenue and costs. In view of the importance of properly prepared data, a secondary purpose of t h i s study i s to recommend accounting procedures to record data i n a usable form for further studies of t h i s kind. The concept of revenue f o r a lane i s not d i f f i c u l t to understand. However, the concept of cost f o r a lane r a i s e s some d i f f i c u l t questions. Since a terminal handles t r a f f i c from a v a r i e t y of lanes, the crux of the problem i s to disaggregate the terminal costs to each i n d i v i d u a l lane. S t a t i s t i c a l costing i s the.main t o o l used i n t h i s study. It i s not the most accurate method but i s les s c o s t l y than most other methods. Thus, i t i s often an indeal s u b s t i t u t i o n f o r de t a i l e d engineering studies. S t a t i s t i c a l methods have a p p l i c a b i l i t y when d i r e c t observation of the re l a t i o n s h i p between cost and output i s d i f f i c u l t or impossible. To t h i s end, regression analysis was proposed extensively i n the study to examine the behaviour of d i f f e r e n t cost elements. With a good grasp of the r e l a t i o n s h i p between terminal costs and terminal output ( a c t i v i t i e s ) one can apportion the rel a t e d terminal costs to the lanes of i n t e r e s t . This study presents a normative model. To construct the model, the examination of a common motor c a r r i e r ' s operation has provided much - i i i -insight regarding (1) the kinds of data that are generally a v a i l a b l e , (2) how the a v a i l a b l e data can be improved, and C3)_ how the constructed model r e l a t e s to the motor c a r r i e r examined. To appreciate the s u b t l e t i e s inherent i n this study, a general understanding of the industry as well as the d a i l y operation of a motor c a r r i e r i s required. To assess the p r o f i t a b i l i t y r e l a t i n g to d i f f e r e n t lanes, one requires some workable methods, and above a l l , workable data. - i v -TABLE OF CONTENTS Chapter Page 1. INTRODUCTION 1 Purpose 1 Importance of the Study 2 Background 5 Uses of the Study 7 Thesis Outline 8 General Description of the Trucking Industry 9 C l a s s i f i c a t i o n 9 Economics 10 Rates. . 13 Operating Costs Structure 14 Measurement of Operating Effectiveness 14 F i n a n c i a l Structure 15 2. OPERATIONAL MODEL 18 Background 18 Model Ca r r i e r Description 18 Organization of Branch Terminal.... 19 Day-to-day Operation 21 3. ESSENTIALS OF LANE PROFITABILITY. . 24 D e f i n i t i o n of a Lane... 24 Concept of P r o f i t a b i l i t y 25 Components of P r o f i t a b i l i t y 26 Revenue 26 Cost 28 Basic Concepts 28 D e f i n i t i o n of Various Cost Terms 29 Cost Elements 31 Terminal Costs 33 Line Haul Costs 35 Contribution Margin Approach to Costing 36 Importance of Contribution Margin Approach 36 Departure from the Contribution Margin Approach 36 4. LITERATURE REVIEW 38 Background 38 Highway Form A 39 Highway Form B 45 Measuring P & D Costs f o r Small Shipments 48 Case Study: Carolina Freight C a r r i e r Corp 51 - v -Chapter Page 5. LANE PROFITABILITY MODEL 55 Model Abstract 55 Consideration of Cost-Output Analysis 62 Basic Requirements 62 Length of Time Periods 62 Number of Observations 63 Choice of Explanatory Variables 65 Important Issues 67 Time Lag 67 L i n e a r i t y 67 M a t e r i a l i t y 68 S t a t i s t i c a l Test of Significance 68 Det a i l s of A l l o c a t i o n Procedures 73 Assignment of Terminal Costs 74 Troublesome Aspects of Terminal Costs 78 Wages 78 Leased equipment and Hired Cartages... 78 Ti r e s 79 Maintenance 80 Bad Debts and Claims 80 Depreciation 80 Calc u l a t i o n of Line-haul Cost 81 Determination of P r o f i t a b i l i t y 82 6. INFORMATION SYSTEM FOR THE STUDY 83 Background 83 Data versus Information 84 C r i t e r i a of Data to be Collected 84 Data Base i n Relation to the Study 85 Exposition of Model Car r i e r ' s Data 85 Discussion on S c r u t i n i z i n g Data C o l l e c t i o n . 87 Revenue Data • 87 Terminal Costs Data 88 Supporting Data 90 7. CONCLUSIONS AND RECOMMENDATIONS 92: Conclusions 92 Recommendations 93 - v i -LIST OF EXHIBITS AND TABLES Page Exhibit 1-1 E x i s t i n g Transportation Flows - For Hire Trucking 1971 Volume Carried 12 Exhibit 2-1 Organization Chart of a Branch Terminal 20 Exhibit 2-2 Schematic of Flow of LTL I n t e r c i t y Shipment through a General-Commodities C a r r i e r Operation 22 Exhibit 3-1 I l l u s t r a t i o n of the Notion of Revenue 26 Table 3-1 L i s t of Terminal Costs 33 Table 3-2 L i s t of Line-haul Costs 35 Exhibit 5-1 I l l u s t r a t i o n of Lane D e f i n i t i o n 56 Exhibit 5-2 Line-haul Unit Cost Estimation Graph 59 Exhibit 5-3 Cost Components Representation 60 Exhibit 5-4 Flow Chart to Determine the T o t a l Variable Costs for T r a f f i c from City A to City B 61 Exhibit 5-5 A l l o c a t i o n Scheme 75 Exhibit 6-1 Suggested Cost Recording Methods 89 - v i i -ACKNOWLEDGMENT The author i s indebted to Mr. Harry White, general manager of A l l t r a n s Express Limited, f o r f i r s t arousing my i n t e r e s t i n the assess-ment of lane p r o f i t a b i l i t y , and for allowing me generous access to various kinds of information i n the company. Numerous people of the company offered both t h e i r invaluable time and t h e i r expert opinions, e s p e c i a l l y Mr. Frank D a l l i s o n ( c o n t r o l l e r , accounting department) who spent many hours discussing various problems with me. In the industry, my thanks are due to Mr. Chub Bawa of Johnston Terminals, Mr. Bob Simpson of C P . Transport, Mr. Richard F. Keeler of McLean Trucking Company (in the U.S.) and Mr. J . Diamond of the Canadian Transport Commission f or answering questions or providing i n f o r -mation f o r references. I am g r a t e f u l to Professors David H. Maister, Terence Brown, and Izak Benbasat f or t h e i r guidance, constructive c r i t i c i s m , and a con-siderable s a c r i f i c e of t h e i r time. F i n a l l y , I with to thank my colleagues and f r i e n d s : Wayne Simle of A l l t r a n s Express Limited f o r h i s h e l p f u l comments, and Karen Watson for her patience i n proof-reading the manuscript. - 1 -CHAPTER 1 INTRODUCTION Purpose Most of the a c t i v i t i e s of a long-haul trucking concern involve the movement of commodities from one c i t y to another. The t r a f f i c moved between a given c i t y p a i r i s generally termed a lane. The revenues generated by the lanes served by a trucking f i r m determine the p r o f i t -a b i l i t y of the whole operation, a f t e r the required operating costs are deducted. The f i r s t objective of the study i s to demonstrate how to construct a model and develop a set of procedures to determine the contribution margin of i n d i v i d u a l lanes. The second objective i s to propose proper procedures f o r recording accounting data pertaining to the construction of the model. To f a c i l i t a t e discussion, a model c a r r i e r i s used as a basic reference. The model c a r r i e r provides a general framework upon which to b u i l d the model, and, at the same time, sheds some l i g h t on what kinds of data are generally a v a i l a b l e and how data should be properly recorded. - 2 -Importance of the Study One of the most important operating objectives of a going concern i s to maximize i t s wealth. In the face of the ever-increasing cost/price squeeze, the improvement, or merely the maintenance, of p r o f i t s requires clear i d e n t i f i c a t i o n of p r o f i t and l o s s . Most of the trucking companies have an operating r a t i o (operating expenses divided by revenues) of around 95 percent. A one-percent reduction i n costs would thus allow a 20 percent Increase i n the p r o f i t margin.''" It i s not d i f f i c u l t to see why the assessment of p r o f i t a b i l i t y becomes the focus of a motor c a r r i e r ' s attention. Year-end reports and f i n a n c i a l statements are often inadequate f o r i n v e s t i g a t i n g the causes of unsatisfactory performance. I t becomes obvious that small segments of the company's operation need to be examined. The e s s e n t i a l question i s : What segments of the whole opera-t i o n should be examined i n d i v i d u a l l y ? Because of the heterogeneous nature of the transportation output, and the uniqueness of each unit of product, i t i s generally impractical to segregate costs to the l e v e l of i n d i v i d u a l shipments to determine p r o f i t a b i l i t y . A l t e r n a t i v e l y , the e f f i c i e n c y or performance of trucking terminals could be examined to see i f poor p r o f i t s are due to high operating costs. Stanley Warner, The Cost of Trucking: Econometric Ana l y s i s , (Dubuque: Wm. C. Brown Co., 1965), p. x i . Operating r a t i o i above 95% i s interpreted as unsatisfactory i n a trucking firm. - 3 -Since most of the c o n t r o l l a b l e costs occur at the terminal, t h i s approach has the merit of e f f e c t i v e cost c o n t r o l . However, cost c o n t r o l alone does not s u f f i c e i f revenues are lacking i n various segments of the operations (such as the lanes) to cover costs. A terminal i s a cost center but i s not usually considered a p r o f i t center. A cost center i s the smallest unit of a c t i v i t y or area of r e s p o n s i b i l i t y f or which costs are accumulated. A p r o f i t center i s a segment of a business that i s responsible f o r both revenues and expenses. The lanes are the revenue-generating units. Examination of lane performance would shed l i g h t on (1) where the l u c r a t i v e markets are and (2) where revenues are lacking. The i d e n t i f i c a t i o n and assignment of costs and revenues to the various lanes are necessary to determine p r o f i t a b i l i t y . The assign-ment of costs and revenues i s not a simple matter, p a r t l y due to the d i f f i c u l t y of measuring transportation output, and p a r t l y due to the s u b j e c t i v i t y involved i n some cost assigments. The long and c o l o r f u l h i s t o r y of the r a i l r o a d operation i n North America has undoubtedly prompted many authors to delve into the r a i l costing problems. Because of the great differences between the r a i l and the truck modes, i n terms of cost structures, c a p i t a l i n v e s t -ment requirement, f l e x i b i l i t y of operation, ease of entry and with-drawal, i t i s evident that the emphases of t h e i r costing problems are considerably d i f f e r e n t . Because of these differences and the differences Output i s considered i n t h i s context to be the work done or the activities"performed as part or a l l of the transportation function, including the supporting functions such as c l e r i c a l work. - 4 -i n the kinds of costs incurred by the two modes, i t would be unwise to apply r a i l costing techniques indisc r i m i n a n t l y to a trucking operation. The l i t e r a t u r e review i n Chapter 4 lends some support to the importance of i n i t i a t i n g a study l i k e t h i s one. A b r i e f review of the current l i t e r a t u r e reveals that: 1. Cost-accounting l i t e r a t u r e should not be expected to deal with transportation, although the background knowledge provided i s invaluable. 2. L i t e r a t u r e on transportation that addresses the question of lane p r o f i t a b i l i t y can not be found. However, l i t e r a t u r e r e l a t i n g to transportation i s enlightening. 3. The U.S. government-prescribed costing methods suggested by the Interstate Commerce Commission are not applicable f o r two reasons. F i r s t , the methods are used f o r the sake of uniformity (among c a r r i e r s for rate-making purposes). Second, some of the factors developed are based on regional data i n the U.S. and are not applicable i n Canada. - 5 -Background To understand the p a r t i c u l a r problems created by the complexity of a motor-carrier operation, i t i s c r u c i a l to gain an understanding of the nature of the transportation output. A wide spectrum of commodities i s hauled by a common c a r r i e r from one c i t y to another. Because these commodities come i n a l l d i f f e r e n t forms, shapes, and s i z e s , the measurement of transportation output i s a formidable task. By the same token, costing i s a rather complex matter. How does one compare the e f f o r t required to haul a hundred pounds of n a i l s with that required to haul the same amount of feathers by weight? How does one compare the cost of handling one thousand pounds of canned foods i n small cartons with the same commodities i n big crates or p a l l e t s ? There are many factors a f f e c t i n g the costs of handling commodities. These factors are, f o r example: (1) the l e v e l of t r a f f i c being handled at a p a r t i c u l a r point i n time, (2) the types of v e h i c l e s used and how f u l l y they are loaded, (3) the value of the commodity and the amount of care required f o r i t s handling, (4) the speed at which i t i s moved, and (5) the l o c a t i o n of the terminal. These factors add another dimension to the cost problems f o r i t i s evident that i t may cost a d i f f e r e n t amount to move the same commodity over the same distance at d i f f e r e n t times, or d i f f e r e n t commodities of the same weight over the same distance at the same time. It i s also necessary to understand the general a c t i v i t i e s of the motor-carrier industry, the day-to-day operation of a representative c a r r i e r , and the nature of the various costs problems i n transportation - 6 -costing. S p e c i f i c knowledge of the manner i n which costs are recorded i s often h e l p f u l to see i f input data are reasonable. To i l l u s t r a t e t h i s point, a model c a r r i e r i s necessary because i t serves as an example i n a r e a l - l i f e s i t u a t i o n . Recommendations regarding the questions of how and when input data should be recorded w i l l be based on the framework provided by the model c a r r i e r . The constructed model i s based on the operation of a sing l e common c a r r i e r which the author considers a representative c a r r i e r of i t s kind (common c a r r i e r ) . Discussions with people i n the f i e l d i n d i c a t e that other c a r r i e r s do have s i m i l a r problems i n conducting a lane p r o f i t a b i l i t y study. It i s hoped that the model suggested i n th i s paper has some value for general a p p l i c a t i o n . - 7 -Uses of the Study Results and conclusions of the study can be used to serve the following purposes: 1. To help management determine which of the lanes c a l l f o r more marketing e f f o r t s with respect to the volume and types of t r a f f i c . 2. To help management determine which of the lanes need to be re-rounted or deleted. 3. To provide i n s i g h t f o r rate-structure decisions. 4. To enable management to observe the o v e r a l l e f f e c t s on p r o f i t a b i l i t y when variables such as shipment c h a r a c t e r i s t i c s and rate structures are changed i n a p a r t i c u l a r lane. It should be noted that decisions such as those mentioned above should not be based s o l e l y on the r e s u l t s of the study. Other considera-tions such as: competition, side e f f e c t s of c e r t a i n courses of action, and shipper-trucker r e l a t i o n s h i p s should come to bear. For example, the existence of some of the lanes i n sp i t e of low contribution margins may be explainable on p r a c t i c a l grounds. The maintenance of an un p r o f i t -able lane may fos t e r a good shipper-trucker r e l a t i o n s h i p , promote good w i l l , and avoid d r a s t i c loss of t r a f f i c i n other lanes when the un p r o f i t -able lane i s deleted. - 8 -Thesis Outline A general d e s c r i p t i o n of the common motor-carrier industry i s presented to the remaining section of th i s chapter. The discussion covers the general economics, the rate structure, and the measurement of o v e r a l l operating effectiveness of a trucking firm. Chapter 2 gives a des c r i p t i o n of the organization and the day-to-day operation of the model c a r r i e r under study. The chapter aims to pro-vide an understanding of the way commodities are handled and moved. The flow of i n t e r c i t y shipments through a general commodity c a r r i e r and the kinds of people involved i n the production of the transportation service are discussed i n some d e t a i l . Chapter 3 discusses the meaning of a lane and the concept of p r o f i t -a b i l i t y . The l i t e r a t u r e review i n Chapter 4 examines the past research regard-ing trucking cost, and p r o f i t a b i l i t y . Chapter 5 contains the model i t s e l f and the suggested procedures to determine p r o f i t a b i l i t y . S t a t i s t i c a l t e s t i n g methods are also included to ensure that the findings are s i g n i f i c a n t . Chapter 6 discusses how and when accounting records should be kept to provide the needed ingredients using the model c a r r i e r as an example. Chapter 7 contains conclusions and recommendations. - 9 -General Description of the Motor C a r r i e r Industry An understanding of the general nature of the motor-carrier industry enables one to come to grips with the types and c l a s s i f i c a t i o n s of c a r r i e r s , the economics of the industry, and the rate and cost s t r u c -ture. This section provides readers who are not involved i n the trucking mode with an understanding of the general issues a r i s i n g out of the industry. C l a s s i f i c a t i o n : Motor c a r r i e r s can be c l a s s i f i e d by types, namely, f o r - h i r e and priva t e . A f o r - h i r e c a r r i e r could e i t h e r be a common c a r r i e r or a con-t r a c t c a r r i e r . The common motor c a r r i e r i s defined by statute as any person or company which engages i n the transportation of goods f o r the general public on regular or i r r e g u l a r routes. A contract c a r r i e r i s a c a r r i e r that provides transportation services for shippers l i k e the common motor c a r r i e r , except that the services are i n general provided f o r a s p e c i f i c c l i e n t or group of c l i e n t s through the assignment of vehicles f o r a given period of time under the terms of the contract. A p r i v a t e c a r r i e r i s a c a r r i e r whose sole purpose i s to provide transportation service f o r a corporation's primary business. The c a r r i e r i s p r i v a t e l y owned and does not provide i t s service f o r other corporations f o r profit-making purposes. Ca r r i e r s can also be c l a s s i f i e d by the types of commodities c a r r i e d , such as, c a r r i e r of general f r e i g h t , c a r r i e r of household goods, and - 10 -c a r r i e r of s p e c i a l commodities. Yet another way to c l a s s i f y c a r r i e r s i s by the gross revenue generated. I n d i r e c t l y , t h i s i s a c l a s s i f i c a t i o n of c a r r i e r s by the s i z e of operation. S t a t i s t i c s Canada c l a s s i f i e s c a r r i e r s i n the following manner: Class I: revenue per annum above $2 m i l l i o n Class I I : revenue per annum between $500,000 and $2 m i l l i o n Class I I I : revenue per annum between $100,000 and $500,000 ' Class IV: revenue per annum between $25,000 and $100,000 Class V: revenue per annum below $25,000 Economics: Regarding the economics of commercial motor c a r r i e r s , a few areas are of i n t e r e s t and have received much attention. 1. Size of shipments: Shipment sizes i n terms of weight are ei t h e r c l a s s i f i e d as truckload (TL) or less-than-truckload (LTL) t r a f f i c . Note that the terms TL and LTL cannot be s t r i c t l y defined because what con-s t i t u t e s a TL shipment depends on how a p a r t i c u l a r c a r r i e r defines TL and on the kinds of commodities being shipped. By the same token, what constitutes a small shipment i s also a r b i t r a r y at best. Small shipments are usually more co s t l y to handle because they often involve as much paper work as large shipments. They are, i n general, short haul t r a f f i c . 2. Types of t r a f f i c : Most of the f r e i g h t movements are s i n g l e - l i n e hauls ( i . e . , only one c a r r i e r i s involved i n the haul). When the move-ment involves another c a r r i e r f o r the completion of the haul, i t i s c a l l e d i n t e r l i n e . - 11 -3. Length of haul: T y p i c a l l y , the motor c a r r i e r serves the shorter-haul market as compared to the r a i l mode. (See Exhibit 1-1) The Interim Report on Freight Transport i n Canada indicates that the average haul f o r r a i l i s 600 miles and that f o r truck i s 150 miles. Since terminal cost i s the same i r r e s p e c t i v e of the length of haul, short haul t r a f f i c i s therefore more expensive to handle because the terminal cost i s a larger percentage .of the t o t a l cost. On a cost-per-mile basis, longer-haul t r a f f i c shows a lower cost f i g u r e because the terminal cost i s spread over the number of miles. EXHIBIT 1-1 PRAiRIES(l) NOTE 1: PRAIRIE REGION INCLUDES YUKON AND NORTH WEST TERRTORIES Source: Min is try of Transport, An Interim Report of Freight Transportation in Canada Ottawa, June 1975, p. 10. - 13 -Rates T h e o r e t i c a l l y , seven items should be considered i n rate determina-tion. They are: (1) density of t r a f f i c , (2) distance of haul, (3) f r a g i l i t y of commodities, (4) value of service, (5) weight of shipment, (6) c l a s s , and (7) packaging. There are three common kinds of rates, namely, class rates, point-to-point rates and commodity rates. Class rates, giving a basic rate structure, are derived from the Canadian Railway Freight C l a s s i f i c a t i o n No. 22. The c l a s s i f i c a t i o n of commodities i s expressed as percentage of the F i r s t Class rate which serves as a reference point. For example, the F i r s t Class rate f o r a distance of 60 miles i s $1.20 per unit weight; thus the rate f o r a commodity hauled over a distance of 60 miles i s between 100 percent and 40 percent of $1.20. The appropriate f r a c t i o n depends on the type of commodity i n question. In addition, there i s considerable use of s p e c i f i c t a r i f f s that one can apply between s p e c i f i c points. In general, they are lower than class rates. They may r e f l e c t the influence of intermodal competition, or i n some cases, the volume of shipments. Commodity rates are point-to-point rates developed to meet the varied 2 c h a r a c t e r i s t c i s of the demand for trucking services. The control of trucking rates i s l a r g e l y i n p r o v i n c i a l hands. There e x i s t s considerable d i v e r s i t y among provinces i n t h e i r regulation H.L. Purdy, Transport i n Canada, Composition and Public P o l i c y (Vancouver: Un i v e r s i t y of B r i t i s h Columbia Press, 1972), p. 106. - 14 -of rates.' F i l i n g of t a r i f f s and adherence to these t a r i f f s i s required i n a l l provinces except Alberta. Operating Cost Structure A large portion of the costs of the Canadian trucking industry are vari a b l e . For Class I and II c a r r i e r s , f u e l costs represent between 7 and 12 percent of t o t a l operating costs, while labour costs represent between 40 and 60 percent. The r a t i o of v a r i a b l e costs to t o t a l costs i n the trucking business i s generally believed to be higher i n the trucking mode than most other transportation i n d u s t r i e s . Measurement of Operating Effectiveness Several crude methods are used i n the industry to measure a trucking firm's a b i l i t y to generate revenues and a b i l i t y to con t r o l costs. These methods are: 1. Turnover r a t i o : the turnover r a t i o shows how many d o l l a r s of gross revenue the c a r r i e r generates from a d o l l a r of assets. It i s given by: t o t a l operating revenue  net operating property + working c a p i t a l 2. Operating rate of return: a measure of the p r o f i t generated by each d o l l a r invested. In the motor-carrier industry, the rate of return i s conceived to be higher than i n the r a i l industry because of i t s r e l a t i v e l y low c a p i t a l investment requirement. 3. Operating r a t i o : a measure of the amount of operating expenditure 3 Ibid p. 199. - 15 -required to generate the operating revenue. I t i s equal to operating expenses divided by operating revenue. This i s by f a r the most commonly adopted method f o r evaluation purposes. However, the ratio-.-- does not explain how each input i s used, or does i t explain whether a high r a t i o i s due to i n e f f i c i e n t use of resources or to other external f a c t o r s . One can i n t e r p r e t the r a t i o s by comparing them with other s i m i l a r firms i n the industry or with the i n d u s t r i a l average. A l t e r n a t i v e l y , one can compare the present r a t i o s with the past r a t i o s i f the i n d u s t r i a l averages are not r e a d i l y a v a i l a b l e . On many occasions, i t may be necessary to go beyond the s u p e r f i c i a l figures reported from the r a t i o s to properly analyse the firm's perfor-mance. A great deal of caution should be exercised when using r a t i o s . Whichever of the above r a t i o s i s used, i t serves as a s i g n a l f o r further i n v e s t i g a t i o n s . For example, i f a firm's operating r a t i o i s too high, i t may be necessary to examine segments of the operation, such as terminal performance or lane performance, to see i f the root of the problem can be traced. On the other hand, even i f o v e r a l l performance i s s a t i s f a c t o r y , i t may s t i l l be sensible to carry out the same kind of i n -v e s t i g a t i o n to see i f knowledge about successful segments of the operation can be tapped to improve the less successful ones. F i n a n c i a l Structure The trucking industry i s t y p i f i e d by operations with low r e a l 4 c a p i t a l investment. It has been observed that motor c a r r i e r s can 4 Canadian Transport Commission, The Canadian Trucking Industry: Issues A r i s i n g out of Current Information (Ottawa: Queen's P r i n t e r , A p r i l 1975), p. 16. - 16 -support s u b s t a n t i a l revenues on r e l a t i v e l y t h i n c a p i t a l structures. The c a p i t a l investment depends on the type of c a r r i e r (general-commodity vs. special-commodity c a r r i e r , or common vs. contract c a r r i e r ) and the s t y l e of operation. For example, a contract c a r r i e r can rents i t s equipment f o r a short-term contract to reduce i n i t i a l c a p i t a l investment. Most c a r r i e r s are able to c o l l e c t t h e i r accounts receivable within a short time. Because of t h i s and the f a c t that inventories do not ex i s t , working c a p i t a l i s reduced. Many trucking firms finance the a c q u i s i t i o n of t h e i r required c a p i t a l assets ( i . e . , trucks) through loans from various f i n a n c i a l i n s t i t u t i o n s . Nevertheless, compared to other modes of transportation, the average r a t i o of debt to equity of trucking firms i s quite low. Operating r a t i o s tend to be lower f o r smaller firms. This may be due to the f a c t that smaller firms have lower overhead and administrative 5 expenses. The general-commodity c a r r i e r s do not operate under a rate structure that i s rela t e d to the cost structure. Many shipments are a c t u a l l y sub-s i d i z e d by more l u c r a t i v e ones, even though the o v e r a l l p r o f i t a b i l i t y p i c t u r e i s s a t i s f a c t o r y . I t has been observed that not a l l the shipments hauled by U.S. general-commodity c a r r i e r s produce an operating r a t i o n below 100%. However, one cannot conclude that one type of shipment i s more l u c r a t i v e than another or that a c a r r i e r should discard the l e s s p r o f i t a b l e shipments. Rather, i t simply i l l u s t r a t e s the point that some Ibid, p. 15. Economic Research Committee, I.C.C., Cost, Revenues and Small Ship- ments (Washington, D.C: Regular Common Ca r r i e r Conference, 1972), p. 4. - 17 -shipments do not pay t h e i r own way and should therefore be i d e n t i f i e d as such. Darly Wyckoff, i n h i s book "Organization Formality and Performance", indicates.that there have been some recent e f f o r t s to a l i g n rates with costs f or smaller shipments. - 18 -CHAPTER 2 MODEL CARRIER Background There seem to be two generally accepted ways to Impart knowledge or ideas. One way i s to lay out the t h e o r e t i c a l concepts i n some l o g i c a l or chronological order. The other way i s to i l l u s t r a t e the ideas by means of hypothetical or r e a l - l i f e examples. Either method i s workable i f properly handled. - Thus, i t i s con-ceivable that the combination of the two ways i s a sui t a b l e v e h i c l e to present t h i s study. Much reference w i l l be made to the model c a r r i e r , which i s of necessity a representative c a r r i e r of i t s type (common c a r r i e r ) . However, the constructed model f o r lane p r o f i t a b i l i t y should be amenable to general applications. Before describing the procedures used to determine lane p r o f i t a b i l i t y , i t i s therefore important to get acquainted with the general operation of the model c a r r i e r . Model C a r r i e r Description The model c a r r i e r , ALLTRANS EXPRESS LTD., i s a general-commodity, long-haul concern. It i s a common motor c a r r i e r serving the major eastern and western c i t i e s i n Canada. The types of commodity c a r r i e d are many and varied. The weight of a shipment c a r r i e d i n the company can be as small as f i f t y pounds or as large as f o r t y thousand pounds. In. other words, the company hauls - 19 -truckload and less-tKan-truckload t r a f f i c . The organization of the company can be viewed from the head o f f i c e and the branch terminals. The general head o f f i c e i s not d i r e c t l y involved with the movement of t r a f f i c and i s therefore not discussed here. A discussion of the branch terminals' organization provides adequate back-ground knowledge f o r t h i s study. Organization of Branch Terminal The organization of a t y p i c a l branch terminal i s shown i n Exhibit 2-1. The functions performed i n each brance are (1) o f f i c e , C2) sales , (3) t r a f f i c and (4) terminal operation. The manager of each of these functions reports to the branch manager who i n turn report to the head o f f i c e . The terminal operation manager i s responsible f o r the c i t y dispatch and dock operation. The former controls the pickup and d e l i v e r y function, and the l a t t e r controls the movement of f r e i g h t across the dock. The dock foreman i s also responsible f o r the proper arrangement of dock and yard equipment. The sales manager supervises the personal door-to-door s e l l i n g function performed by a few salesmen. The o f f i c e manager i s responsible f o r the inspection functions and a f f a i r s r e l a t i n g to overage, shortage and damage (O.S. & D.) of commodi-t i e s . He also t r i e s to reduce claims through correction of errors at t h e i r sources. The t r a f f i c supervisor manages the quoting, the extending and cut t i n g of rates, and b i l l i n g . EXHIBIT 2-1 ORGANISATIONAL CHART OF A BRANCH TERMINAL Branch Manager Terminal Manager O f f i c e Manager Ci Dis ty patch P & D Drivers Dock Foreman Loaders 0. S.&D. Claim Sales Manager T r a f f i c Manager Tracing Accounts Receivable Salesmen Rating B i l l i n g Yard-men Strippers - 21 -The following section discusses the day-to-day operation of the model c a r r i e r . The day-to-day operation i s d i r e c t l y r e l a t e d to the actual movement of goods. Day-to-Day Operation The transportation a c t i v i t y begins when a shipper phones to request a pickup. P r i o r to that, however, he may wish to inquire about the rate before deciding which c a r r i e r to patronize. The rate c l e r k whose duty i s to answer rate questions and o f f e r advice to shippers, generally provides the needed information. Following the flow of i n t e r c i t y shipment i n Exhibit 2-2, the next step i s to pick up the shipment with a pickup and d e l i v e r y (P & D) truck. A b i l l of lading i s prepared at the same time. Before the P & D truck i s dispatched, the driver has to obtain the following information about the shipper: (1) destination, (2) s p e c i a l equipment requirement, (3) name of shipper and address, and (4) type and weight of f r e i g h t . A b i l l of lading i s usually prepared by the shipper using a pre-printed form provided by the c a r r i e r . It has information such as, (1) point of o r i g i n , (2) shipper's name and address, (3) consignee's name and address, (4) number of pieces, (5) de s c r i p t i o n of goods and s p e c i a l remarks, (6) weight of shipment, (7) rate, (8) amount shipped, and (9) terms of the contract. The weight of the shipment i s provided by the shipper, and the c a r r i e r only does spot checks from time to time to ensure accuracy. The c i t y dispatcher's o v e r a l l r e s p o n s i b i l i t y i s (1) to con t r o l P & D truck EXHIBIT 2-2 Schematic of flow of LTL i n te r c i t y shipment through a general Commodity ca r r ie r operation Requested Picked up or by Scheduled P-D trucks > pickups i i i i j . Prepare 1 B/L Del ivery to Receipt by 0/B terminal s ^ 3/B 'Termi-/ > nals Removed from move to move to 0/B P-D Truck & check s staging area ? l i ne -hau l trucks i i Rate quote, \ Prepare axtend & cut 7 freight b i l l s Receipt by I/B term-i n a l (removed fromf trucks, & check move to staging area load onto P-D trucks, & check del ivery to consignee P.D. = pickup and del ivery 0/B = outbound I/B = inbound B/L = b i l l of lading check = count, compare, labe l s , spotweight = document flow = fre ight flow - 23 -d r i v e r s , (2) to supervise P & D operation, C3) to co-ordinate P & D with the dock operation, and (4) to handle pickup requests and gather pickup information. The c i t y dispatch has to be i n close contact with the l i n e - h a u l dispatcher, the dock foremen, and c i t y drivers to ensure smooth operation. Once the shipment has been picked up from the shipper, and taken to the terminal, i t i s moved across the dock into the l i n e - h a u l t r a i l e r that takes the shipment to i t s destination c i t y . Otherwise, i t i s placed i n a staging area or warehouse to be loaded into a l i n e - h a u l t r a i l e r at a l a t e r stage. A f r e i g h t b i l l i s typed a f t e r the rates are quoted and extended. It shows the amount the shipper or consignee i s to pay for the shipment. The movement of f r e i g h t across the dock i s c o n t r o l l e d by the dock foreman. He supervises the loaders and s t r i p p e r s . The loaders and s t r i p p e r s load and unload P & D trucks and l i n e - h a u l t r a i l e r s . They also perform the checkers' function to ensure proper loading of shipments to the correct destination. Improper l a b e l l i n g of packages, poor scheduling and routing, and i n -s u f f i c i e n t dock space, impede e f f i c i e n t dock a c t i v i t i e s . The procedure repeats i t s e l f a f t e r the shipment reaches i t s destination c i t y . The ensuing chapter discusses the e s s e n t i a l s of lane p r o f i t a b i l i t y to provide some i n s i g h t regarding the meaning of a lane and the concepts r e l a t i n g to p r o f i t a b i l i t y . - 24 -CHAPTER 3 ESSENTIALS OF LANE PROFITABILITY The meaning of "lane" and " p r o f i t a b i l i t y " should be understood before proceeding to the ensuing chapters. The discussion of p r o f i t a b i l i t y involves the discussion of i t s components, revenues and costs; and each of the components w i l l be covered i n some d e t a i l . D e f i n i t i o n of a Lane A lane i s defined f o r the model c a r r i e r s as w e l l as i n the truck-ing industry as the t r a f f i c flow between a c i t y p a i r or between two terminals. In essence, the t r a f f i c between terminal A and B i s the combination of t r a f f i c moving from A to B and from B to A. From the standpoint of terminal A, the t r a f f i c moving from B.to A i s the inbound t r a f f i c , and the t r a f f i c moving from A to B i s the outbound t r a f f i c . I t i s not unusual i n transportation to have more t r a f f i c i n one d i r e c t i o n than i n the reverse d i r e c t i o n . The t r a f f i c moving i n the higher-density d i r e c t i o n i s generally termed the headload t r a f f i c . The t r a f f i c moving i n the lower-density d i r e c t i o n i s termed the backhaul t r a f f i c . With a possible combination of nearly one hundred lanes i n the net-work, i t i s p r a c t i c a l to s e l e c t c e r t a i n lanes of i n t e r e s t f o r an a l y s i s . In the f i r s t place, an examination of a l l the lanes i n existence i s time consuming. Some lanes have a n e g l i g i b l e amount of t r a f f i c ( i n terms of revenue) and do not warrant research e f f o r t s . Secondly, lanes with n e g l i g i b l e t r a f f i c are the ones that do not have regular business. In a - 25 -period of say, two years, one cannot obtain twenty four montly data points from those lanes which do not have regular t r a f f i c . Thus, lanes of t h i s nature do not provide adequate data points f o r analysis. One can pick out major lanes between various b i g c i t i e s to d r a s t i -c a l l y reduce the amount of research work required without s a c r i f i c i n g the completeness of the study. An examination of a few selected lanes rather than a l l the lanes w i l l enable management to concentrate t h e i r e f f o r t on lanes of most i n t e r e s t . The following section w i l l be a discussion on the concept of p r o f i t -a b i l i t y and the components of p r o f i t a b i l i t y . Concept of P r o f i t a b i l i t y P r o f i t a b i l i t y , according to Ezra Solomon, i s an operational concept, not an owner-oriented concept.^ By t h i s , one can say that when management i s given the job to maximize p r o f i t a b i l i t y , i n a c o n d i t i o n a l s i t u a t i o n , management has to see to i t that within the various constraints i t has to work under, the operation, on the average, has more inflow than outflow i n terms of funds or i n other measurable terms. For an operation to be p r o f i t -able then, the operating revenues generated from the summation of a l l i t s segments, on the average, should be above costs which are e s s e n t i a l to generate the revenues. Since p r o f i t a b i l i t y i s an operational concept, t h i s study, a p r o f i t -a b i l i t y study, w i l l not deal with the owner-oriented objectives (often Ezra Solomon, The Theory of F i n a n c i a l Managements (New York: Columbia University Press, 1963), p. 17. - 26 -nebulously defined) such as those of the maximization of wealth or of p r o f i t s . It should be noted, however, that p r o f i t a b i l i t y maximization i s a necessary but not s u f f i c i e n t condition for the attainment of the afore-8 mentioned owner-oriented objectives. Components of P r o f i t a b l i t y Revenue The explanation of the notion of revenue can best be done with the aid of symbols. Let R^ = revenue of t r a f f i c moving from c i t y A to B Rg ^ = revenue of t r a f f i c moving from c i t y B to A R A t ) = revenue of the above combined = revenue for lane AB Suppose there are four terminals, A, B, C, & D under consideration. EXHIBIT 3-1 - Notion of Revenue Calvin Potter, Finance and Business Administration i n Canada (Scarborough: Prentice-Hall of Canada Ltd., 2nd E d i t i o n , 1970), p. 91. - 27 -The outbound revenue associated with terminal A i s : R _ + R. + R, T , A.B A.C A.D The inbound revenue associated with terminal A i s then: RB.A + RC.A + VA The t o t a l revenue associated with terminal A i s equal to the sum of the above, or simply the sum of the lane revenues: RAB + RAC + RAD - 28 -Cost Basic Concepts The prime objective of a going concern i s to be able to p r i c e i t s s e r v i c e , on the average, above costs. The importance of costs to data c o l l e c t i o n , i d e n t i f i c a t i o n , and con t r o l i s attested to by the f a c t that knowledge of costs has been used t r a d i t i o n a l l y as an invaluable decision-making t o o l . There i s , i n general, a lack of awareness regarding the implica-t i o n of "cost" f o r rate l e v e l s , t r a f f i c volumes, and service standards. Fa l l a c i o u s decisions are sometimes made without an understanding of the assumptions underlying the cost figures gathered and the l i m i t a t i o n of the use of cost knowledge. F i r s t , many transporation costs cannot be measured with complete p r e c i s i o n . Some costs can be d i r e c t l y traced to s p e c i f i c t r a f f i c but others cannot. A r b i t r a r y methods have to be designed, i n some instances, to apportion costs to d i f f e r e n t segments of t r a f f i c . Second, past cost data have to be rela t e d to the future. It must be r e a l i z e d that data of recent months are not usually used to make decisions f o r the i n d e f i n i t e future. Another point worth mentioning i s that, i n sp i t e of the seemingly complicated mathematical manipulations and high-sounding s t a t i s t i c a l techniques that surround cost analyses, the r e s u l t s obtained from the analyses are merely predictions of the future. Complex formulations often create a f a l s e sense of p r e c i s i o n . Third, costs mean d i f f e r e n t things at d i f f e r e n t times. In p r a c t i c e , i t does not always cost the same to haul two i d e n t i c a l commodities the same distance, depending f o r example, on whether i t i s the headload or - 29 -backhaul t r a f f i c , or whether workers are paid over-time wages to handle the t r a f f i c . In s pite of the above l i m i a t i o n s of the uses of cost, knowledge of costs i s used for a multitude of routine and non-routine decisions. How-ever, before one can use costing to make decisions, i t i s e s s e n t i a l to understand the various cost terms and the c h a r a c t e r i s t i c s of the cost elements i n a trucking terminal. Cost C l a s s i f i c a t i o n and Relevant Cost In l i g h t of the fact that cost terms are often defined s l i g h t l y d i f f e r e n t l y i n d i f f e r e n t s i t u a t i o n s , i t i s appropriate to define the following terms i n the context of t h i s paper. Direct costs: d i r e c t costs are those that are immediately traceable to a p a r t i c u l a r type of output, or costs that can be traced to p a r t i c u l a r t r a f f i c . A l i n e - h a u l driver's wages, f o r example, can be traced d i r e c t l y to the p a r t i c u l a r run he performed. Indirect costs: i n d i r e c t costs are those that cannot be e a s i l y traced to a p a r t i c u l a r t r a f f i c , or those that are not d i r e c t l y connected with output. Taxes of various kinds,.phone b i l l s , are examples of i n d i r e c t costs. It should be noted that d i r e c t and i n d i r e c t costs are not synonymous with f i x e d and v a r i a b l e costs. Not a l l v a r i a b l e costs are d i r e c t costs, and not a l l d i r e c t costs are v a r i a b l e s . Furthermore, when speaking of d i r e c t costs, i t i s e s s e n t i a l to s p e c i f y the unit being costed. Costs which are d i r e c t with respect to one unit are often i n d i r e c t with respect to other units. For example, the branch manager's salary i s d i r e c t l y - 30 -assignable to the cost of running a branch, but i t i s not d i r e c t l y assignable to the costs of operating a lane. Fixed costs: f i x e d costs are those costs that remain f i x e d i n t o t a l even with changes i n output. A f i x e d cost i s f i x e d , only i n r e l a t i o n s h i p to a given period of time and a given range of a c t i v i t y , c a l l e d the "relevant range". Fixed costs vary on a unit basis with changes i n output l e v e l but do not change i n t o t a l . Variable costs: v a r i a b l e costs are those that are uniform per u n i t , but f l u c t u a t e i n t o t a l i n d i r e c t proporation to changes i n the r e l a t e d t o t a l a c t i v i t y or volume i n a given time period and range of a c t i v i t y . The d i s t i n c t i o n between fixed and v a r i a b l e costs cannot be made without f i r s t s p e c i f y i n g the time span and the l e v e l of a c t i v i t y . The time span should be the time i n which management has had ample time to adjust costs 9 to t r a f f i c volume. Semi-variable costs: semi-variable costs are those that have both fixed and v a r i a b l e elements. The f i x e d elements represent the minimum cost of supplying a service. The v a r i a b l e element i s that portion of the cost influenced by changes i n a c t i v i t y . Incremental costs: incremental costs are those added costs involved i n a change of l e v e l of output. T h e o r e t i c a l l y , there i s a difference between v a r i a b l e cost and incremental costs. While v a r i a b l e cost i s uniform per unit of output produced, an incremental cost i s not. For example, i t cost very l i t t l e to haul an a d d i t i o n a l hundred pounds 9 Royal Commission on Transportation (Ottawa: Queen's P r i n t e r , J u l y 1962), Vol. I l l , p. 168, quoting the "Excerpts from A Study of Cost Structures and Cost Finding Procedures i n the Regulated Transportation Industries", prepared f o r the U.S. Dept. of Commerce, Nov. 1959. - 31 -i n a h a l f - - f u l l t r a i l e r ; however, i f several many a d d i t i o n a l hundred pounds were added u n t i l another t r a i l e r was required, the added costs would be very high. In p r a c t i c e , another truck w i l l not be dispatched j u s t to carry the a d d i t i o n a l hundred pounds. The f i n e d i s t i n c t i o n between incremental and v a r i a b l e cost i s an academic one. F u l l y d i s t r i b u t e d costs: f u l l y d i s t r i b u t e d costs are those costs that are based on the out-of-pocket or v a r i a b l e costs plus an apportion-ment of the constant expenses. They show the extent of the constant costs which are present i n the operation and which must be recovered out of the revenues received over and above the v a r i a b l e expenses. Many authors question the usefulness of f u l l y d i s t r i b u t e d costs for decision making i n other modes of transportation such as r a i l . Professor Edwards contends that f u l l y d i s t r i b u t e d costs have no relevance i n the establishment of f r e i g h t rates. Poole, i n h i s book on Railway Costs, mentions that the only cost f i n d i n g that has any . v a l i d i t y i s that which concerns i t s e l f with costs that vary with the volume of production. Cost Elements The two major components of cost to be examined i n t h i s study are terminal costs and l i n e - h a u l costs. Terminal costs are many and varied i n nature. Each terminal cost Ernest Poole, Cost - A Tool f o r Railway Management (New York: Simons-Boardman Publishing Corporation, 1962), p. 18. Ford Edwards, "The Role of Transportation Costs and Market Demand i n Railroad Rate Making", Journal of Transportation, F a l l 1969, Vol. 9, No. 1, p. 45. - 32 -demonstrates p e c u l i a r c h a r a c t e r i s t i c s of i t s own, and a b r i e f exposition of the d i f f e r e n t nature of each cost may be h e l p f u l f o r understanding the following chapters. Note that the pickup and d e l i v e r y cost i s also considered as .a terminal cost i n t h i s paper. Line haul costs are costs required to perform the "over-the-road" functions. An explanation of the d i f f e r e n t costs are shown separately i n Table 3-1 and Table 3-2 for the terminal and l i n e - h a u l functions. - 3 3 -TABLE 3-1 Terminal Costs Costs Explanation Wages - P & D Wages - dock Welfare Leased equipment Hired Cartage Accidental repairs Licenses Fuel & O i l Radio communication wages for d r i v e r s & helpers doing P & D within the terminal.city* wages f o r loaders, s t r i p p e r s , checkers ( i f applicr-able) and yard jockeys. fringe benefits l i k e medical plans, dental plans, and company-paid l i f e insurance. tra c t o r s and t r a i l e r s for P & D are rented for hours or days when the e x i s t i n g equipment i s inadequate. same nature as leased equipment except h i r e d cartage involves the h i r i n g of d r i v e r s as w e l l as cartages from a cartage company. accidental repairs are an expense when the company i s s e l f insured. Otherwise, t h i s expense i s replaced by insurance expense. a f i x e d annual expense based on the s i z e of the f l e e t and the type of service performed. f u e l & o i l used f o r P & D trucks within the c i t y of a p a r t i c u l a r terminal. maintenance of radio equipment for the c i t y dispatch function. Dock supplies T i r e s & tube Maintenance Salary - Branch & term manager Salary - dispatch & formen supplies such as p e l l e t s , dunnage, staples and f l o o r absorbent. replacement of t i r e s and tubes for P & D operation. maintenance of P & D equipment including parts and major overhaul. s t r a i g h t monthly salary f o r the administration of the branch terminal. s t r a i g h t monthly salary f o r the operation of the terminal and P & D function. Salary - O f f i c e & Janitors s t r a i g h t monthly salary to carry out the routine work of an o f f i c e . - 34 -Welfare O f f i c e equipment Postage, p r i n t i n g & stationery Property maintenance U t i l i t y Telephone & Teletype Business & Property tax Security Rent Sales & T r a f f i c Depreciation Interest Claims Bad debt fri n g e b e n e f i t s , unemployment insurance, etc. f o r s a l a r i e d employees. leasing and maintenance of o f f i c e equipment l i k e adding machines, typewriters, & photocopiers postage f o r mailing out b i l l s , sales l i t e r a t u r e and so f o r t h . P r i n t i n g & stationery are used on a regular b a s i s . refurbishing of the terminal premises, heat, l i g h t , and water. the long-distance telephones and teletype expenses increase as more transactions take place. f i x e d annual expenses to be spread over the year. a hired service to safeguard the terminal properties and equipment. fi x e d monthly payment. salesmen commissions, car allowances, advertising. depreciation of trucks and t r a c t o r s . If equipment wears out quickly on usage, depreciation should r e f l e c t t h i s . See discussion i n Chapter 6. i n t e r e s t f o r bank loans and overdrafts. payment made for l o s t of damaged shipments as a compensation. a bad debt'expense i s incurred i f the c o l l e c t i o n of a payment i s unsuccessful. - 35 -TABLE 3-2 Line-haul Costs Operating Expenses: Piggyback Wages Welfare Lease equipment Accidental repair Fule & O i l Licenses Maintenance T i r e s &.tubes Depreciation cost to send a l i n e - h a u l t r a i l e r by r a i l Line-haul d r i v e r s and helpers' wages dental p l a n s , l i f e insurance, medical plans occurs when there i s inadequate equipment on hand outside repair due to accidents d i e s e l f u e l and motor o i l f o r l i n e - h a u l trucks f i x e d operating fee repairs and upkeeping replacement of worn-out t i r e s l i n e haul t r a c t o r and t r a i l e r depreciation Overhead Expenses Executive Salary Welfare s e l f explanatory medical and dental plans, l i f e insurance, etc. - 36 -Contribution Margin Approach to Costing Inportance of Contribution Approach The contribution margin approach theorizes that, i f the revenue generated i s greater than the va r i a b l e cost, then the difference, c a l l e d the contribution margin, can be used to recoup the f i x e d costs. As long as there i s some contribution towards f i x e d costs, t r a f f i c should move, provided of course no better a l t e r n a t i v e s are a v a i l a b l e . The contribution margin 12 theory does not deny the importance and relevance of the f i x e d c o s t s but the d i s t i n c t i o n between the behavior of fixed and v a r i a b l e costs i s help-f u l f o r answering questions such as: 1. Which of the lanes requires more marketing e f f o r t s ? 2. Which of the lanes should be dropped? 3. I f the rate structure cannot be adjusted at w i l l , how much va r i a b l e cost i s allowable before a zero margin i s reached? 4. How does one . u t i l i z e resources more e f f e c t i v e l y f o r lanes with low contribution margins? Departure from Contribution MarginvApproach The contribution margin approach i s less e f f e c t i v e as a decision aid when the proportion of v a r i a b l e costs i s r e l a t i v e l y small, This i s so because, i f the va r i a b l e portion of the t o t a l cost i s so low, almost Charles Horngren, Cost Accounting, A Managerial Emphasis. (New Jersey: Prentice H a l l Inc. 1972), p. 309. - 37 -any amount of revenue shows a p o s i t i v e contribution margin. The contribu-t i o n margin then loses i t s discriminatory power i n choosing among a l t e r n a -t i v e s . The author estimates that about 70 to 80 percent of the terminal cost of the model c a r r i e r i s v a r i a b l e judging from the a v a i l a b l e data. It i s l i k e l y that the contribution margin approach w i l l remain to be a useful t o o l f o r some time to come. The increasing incidences of guaranteed wages f o r hourly-paid workers, and union-stipulated minimum number of workers i n a s h i f t often a f f e c t the v a l i d i t y of the contribution margin approach. Judging from the r e l a t i v e l y high proportion of v a r i a b l e cost i n r e l a t i o n to terminal costs i n the model c a r r i e r , unless the a c t i v i t y l e v e l i s so low that s t i p u l a t e d wages are constantly paid f o r l i t t l e or no p r o d u c t i v i t y , such incidences w i l l not greatly undermine the usefulness of the contribution margin approach. This chapter enhances better understanding of the ensuing chapters. The following chapter examines the research that has been undertaken r e l a t i n g to transportation costing. - 38 -CHAPTER 4 LITERATURE REVIEW Background The l i t e r a t u r e review i n t h i s chapter examines the extent to which current transportation l i t e r a t u r e i s relevant to t h i s study. It appears that most standard cost accounting texts and a r t i c l e s are geared to manufacturing. Costing i n the transportation industry i s d i f f e r e n t from that i n manufacturing. This i s due to the f a c t that manu-factured products are more homogeneous. This f a c t diminishes the u s e f u l -ness of cost accounting l i t e r a t u r e f or transport costing. On the other hand, transportation l i t e r a t u r e alone does not provide a background of cost accounting theory s u f f i c i e n t to pursue the problem of lane p r o f i t a b i l i t y . C l e a r l y , there i s a need to f i l l the void. The l i t e r a t u r e review w i l l not include t h e o r e t i c a l works on cost accounting, since they can be found i n any standard text. Much of the transportation l i t e r a t u r e was examined to determine i t s a p p l i c a b i l i t y to t h i s study. Four studies are examined i n t h i s review. The f i r s t two are cost determination formulae prescribed by the Interstate Commerce Commission (I.C.C.) i n the United States. The t h i r d i s an a r t i c l e on measuring pick-up and d e l i v e r y costs for small shipments. The fourth i s a case study dealing with the implementation of a p r o f i t a b i l i t y system. The two U.S. government prescribed cost formulae, e n t i t l e d , "Highway Form A" and "Highway Form B" are being considered for mandatory use by a l l c a r r i e r s i n presenting cost data at rate hearings. Although the formulae., are developed mostly for statutory .purposes, i t i s i n t e r e s t -- 39 -ing to f i n d out i f the formulae have any contribution i n the determina-tion of lane p r o f i t a b i l i t y . The study on measuring pickup and de l i v e r y costs f o r small ship-ments was based on actual data c o l l e c t e d form a metropolitan trucking firm. The study may be of i n t e r e s t to small trucking firms which do not want to do extensive research. The case study depicts some p r a c t i c a l problems that one may encounter when implementing a shipment p r o f i t a b i l i t y system. Most of the discussions are of much i n t e r e s t i n t h i s case study. (1) Formula f o r the Determination of the Costs of Motor C a r r i e r of Property. (Highway Form A) The Highway Form A cost formula was developed i n March 1973 to ascertain motor c a r r i e r costs f o r rate-making purposes. The o r i g i n a l intent was to e s t a b l i s h some procedures which a l l c a r r i e r s can use as a un-iform 1, method of developing and presenting cost data. It should be emphasized at t h i s point that the Highway Form A pre-scribed by the Interstate Commerce Commission was not introduced as an innovative technique to estimate cost. Rather, i t was meant to be a uniform way to estimate cost among c a r r i e r s . Although the I.C.C. cost formula was frequently referred to when the author discussed trucking costs with trucking firms and governmental agencies, the Highway Forms A & B do not d i r e c t l y r e l a t e to the p r o f i t -a b i l i t y study i n t h i s paper. Most of the forms, schedules, and summaries are quite detailed. Some of them involve a breakdown of some kind, such as cost by weight bracket, and cost by mileage block, to perform a function. - 40 -The approximate order i n which the schedule, forms and summaries are f i l l e d out are represented diagramatically below: Assemble data to f i l l out the worktable > F i l l out the various forms to pertinent information provide i  F i l l out schedules. Some schedules (B&C) require information from the forms i F i l l out summary sheet i n numerical ord-er 1-5 using the information from the forms and schedules Below i s a b r i e f summary explanation of the various schedules, forms, and summaries. It i s a formidable task to follow every l i n e and every step of the formula. Because of t h i s , the discussion below w i l l only h i g h l i g h t the methods used rather than discuss the d e t a i l s . Schedule A: Expenses of operation, taxes, and rents are d i s t r i b u t e d among the four major services, namely (a) l i n e haul, (b) pickup & de l i v e r y , (c) terminal platform, and (d) b i l l i n g and c o l l e c t i o n . Sheet one to four of the schedule assigns i n d i v i d u a l accounts to a p a r t i c u l a r s e rvice. For example, l i n e - h a u l d r i v e r s ' wages are assigned to the li n e - h a u l service. Apportionment factors are used only when d i r e c t assignment i s not f e a s i b l e . The apportionment factors are provided by one of the following - 41 -three sources: (a) simple percentage based on other apportioned costs, (b) r e s u l t s taken from the work tables which can be used to provide supporting s t a t i s t i c s , (c) factors provided by the commission i n the appendix of the I.C.C. formula. Sheets 5 and 6 provide guidance f o r the c a l c u l a t i o n of the out-of-pocket and constant portion of the operating expenses based on a s p e c i a l study conducted by the commission. The out-of-pocket costs are the expenses incurred, i n addition to the f i x e d costs which have been expended, to perform a service. I.C.C. deemed 90% of the t o t a l operating expenses to be the v a r i a b l e portion. Schedule B: Pickup and Delivery costs are apportioned, based on the time factors provided by the I.C.C. s p e c i a l study, to d i f f e r e n t weight categories f o r the stop time and running time of the P & D a c t i v i t i e s . The stop time i s the t o t a l time spent at each stop and the running time i s the time spent on running between stops. Performance factors i n the P & D service such as v e h i c l e running minutes per ton can be computed. Schedule C: The purpose of t h i s schedule i s to compute the P & D costs f o r small shipments, 300 pounds or l e s s , on a cost per shipment bas i s . The same method i s used f o r computing costs f o r a s p e c i f i c weight shipment as i n schedule B, except that t h i s time the s p e c i f i c weight of the shipment, rather than the average weight per shipment, i s used f o r cost c a l c u l a t i o n . - 42 -Schedule D: This schedule develops factors to adjust costs f o r the e f f e c t of density on pickup and de l i v e r y , platform handling, and li n e - h a u l running services. Sheet 1 provides f o r adjustments of the pickup and d e l i v e r y costs a f f e c t e d by density. Most of the information i s obtainable from schedule B to a r r i v e at the r e s u l t s i n t h i s schedule. Sheet 2 establishes the r a t i o s of the adjusted pickup and de l i v e r y , platform handling, and li n e - h a u l costs to the average costs. Adjustment r a t i o s are, f o r the most part, provided by the I.C.C. from the work tables or from footnotes, e.g., the expenses of running costs affected by density can be found by multiplying the expenses i n schedule B by a set of provided r a t i o s f o r d i f f e r e n t density groups as shown: Density group 0-4.9 5-9.9 10-14.9 15-19.9 20-29.9 30-39.9 Ratios 1.71 1.47 1.26 1.13 1.00 .89 S i m i l a r l y , for terminal handling a set of r a t i o s i s provided f o r d i f f e r e n t density groups. Form 1 Form 1 summarizes the basic information of miles and hours spent for P & D and l i n e - h a u l services. The information thus gathered i s used to compute the unit-costs i n schedule A described previously. The l i n e - h a u l and P & D speed factors are developed i n the work-tables. The speed factors for the P & D service take into consideration items such as the number of stops, numbers of shipments, productive - 43 -vehicle-minutes at stops.and productive v e h i c l e man-minutes when running. For the l i n e - h a u l service, performance factors by mileage blocks contain the average load and the r a t i o of t o t a l vehicle-miles to loaded v e h i c l e miles. With the speed f a c t o r s , one can ca l c u l a t e the i n t e r c i t y hours by di v i d i n g the i n t e r c i t y miles by the speed, and the P & D miles by m u l t i -p l y i n g the P & D hours by speed. Form 2 Form 2 i s simply a summary of the c a r r i e r s ' f r e i g h t b i l l s used to obtain s t a t i s t i c s of weight and the number of shipments by weight bracket and type of t r a f f i c . This form i s used f o r the purpose of apportioning tons, ton-miles and shipments to s i n g l e - l i n e or i n t e r l i n e t r a f f i c by selected brackets. Form 3 Form 3 i s another basic breakdown of a c a r r i e r ' s t o t a l tons, ship-ments, and ton-miles by weight category. The percentage d i s t r i b u t i o n of shipments at o r i g i n and destination are computed also by weight brackets as for pickup and de l i v e r y and terminal handling services. Summary 1: This summary develops the weighted average cost per cwt. for pickup and del i v e r y , platform handling, and b i l l i n g and c o l l e c t i o n . D i f f e r e n t weight brackets are considered. Information from Form 3 and - 44 -and schedule B i s necessary f o r some c a l c u l a t i o n s . Summary 2: Its purpose i s to e s t a b l i s h l i n e - h a u l costs by mileage blocks and major weight brackets. S p e c i f i c items to be computed include: a) non-d r i v e r hourly costs b) average l i n e - h a u l speed c) non-driver hourly costs i n cents per v e h i c l e mile d) driver's wages and expenses per v e h i c l e -mile e) mileage costs i n cents per v e h i c l e mile f) t o t a l cost per hour and per mile g) r a t i o of cost for each mileage block to cost f o r a l l mileage blocks. Previous c a l c u l a t i o n from schedule A i s necessary to complete t h i s summary. The r a t i o of cost for each mileage block to cost f o r a l l mileage blocks i s instrumental to the c a l c u l a t i o n of l i n e - h a u l costs per 100 pound-miles. Summaries 3, 4 and 5: These summaries represent various types of cost scales developed i n Highway Form A such as cents per shipment and cents per 100 pounds. The voluminous amount of schedules, forms and worktables to be f i l l e d are often discouraging and confusing. They tend to be too complex for small and medium-sized c a r r i e r s which do not have cost experts on t h e i r s t a f f . Also, the tables cannot be completed i n a streamlined manner because there i s too much cross referencing among tables. A r b i t r a r y percentages (derived from an I.C.C. s p e c i a l study) used f o r cost estimation are not always r e a l i s t i c . For example, 90 percent of the operating expenses i s deemed to be the v a r i a b l e portion. . - 45 -Obviously the f i x e d and v a r i a b l e portion of the cost makeup va r i e s from time to time and from company to company. The regional factors provided to a i d c a l c u l a t i o n w i l l be le s s v a l i d with the passage of time. Most of the factors need to be updated constantly to keep up with d i f f e r e n t kinds of changes. F a i l u r e to do so w i l l undermine the usefulness of the formula. Since regional factors do not include any Canadian regions, the factors are not applicable to a Canadian trucking f i r m and thus the usefulness of the study i s l i m i t e d to a U.S. trucking company. The next review, Highway Form B, shares some of the shortcomings of Form A. However, Form B i s a somewhat simplier version of the I.C.C. formulae. (2) S i m p l i f i e d procedures f o r the Determination of Costs of Handling Freight by Motor Carr i e r s (Highway Form B). The s i m p l i f i e d version, the Highway Form B, does not require c a r r i e r s to f i l l out the various forms and summaries. Instead, i t i s only l i m i t e d to Schedule A and Form 1, which are b a s i c a l l y the same as those of Highway Form A. The summary schedule then, i n l i e u of the f i v e summary schedules i n Form A, f a c i l i t a t e s the computation of the approximate out-of-pocket cost of selcted sizes of shipments moving i n given weight loads f o r various distances. Since the unit costs by services was determined i n Schedule A i n the same manner as i n Highway Form A, the d e t a i l s w i l l not be discussed here. Using the r e s u l t s from Schedule A such as: - 46 -Line haul cost per cwt. mile Line haul cost per v e h i c l e mile... Pickup & d e l i v e r y cost per cwt Platform cost per cwt B i l l i n g and c o l l e c t i o n cost per shipment 34.0 c 20.0 C 32.0 C 95.0 C .47C one can s t a r t to develop out-of-pocket costs for s p e c i f i c hauls. To do that, heavy r e l i a n c e on the various tables of f a c t o r s i s necessary. The tables provide such items as the speed and time factors which specify the average l i n e - h a u l speed and stop time, the wage d i s t r i -bution among the various functions, the percentage of P & D costs a t t r i b u -table to TL or LTL t r a f f i c , and r a t i o s f o r adjustment of P & D costs by s i z e of shipment, etc. Using the above f i g u r e for an example, the t o t a l out-of-pocket cost for a shipment of 5000 pounds shipped over a distance of 1000 miles would be equal to: 47c x 1000 + 20c x 50 + 32c x 50 + 95c x 1. Adustment factors are applied on top of the expression to r e f l e c t the speed, time and regional differences. The following page i l l u s t r a t e s how the adjustment factors are used. Pickup and Delivery: Supposing one wants to c a l c u l a t e the pickup and delivery cost per 100 l b . of a 5000 l b . shipment, and supposing the system average weight i s 1000 l b s . , the c a l c u l a t i o n i s as follows. According to the r e s u l t i n schedule A, the pickup and d e l i v e r y cost per cwt. i s 20c, therefore 5000 l b s . w i l l cost $10 before adjustment. Cost figures derived need to be revised to r e f l e c t p r i c e l e v e l changes, presumably every time a major rate adjustment takes place. - 4 7 -Looking at table M ( of Form B ), the adjustment f a c t o r f o r a firm whose system average weight i s 1000 lbs. and i s carrying a 5000 l b . shipment, i s .87. Therefore, the t o t a l cost i s $10 x 0.87 = $8.7. The cost per cwt. for P & D service i s then $8.7 + 50cwt. = 17.4£. Platform The platform cost f o r the 5000 lbs. before adjustment i s 32c x 50 cwt. according to r e s u l t s i n schedule A. Table D i n the I.C.C. appendix suggests that f o r 5000 l b . shipments, the percentage of tons handled over the platform f o r a given region, say the c e n t r a l region, i s 31.93% of t o t a l tons handled. Thus, the platform cost i s 32c x 50cwt. x 31.93%. The platform cost per cwt. i s therefore 32C x 31.93%. There are few advantages i n using Form A instead of Form B, since the l a t t e r i s a s i m p l i f i e d version of the former and yet serves a s i m i l a r pupose. Nevertheless, Form B i s s t i l l too complex for small and medium-size companies to understand and use. Like Highway Form A, the cost formula i n Form B assumes that the unit costs of each function can be added l i n e a r l y . However, according to 13 a study by Warner and Burstein, there are some economies of scale i n trucking, meaning that unit trucking costs are a function of volume of business. Unfortunately, the I.C.C. cost formula appears to give l i t t l e weight to the e f f e c t s of capacity u t i l i z e d on unit costs. The following a r t i c l e i s an i l l u s t r a t i o n of how cost estimation can be done using very simple methods. 13 Warner and Burstein, op_. c i t . , p. 40. - 48 -(3) Measuring Pickup and Delivery Costs for Small Shipments by C.K. Walter (Transportation Journal, Vol. 14, No. 1, F a l l 1974) Based on the data obtained from a trucking firm, the author attempted to measure pickup and d e l i v e r y costs f o r small shipments using mainly regression analysis. The method developed can be applied to trucking firms without the need f o r complex c a l c u l a t i o n s and deta i l e d cost data. The method i s r e l a t i v e l y crude, perhaps somewhat s i m p l i s t i c . The idea of using time as a common denominator to regress against work done (such as weight handled) appears workable. Simple regression was used i n th i s study. It i s conceivable that i t can be improved i f multiple regression i s used so that more variables can be included. The study was presented i n three stages. F i r s t , i t was necessary to determine which were the "small" shipments. A frequency d i s t r i b u t i o n of the weight and piece counts can provide i n s i g h t . Second, i t was ascertained i f the weight handled and piece counts r e l a t e d to the running time and dock time. Third, i f a r e l a t i o n s h i p was found to e x i s t , i t was possible to determine, f o r example, how much time would be required at the customer's dock to handle 2000 pounds of shipments. Since the wage scale i s known, the cost i s e a s i l y determined. To determine which are small shipments, a frequency d i s t r i b u t i o n of the piece count per shipment and weight per shipment of the sample trucking f i r m were pl o t t e d as follows to give some i n d i c a t i o n of what "small" shipments are. - 49 -. 200 600 '.. .1000 2000 weight (pounds) Afte r determining the composition of the t r a f f i c , the r e l a t i o n -ship between time and shipment s i z e and that between s i z e and weight were established. The average dock time was plotted against the respective weight and piece categories to determine the c o r r e l a t i o n . The former p l o t i s shown below. - 50 -200 600 1000 weight (pounds) 2000 The dock time p l o t t e d consisted of the i n t e r v a l between the dock and the departure time. A l i n e a r r e l a t i o n s h i p i s observed, and by using stepwise l i n e a r regression, a r e l a t i o n s h i p of either T=a + b W or T = a + b P was developed, where: T = time W = weight P - number of pieces a = constant term b = slope of regression l i n e R of .98 and .92 was obtained for the two equations r e s p e c t i v e l y . 2 Since the f i r s t equation had a higher R , and both equations are s t a t i s t i -c a l l y s i g n i f i c a n t , i t was chosen. The r e s u l t s f o r P & D are approximately the same, and can be expressed as T = 6 + 0.01 W. A 900-pound shipment, for .example, w i l l require 6 + .01 x 900 or 15 minutes dock time. Since the t r a n s i t (running) time i s independent of weight, i t i s considered a constant and i s averaged to be 11 minutes. Thus for a pickup of d e l i v e r y , the t o t a l time w i l l be T = 11 + 6 + .01W = 17 + .01 W The equation can be used to determine cost i f the labour wage scale i s known or i f the cost of equipment use per hour i s predetermined. - 51 -The next a r t i c l e to be discussed i s perhaps most relevant to t h i s paper because i t deals with the issues of p r o f i t a b i l i t y study. (4) '.'Case Study: Carolina Freight C a r r i e r s Corporation", by M. Edgar Barrett, Harvard Business School. The case deals with the implementation of a shipment p r o f i t a b i l i t y system of a trucking corporation. A number of questions were discussed: what lead up to the decision to develop the system?; how the system had been developed?; and what data were a v a i l a b l e from the system? In the case of Carolina Freight C a r r i e r s , the decision to develop the system was triggered by the sudden drop i n p r o f i t s . Before the system was implemented, the explanation of poor p r o f i t s was, at best, a guess. In order to f i n d the root of the problem, the management eventually decided to develop a p r o f i t a b i l i t y system. P r i o r to the introduction of the system, the company used the following methods: (a) Terminals' operating costs are compared with t h e i r respective inbound and outbound t r a f f i c . (b) Developed schedules are used to show the revenues required on truckload t r a f f i c between each two points to operate at a s a t i s -factory p r o f i t l e v e l . (c) Manual methods based on I.C.C. Form B are used to c a l c u l a t e the cost of i n d i v i d u a l less-than-truckload shipments. It i s indicated i n the case that each of the three tools has i t s own drawbacks. The standard cost analysis uses cost figures by terminal that are too general to r e l a t e d i r e c t l y to p r o f i t , since the various - 52 -types of f r e i g h t have d i f f e r e n t published t a r i f f s . The schedule i s only-, u s e f u l f o r truckload t r a f f i c but i s of no use f o r less-than-truckload shipments. The adoption of I.C.C. Form B i s time consuming and i s therefore not s u i t a b l e f o r repeated usage. The steps involved i n the design of the shipment p r o f i t a b i l i t y system deserve some mention. The steps are: (a) i d e n t i f y t r a f f i c categories which receive d i f f e r e n t handling. (b) devise a l i s t i n g of work a c t i v i t i e s or cost functions. (c) create a t r a f f i c costing matrix showing which t r a f f i c types are associated with which work a c t i v i t i e s . (d) assign the general ledger expense items to one or more cost functions or a c t i v i t i e s . (e) determine the basis of a l l o c a t i o n f or assigning s p e c i f i c costs from the functions to the various types of t r a f f i c . Steps (a) to (c) are quite s t r a i g h t forward. Step (d) f a c i l i t a t e s the association of cost with work done. P r i o r to these steps, revenue figures should be recorded. Step (e) i s a s i g n i f i c a n t challenge. The following are some of the a l l o c a t i o n bases suggested i n the case. Dock costs are a l l o c a t e d on the basis of number of shipments and weight of shipments. Detailed time studies are required to determine how much emphasis to put on the number of shipments and weight of shipments. Accounts receivable costs are a l l o c a t e d on a per-shipment bas i s . Each truckload i s a l l o c a t e d the same pickup and d e l i v e r y costs. Less-than-truckload t r a f f i c i s given i t s share of pickup and d e l i v e r y costs on a shipment and weight bas i s . - 53 -Sales and t r a f f i c costs are a l l o c a t e d using the bases of other r e l a t e d costs that have been s u c c e s s f u l l y a l l o c a t e d . If a shipment i s given a bigger share of dock costs, pickup and d e l i v e r y costs, than other ship-ments, i t s sales and t r a f f i c apportioned cost w i l l p r o p o r t i o n a l l y be greater. Thus f a r , the a l l o c a t i o n bases have not considered density. The case suggests that when a shipment i s over 10,000 l b s . or takes up 50% of the t r a i l e r or more, density i s a major consideration. To adjust f o r the density f a c t o r , one needs to know the amount of space the shipment occupies, the weight of the shipment, and the outbound load average. If the outbound load average i s 24,000 l b s . , and the capacity of a l i n e - h a u l t r a i l e r i s 3,000 cubic f e e t , then the cube f a c t o r i s 8 lb./cu. f t . on the average. If the given shipment weighs 5,000 l b s . and takes up 1000 cubic feet, the cube f a c t o r i s 5 l b . per cubic f e e t . I t i s necessary to charge more costs per pound to the shipment than f o r a shipment with a cube f a c t o r 8 pounds per cubic foot. The case i l l u s t r a t e s the weaknesses of some of the methods to detect p r o f i t a b i l i t y . Since the case study deals with the implementation of a shipment p r o f i t a b i l i t y system, i t does not d i r e c t l y suggest how one can go about determining lane p r o f i t a b i l i t y . Nevertheless, one can gain much in s i g h t from t h i s study to develop a l a n e - p r o f i t a b i l i t y model. One possible drawback of the shipment p r o f i t a b i l i t y system suggested i n the case i s that the system's usefulness diminishes i n the case of a c a r r i e r which hauls mostly small shipments and i n r e l a t i v e l y small quantities. The case did not mention anything about the procedures to record actual current costs on an accrual basis. The timeliness of the data - 54 -should be emphasized. A l l i n a l l , the l i t e r a t u r e reviewed did not s p e c i f i c a l l y deal with the costing or p r o f i t a b i l i t y study of a lane. It i s hoped that the next chapter, which contains the lane p r o f i t a b i l i t y model, w i l l have some con-t r i b u t i o n s to t h i s end. - 55 -CHAPTER 5 LANE PROFITABILITY MODEL Abstract This section i s an abstract of the procedures used f o r the deter-mination of lane p r o f i t a b i l i t y — an overview of the model i t s e l f . Since the movement of t r a f f i c from terminal A to terminal B u t i l i z e s terminal f a c i l i t i e s at both terminals, i t follows that the move-ment should be given some burden of both terminals' costs. (See Exhibit 5-1.) Instead of examining the lane as a whole, i t i s often useful to examine the headload and backhaul t r a f f i c i n d i v i d u a l l y when performing cost a l l o c a t i o n . An obvious advantage of i n v e s t i g a t i n g the two types of t r a f f i c separately i s that the prof itability!> of the headload and backhaul t r a f f i c can be compared while doing a lane p r o f i t a b i l i t y study. - 56 -EXHIBIT 5-1 I l l u s t r a t i o n of lane d e f i n i t i o n Pickup from shipper to terminal ^ j Terminal Delivery from terminal to consignee - 57 -Two i n t e r e s t i n g features should be noticed i n the cost assignment process. F i r s t , truckload t r a f f i c i n many common c a r r i e r s does not require the use of terminal f a c i l i t i e s such as dock and P & D f a c i l i t i e s . It i s for t h i s reason that some of the terminal costs can be completely done away with. In the model c a r r i e r , however, truckload t r a f f i c i s hauled to the terminal with c i t y P & D tract o r s to f i l l the emply space with small shipments. Although some costs are incurred i n moving the li n e - h a u l unit to the terminal, i t i s debatable whether the TL t r a f f i c should be responsible f o r such cost, since the movement i s s o l e l y f o r the purpose of loading small shipments. This paper takes the p o s i t i o n that TL t r a f f i c should be assigned the P & D costs, because by f i l l i n g the empty spaces with small shipments, one reduces the l i n e - h a u l costs of the TL shipments and make TL t r a f f i c more l u c r a t i v e . Besides, small shipments have already incurred t h e i r share of the P & D costs. I t can be argued that not a l l o c a t i n g the P & D costs to the TL t r a f f i c means double counting f o r the small shipments. Second, depending l a r g e l y on the s t y l e of operation of the c a r r i e r , some of the terminal costs are only applicable to outbound t r a f f i c and should not be assigned to inbound t r a f f i c . Examples of these costs are: b i l l i n g , sales, bad debts and claims. The main t o o l proposed to develop the set of procedures to assess lane p r o f i t a b i l i t y i s regression analysis. Regression analysis i s u s e f u l i n t h i s study i n examining the cost behaviour and to obtain the marginal cost f o r one a d d i t i o n a l unit of output. The a l t e r n a t i v e s l i s t e d below are used to assign terminal costs to lanes by detecting the existence of cost-output r e l a t i o n s h i p or - 58 -otherwise. 1. Each p o t e n t i a l l y v a r i a b l e cost can be regressed with the variables which adequately explain the cost behaviour at "different l e v e l s of output. For example, dock wages are regressed with weights of d i f f e r e n t weight categories handled and number of shipments. 2. The percentage d i s t r i b u t i o n of costs that have been previously a l l o c a t e d using a l t e r n a t i v e 1 i s used as an a l l o c a t i o n basis f o r costs that cannot be a l l o c a t e d with reasonable accuracy by other means. The use of t h i s a l t e r n a t i v e i s very common i n the costing precedures recommended by the I.C.C. Highway Form A and B. 3. Subjective evaluations or simple engineering studies ( l i k e time and motion studies) are required i n some instances to replace or accom-pany a l t e r n a t i v e s 1 and 2 above. If a l t e r n a t i v e 1 i s used to assign a p a r t i c u l a r terminal cost f o r the movement of t r a f f i c from A to B, the portion of cost assigned to such a movement i s equal to the regression c o e f f i c i e n t m u l t i p l i e d by the e x i s t -ing quantity of output (such as weight or number of shipments handled) summed over the measure of output. The use of a l t e r n a t i v e 2 i s s t r a i g h t forward. I t i s used when no explanatory variables are a v a i l a b l e . In a l t e r n a t i v e 3, a d d i t i o n a l studies, such as time and motion studies, can often provide an a l l o c a t i o n basis as a percentage d i s t r i b u t i o n or simple ratior. to prorate costs. A f t e r terminal costs have been a l l o c a t e d to t r a f f i c segments, the l i n e - h a u l cost has to be determined. Because i t generally costs the same to run a truck from c i t y A to c i t y B whether i t i s h a l f f u l l or completely f u l l , i t i s f r u i t l e s s to use weight (e.g., cwts) or the product of weight and distance (e.g., - 59 -cwt-miles) as an output measure i n observing the cost-output r e l a t i o n s h i p . Two ways to develop l i n e - h a u l cost on a per-mile basis are suggested here. F i r s t , one can divide the t o t a l v a r i a b l e costs by the t o t a l number of miles t r a v e l l e d during a given time period. Second, one can regress the t o t a l costs (fixed and v a r i a b l e costs combined) of each month with the t o t a l number of miles t r a v e l l e d . The slope of the regres-sion l i n e , or the c o e f f i c i e n t of the explanatory v a r i a b l e i s the unit cost per l i n e - h a u l mile. Exhibit 5-2 i s an i l l u s t r a t i o n of the regression l i n e p l o t t e d . t o t a l monthly li n e - h a u l v a r i a b l e portion cost fixed portion monthly miles t r a v e l l e d EXHIBIT 5-2: Line-haul Unit Cost Estimation - 60 -EXHIBIT 5-3 Cost Components Representation Referring to Exhibit 5-3, the t o t a l v a r i a b l e cost of t r a f f i c moving from A to B (TVC. ) i s composed of: 1. apportionment of terminal A's v a r i a b l e costs (Term-A^ ^) 2. apportionment of terminal B's v a r i a b l e costs (Term-B^ ^) 3. l i n e haul cost from A to B (LH ) A. B The t o t a l v a r i a b l e costs f o r t r a f f i c moving from A to B can be expressed a l g e b r i c a l l y as: TVC = Term-A. _ + Term-BA + LH A.B A.B A.B. A.B The flow chart i n exhibit 6-4 demonstrates the procedure to determine TVC. n A. B - 61 -EXHIBIT 5-4 FLOW CHART OF THE PROCESS OF DETERMINING TOTAL VARIABLE COST OF TRAFFIC MOVING FROM A TO B Identify terminal variable costs Propose independ. variables to explain each cost Do regression analysis Test s t a t i s t i c a l s igni f icance yes ni>>L.. Use arbitrary basis or % d i s t r ibut ion based on other al located costs 1— - _ * |-3 Multiply b coeff. by output quantity or terminal cost times % d i s t r ibut ion Assigning Terminal A ' s Costs. Likewise for Assigning terminal B's Costs. Use b coeff. as marginal cost Perform engineering study -*> (2) Add Line-haul cost to apportionment of both terminals r costs to t r a f f i c moved from A to B Line Haul Calculate Line - Haul costs by mult ip ly ing distance by var iab le - 62 -Let the revenue f o r t r a f f i c moving from A to B . be RA The contribution margin f o r the movement of t r a f f i c from A to B, expressed as CM. i s equal to: RA.B " T e r m " A A . B " T e r m - B A . B " L HA.B ( 1 ) By the same token, the contribution margin f o r the movement of t r a f f i c i n the opposite d i r e c t i o n i s CM which i s equal to: JD • -A. RB.A " T e r m " A B . A " T e r m " B B . A " L H B . A ' • '' ( 2 ) Since lane AB i s the combination of both the headload and backhaul t r a f f i c between A and B, the contribution margin f o r lane AB i s equal to: C MA.B + C M B . A ( 3 ) The abstract discussed thus f a r i n t h i s chapter i s a general frame-work. The fundamental knowledge required to b u i l d the model upon t h i s framework i s discussed i n the following section. Considerations Regarding Cost-output Analysis Basic Requirements Before s t a t i s t i c a l costing, or more s p e c i f i c a l l y , regression analysis f o r costing purposes, can be applied, several basic requirements must be established. These requirements set the stage for meaningful regression analysis and at the same time outline the implications f o r cost recording. The requirements address the issue of how data should be recorded properly f o r th i s kind of analysis. a) Length of time periods: If the terminal costs are a v a i l a b l e - 63 -on a monthly basis, and most other data are a v a i l a b l e on either a weekly or a r ; ' -monthly basis, i t i s impossible to choose time periods for observations of less than a month each. If there are p o s s i b i l i t i e s of time lags i n the order of three or four days between revenue recognition and the cost occurence, a monthly period w i l l be l e s s affected than a weekly period. This point w i l l be elaborated i n the discussion of matching revenue and costs i n the next chapter. b) Number of time periods f o r sample s i z e : In a time seri e s analysis, there i s always a trade o f f involved i n using a large sample. A long time span i s affected by i n f l a t i o n , technological changes, organiza-t i o n a l changes and the l i k e . While changes i n the general p r i c e l e v e l can be adjusted for by using i n f l a t i o n i n d i c e s , many other changes are often unquantifiable. In the case of labour cost, increased wages as a r e s u l t of union contracts or other negotiation processes should be adjusted f o r . Labour costs incurred p r i o r to a wage increase should be elevated by some percentage to be i n l i n e with the current wage scale. Consider the time span between January, 1975 and December, 1976. Suppose a union contract which c a l l e d f or a wage increase of ten percent was negotiated i n September, 1975 and September, 1976. Then, wages p r i o r to the most recent contract negotiation must be brought to the present wage scale. * "Monthly b a s i s " here ref e r s to time periods of four or f i v e weeks to approximate a month. Since the p a y r o l l system i s on a bi-weekly basis i n the model c a r r i e r , and since many other records are on a weekly b a s i s , a 4-or-5-week period i s better than a calendar month, i n that a calendar month i s not a multiple of weeks. - 64 -Diagramatically, the time horizon i s represented as below. January, 1975 January, 1976 January, 1977 I- I f i r s t contract negotiation second contract negotiation T h e o r e t i c a l l y , one d o l l a r ' s worth of labour p r o d u c t i v i t y p r i o r to September, 1975 i s equivalent to $1.10 worth of produ c t i v i t y f o r the year a f t e r . Consequently, the d o l l a r ' s worth of labour p r o d u c t i v i t y p r i o r to September, 1975 i s also equivalent to $1.21 of the present p r o d u c t i v i t y . Thus, to bring wages up to the present scale, wage expenses p r i o r to September, 1975 should be a l l m u l t i p l i e d by 1.21, and s i m i l a r l y , wage expenses p r i o r to September, 1976, but a f t e r September, 1975 should be mu l t i p l i e d by 1.10. I n f l a t i o n i s treated i n a s i m i l a r manner, except that the cuttin g point i s t r a d i t i o n a l l y the end of the calendar or f i s c a l year. In t h i s case, an i n f l a t i o n index i s used. A two-year time period, with a sample s i z e of twenty-four, i s recommended. Although the time period should be as recent as possible, consideration should be given to the representativeness of the chosen time period. A t y p i c a l events such as the purchase of a sub s t a n t i a l amount of equipment, or unusually high or low sales volumes i n a p a r t i c u l a r year should be avoided i n the chosen time span. The former w i l l i n e v i t a b l y reduce the repair costs to a minimal amount and w i l l y i e l d an a r t i f i c i a l l y low annual operating cost. The l a t t e r w i l l make the average t o t a l cost u n r e a l i s t i c a l l y low or high. - 65 -c) Choice of output units measure: The problem of s e l e c t i n g the proper units f or measuring output i s an important one because the r e l a t i o n -ship of output to cost i s of primary concern i n t h i s study. The problem i s a d i f f i c u l t one because of the uniqueness of the transportation output. Note that the output referred to here i s made up of terminal a c t i v i t i e s such as pounds handled on the dock, number of shipments carried by a P & D crew, and number of b i l l s cut at the branch terminal (not to be confused with output re l a t e d to a l i n e - h a u l s i t u a t i o n such as ton-miles). The approximated output units f o r wages should f u l l y r e f l e c t that (1) shipments of d i f f e r e n t weight brackets require a d i f f e r e n t degree of e f f o r t f o r labour costs, and (2) shipments of l i g h t density take up more space and require more P & D t r i p s than denser shipments of the same weight. Instead of using the weight handled by a terminal (both inbound and outbound), i t i s more accurate to express output i n terms of the weight handled i n d i f f e r e n t weight brackets. Density should somehow be r e f l e c t e d i n the output units. Most of the s t a t i s t i c a l reports i n a trucking f i r m do not include density of shipments because such information i s hard to obtain. An approximation i s required to r e f l e c t density i n the output u n i t s . In a s i t u a t i o n where most or a l l of the l i n e - h a u l t r a i l e r s have the same capacity, the t o t a l weight handled i n a given time period divided by the number of l i n e - h a u l trucks that come i n and go out of the terminal within that timer period, w i l l provide some i n d i c a t i o n as to the density of the shipments of that terminal i n general. This estimation of density assumes that each l i n e - h a u l t r a i l e r i s loaded with an equal load f a c t o r and - 66 -s i m i l a r stowability. In terms of the physical movement of commodities, the number of shipments alone i s not a good measure of output. For example, a s h i D m e n t of 50 pounds does not cost the same to move as does a shinment of 600 pounds. In terms of b i l l i n g costs, f or instance, the number of shipments i s a eood measure of output by c l e r i c a l workers. The number of parcels i n a shipment — c o l l e c t i v e l y , the number of parcels i n shipments of d i f f e r e n t weight groups handled by a terminal — can be u t i l i z e d to r e f l e c t the amount of handling. Therefore, i t can be used as one of the explanatory v a r i a b l e s along with weights, number of ship-ments, and density mentioned above. The use of revenue as an output unit has been suggested by some 14 transportation a u t h o r i t i e s . It has been used as a measure of output for s t a t i s t i c a l determination of cost behaviour by Professor J o e l Dean."'""' Using revenue to represent output leads to the assignment of costs to seg-ments of t r a f f i c on the basis or revenue. The drawback of t h i s method i s that i t penalizes success by levying higher costs to l u c r a t i v e lanes. Stowability i s re l a t e d to density f o r i t a f f e c t s the running costs per cwt-mile i n the same manner as density. It i s the space occupancy of the a r t i c l e s that prevent the v e h i c l e from being loaded to i t s weight capacity. "^ F l o t t A l l a n , e t . a l . , "The Ton-mile: Does i t Properly Measure Transportation Output?", Transport Research Record, Vol. 577, 1976, pp. 19-26. "^ J o e l Dean, " S t a t i s t i c a l Determination of Costs; with Special Reference to Marginal Costs", The Journal of Business (Chicago: University of Chicago, Oct., 1936), No. 4, p. 26. - 67 -Important Issues In order to understand the procedures described i n the next section, several important issues should be addressed. (a) Time l a g : Time lage may appear i n many d i f f e r e n t s i t u a t i o n s . Time lag due to the f a i l u r e to record costs on an accrual basis can often be remedied by following proper accounting procedures. Chapter 6 i s p a r t i a l l y devoted to a discussion of data recording. If such a time lag i s of a f i x e d time period, then the regression equation can be expressed as Y t = a + b X t + 1 + U t An example of t h i s s i t u a t i o n i s when a c e r t a i n cost i s incurred but i s not b i l l e d f o r u n t i l a month l a t e r . Time lags due to the peculiar nature of the cost i t s e l f are more complex.than the kind of time lag mentioned above. An a d v e r t i s i n g expense, for example, could have an e f f e c t on the next few months; a time lag l i k e t h i s i s c a l l e d a d i s t r i b u t e d lag. An equation for a d i s t r i b u t e d lag i s Y„ = a + b, X. + b _ X . + + b X,. + u t 1 t+1 2 t+2 n t+n t The equation becomes more lengthy and less e f f e c t i v e f o r lags which extend to more than two or three periods. (b) L i n e a r i t y : Most of the multiple regression analyses pre-suppose a l i n e a r r e l a t i o n s h i p between the explanatory v a r i a b l e s and the costs. Not onlv does t h i s imply that the r e l a t i o n s h i p between cost and each of the v a r i a b l e s i s l i n e a r , but i t also implies that the combined 16 e f f e c t s of independent v a r i a b l e s are a d d i t i v e . Norman H. Nie, S t a t i s t i c a l Package for the S o c i a l Sciences (New York: McGraw H i l l , 1975), p. 368. - 68 -When l i n e a r functions do not y i e l d s a t i s f a c t o r y r e s u l t s , one can manually pl o t the cost with i t s explanatory v a r i a b l e ( s ) to see i f a l i n e a r r e l a t i o n s h i p e x i s t s . I f the r e l a t i o n s h i p between cost and output i s nonlinear, the shape of the curve can be postulated using one's under-standing of the nature of the cost-output r e l a t i o n s h i p ; following t h i s a function can be found to f i t i n t o the t h e o r e t i c a l curve. (c) M a t e r i a l i t y : The concept of m a t e r i a l i t y i s important when one i s facing the decision of whether or not the absence of "vigorous" a l l o -cation methods i s detrimental. A cost i s "material" i f i t i s greater than a predetermined percentage of some fi g u r e s , such as revenue or t o t a l costs. The cumulative e f f e c t s of using the m a t e r i a l i t y c r i t e r i a should also be considered. S t a t i s t i c a l Testing The model described i n the f i r s t section of t h i s chapter i s only v a l i d i f the regression r e s u l t s have been tested f o r s i g n i f i c a n c e , and found to be s a t i s f a c t o r y . The existence of s t a t i s t i c a l s i g n i f i c a n c e and s a t i s f a c t o r y r e s u l t s i n multiple regression imply the following: 2 (1) R , the squared multiple c o r r e l a t i o n c o e f f i c i e n t i s " s i g n i f i c a n t l y " greater than zero. (2) The regression c o e f f i c i e n t s are s i g n i f i c a n t l y d i f f e r e n t from zero. (3) The explanatory variables are not highly correlated with each other, jL. _e., they are not m u l t i c o l l i n e a r . (4) The disturbance term, u, i s not s e r i a l l y correlated so as to - 69 -u n d e r e s t i m a t e the r e g r e s s i o n c o e f f i c i e n t s and p r o d u c e m i s l e a d i n g e s t i m a t e s o f c o s t s . Most computer o u t p u t s o f m u l t i p l e r e g r e s s i o n p r o v i d e i n f o r m a t i o n f o r s i g n i f i c a n c e t e s t i n g such as t he t - r a t i o s , t he F - r a t i o s o f t he e n t i r e e q u a t i o n and t h o s e o f each r e g r e s s i o n c o e f f i c i e n t . 2 C o n d i t i o n ( 1 ) , ( s i g n i f i c a n c e o f R ) i s s a t i s f i e d i f t h e F - p r o b a b i l -i t y o f the e n t i r e e q u a t i o n i s s m a l l . A p r e d e t e r m i n e d a c c e p t a n c e l e v e l s h o u l d be e s t a b l i s h e d . I f t he F - p r o b a b i l i t y i s l e s s t han . 0 5 , i t i s 2 g e n e r a l l y c o n c l u d e d t h a t R i s s i g n i f i c a n t l y d i f f e r e n t f rom z e r o . To s a t i s f y c o n d i t i o n (2) ( s i g n i f i c a n c e o f r e g r e s s i o n c o e f f i c i e n t s ) , one s i m p l y examines the F - p r o b a b i l i t y o f t he c o e f f i c i e n t s i n the r e g r e s s i o n e q u a t i o n . Both c o n d i t i o n s (1) and (2) can a l s o be t e s t e d f o r by i n s p e c t i n g t h e F - r a t i o s , w h i c h s h o u l d i n g e n e r a l exceed the v a l u e o f 4 . 0 . A l t e r n a -t i v e l y , the t - v a l u e ( de te rm ined by d i v i d i n g the c o e f f i c i e n t s o f the r e g r e s s i o n by t h e i r s t a n d a r d e r r o r s ) c o u l d be used f o r t h e same p u r p o s e . I f t he t - v a l u e exceeds 2 .0 , i t i s g e n e r a l l y c o n c l u d e d t h a t t he c o e f f i c i e n t i s s i g n i f i c a n t l y d i f f e r e n t f r om z e r o . To e n s u r e t h a t t h e r e i s no m u l t i c o l l i n e a r i t y p r o b l e m ( c o n d i t i o n ( 3 ) ) , one has t o examine the c o r r e l a t i o n m a t r i x , p r o v i d e d i n many computer p r i n t o u t s , t o see i f t h e c o r r e l a t i o n c o e f f i c i e n t R between each p a i r o f e x p l a n a t o r y v a r i a b l e s i s u n d u l y h i g h . The d e c i s i o n as t o what c o n s t i t u t e s a h i g h v a l u e o f R i s m o s t l y a s u b j e c t i v e one. M u l t i c o l l i n e a r i t y i s an i m p o r t a n t p r o b l e m i n m u l t i p l e r e g r e s s i o n a n a l y s i s . When the i n d e p e n d e n t v a r i a b l e s (X) a r e h i g h l y c o r r e l a t e d w i t h each o t h e r , t h e i r c o e f f i c i e n t s The l a r g e r the s t a n d a r d e r r o r , t h e l e s s c o n f i d e n t one i s r e g a r d -i n g whether o r no t t he r e s u l t i s due to chance . - 70 -many be u n r e l i a b l e . C o n s i d e r the t r a f f i c volume i n d i f f e r e n t we i gh t c a t e g o r i e s . I f the demand f o r s m a l l sh ipments i n c r e a s e s s i m u l t a n e o u s l y w i t h the demand f o r medium,and l a r g e s h i p m e n t s , i t i s l i k e l y t h a t , i f the v a r i a b l e s r e p r e s e n t i n g the t h r e e k i n d s o f sh ipment s a r e u s e d i n t h e same r e g r e s s i o n r u n , the s i t u a t i o n o f m u l t i c o l l i n e a r i t y o c c u r s . I t becomes i m p o s s i b l e i n t h i s s i t u a t i o n to i s o l a t e the m a r g i n a l c o s t s o f h a n d l i n g each t y p e o f sh ipment i n a s t r a i g h t f o r w a r d manner. The p r o b l e m can be t a c k l e d i n two ways. F i r s t , one can s u b s t i t u t e o r e l i m i n a t e some endogenous v a r i a b l e s . The d i s c u s s i o n o f "some t r o u b l e -some a s p e c t s o f t e r m i n a l c o s t s " on page 78 g i v e s an example o f t h i s . The e l i m i n a t i o n o f some endogenous v a r i a b l e s can be done by way o f the so c a l l e d " b a c k w a r d - s t e p w i s e " r e g r e s s i o n . T h i s i s a p r o c e s s o f d e l e t i n g 17 v a r i a b l e s c o n s i d e r e d n o t m e a n i n g f u l o r s i g n i f i c a n t t o p r e d i c t i o n . Second , one can i n c o r p o r a t e pa ramenter e s t i m a t e s d e r i v e d f rom e x t r a n e o u s A - 1 8 d a t a . To t e s t whether the d i s t u r b a n c e t e rm, u , i s s e r i a l l y c o r r e l a t e d ( c o n d i t i o n (4) ), i t i s n e c e s s a r y t o l o o k i n a t a b l e o f D u r b i n - W a t s o n s t a t i s t i c s t o d e t e r m i n e i f t h e c a l c u l a t e d Du rb in -Wa t son s t a t i s t i c i s g r e a t e r t h a n , l e s s t h a n , o r between the two v a l u e s s p e c i f i e d f o r the r e l e v a n t number o f deg rees o f f reedom (.= number o f samples minus o n e ) . I f the c a l c u l a t e d v a l u e i s l e s s than the t a b l e v a l u e s (both upper and l ower b o u n d s ) , t hen s e r i a l c o r r e l a t i o n e x i s t s . I f the c a l c u l a t e d v a l u e F r e d K e r l i n g e r & E l a z a r P e d h a z u r , M u l t i p l e R e g r e s s i o n i n Behav - i o u r a l R e s e a r c h (New Y o r k : H o l t R i n e h a r t & W i n s t o n , 1973 ) , p. 289. 18 Edward Kane, Economic S t a t i s t i c s and E c o n o m e t r i c s (New Y o r k : Ha rpe r & Row, 1968) , p. 279. - 71 -i s greater than the table values, then there i s no evidence of s e r i a l c o r r e l a t i o n . I f the calculated value i s between the table values, then the test i s inconclusive. S e r i a l c o r r e l a t i o n i s a serious p i t f a l l i n regression analysis when one i s dealing with time-series data. When observations are taken i n successive time periods, the disturbance term, u, that a r i s e s i n a time period, t, i s not independent of that which arose i n previous time periods t-1, t-2, ...t-n. The condition indicates that randomness i s lacking i n the data. One cause of s e r i a l c o r r e l a t i o n i s the tendency of costs to be " s t i c k y " . That i s , costs may r i s e i n response to increases i n volume over time. However, those costs may not decline i n the same way as t r a f f i c 19 decreases. When s e r i a l c o r r e l a t i o n e x i s t s , the predictions of cost made from the regression equation w i l l be more v a r i a b l e than i s o r d i n a r i l y 20 anticipated from least-square estimation. Apart from the four tests of s i g n i f i c a n c e mentioned e a r l i e r , i t i s important to note that none of the assumptions of multiple regression analysis should be v i o l a t e d . Most of the assumptions r e l a t e to the d i s -turbance -•.term, u, and tests of the underlying l e a s t square assumptions cannot be done before the regression i s done. The assumptions are the following: 1. Randomness: the i n d i v i d u a l errors or disturbances u. are J random v a r i a b l e s , with f i n i t e means, variances, and covariances. 2. Zero mean: every disturbance term has zero expected value, Horngren, o p . c i t . p. 834. Ibid. - 72 -i r r e s p e c t i v e of the value of X .' 3. Homoscedasticity: the variance of each u. i s the same for a l l J j (where j = l , ,N) and i s independent of X_. . 4. Normality: the density function f Cu) i s normal. 5. Properties of X: The exogenous v a r i a b l e X i s measured without error and has f i n i t e mean and v a r i a n c e . ^ The t h e o r e t i c a l aspects of the above assumptions are beyond the scope of t h i s study. A few simple methods are introduced here to test the assumptions underlying the regression analysis. The test of randomness of the disturbances or the residuals can be done by v i s u a l l y inspecting the plo t t e d values of the re s i d u a l along the X-axis. A simple way to detect heteroscedasticity, the absence of homo-s c e d a s t i c i t y , i s to plo t the X values against the Y values. A graphical * example of heteroscedasticity i s : 21 Kane, p. 355. ... This example of hete r o s c e d a s t i c i t y has the variance of the error term .increasing as X increases. - 73 -Normality of the d i s t r i b u t i o n of u, the disturbance term, can be examined v i s u a l l y by p l o t t i n g frequency d i s t r i b u t i o n graphs of the residuals. These v i s u a l inspection methods are r e l a t i v e l y easy to use and do not require much work of c a l c u l a t i o n , since the graphs are either provided by the s t a t i s t i c a l packaged programs or can be produced by the computer with "canned" pl o t programs. This section has discussed the considerations regarding cost-output analysis. In essence, i t has provided a basic understanding of the kinds of things one need to know before discussing the d e t a i l s of the a l l o c a t i o n procedures. Deta i l s of the A l l o c a t i o n Procedures The abstract i n the e a r l i e r part of t h i s chapter e x p l i c i t y outlined the general procedures used to ca l c u l a t e the contribution margin of each lane. What are l e f t at t h i s stage are the s p e c i f i c s . In the process of a l l o c a t i n g terminal costs, t h i s section attempts to s p e c i f i c a l l y i n d i c a t e (1) the possible costs that r e l a t e to outbound t r a f f i c only, (2) the possible costs that r e l a t e to TL t r a f f i c only, (3) the proposed explana-tory variables that a f f e c t each of the costs, and (4) the use of a r b i t r a r y bases of a l l o c a t i o n when a cost-output r e l a t i o n s h i p does not ex i s t . This section also attempts to depict some of the troublesome aspects of terminal costs. - 74 -Assigning Terminal Costs Exhibit 5-5 i s a summary chart of the e n t i r e cost assigning process. Note that f i x e d costs are not assigned. Column (2) shows the costs that are assigned to outbound t r a f f i c only. Such costs are considered to be postage, sales and t r a f f i c , bad debts and claims. The reason f o r not assigning postage costs i s that the r e c e i v i n g terminal i s presumably not involved-in.mailing b i l l s , answering querries, or doing paper work regarding the shipments. If the sales and t r a f f i c expenses of a branch terminal are mostly incurred for the promotion of t r a f f i c moving out of that c i t y , then such costs should be charged to outbound t r a f f i c . I f bad debts and claims are associated with shippers but not with receivers, they pertain to outbound t r a f f i c only. Column (3) depicts the f a c t the TL t r a f f i c does not usually need dock handling, such as loading, s t r i p p i n g , or checking. One can simply state that dock-related expenses should not be assigned to TL t r a f f i c . Note that P & D-related costs are s t i l l assigned to TL t r a f f i c , based on the argument presented e a r l i e r i n t h i s chapter. Column (4) i s a l i s t of variables proposed to explain the cost behaviour. They are, based on the understanding of the model c a r r i e r ' s terminal operation, suggested to begin the regression a n a l y s i s . The variables can be replaced or reduced i n order to improve r e s u l t s . The r a t i o n a l e behind the choice of explanatory variables are explained as follows. For wages P & D, weight of shipments from 4 weight categories, number of shipments, and density were chosen. Presumably, the breaking down of the t o t a l weight handled by a terminal into d i f f e r e n t weight categories r e f l e c t s the p o s s i b i l i t y that small shipments and bulky ship-- 7 5 - • EXHIBIT 5-5 — (1) (2) (3) (A) A s s i g n e d t o A s s i g n e d Inbound o n l y to Proposed c o s t - e x p l a i n i n g v a r i a b l e s / Cost ( Y t v a r i a b l e ) T r a f f i c a l s o TL T r a f f i c Output measures ( E x p l a n a t o r y X v a r ) 1. Wages - P & D yes yes * W^ , W^ , Wj, W^ , no. o f shpmt, d e n s i t y 2. Wages - Dock yes no W1> W2> W 3 > no o f LTL shpmt, d e n s i t y . 3. W e l f a r e - workers yes yes ** r e f e r t o column 6. 4. Lease equipment yes yes same as row 1. 5. H i r e d Cartage yes yes same as row 1. 6. A c c i d e n t a l r e p a i r s yes yes r e f e r t o column 6. 7. L i c e n s e s x x x xxx x x x 8. F u e l & o i l yes yes same as row 1. 9. Radio communication yes yes r e f e r t o column 6. 10. Dock s u p p l i e s yes no W^ , W^ , W^ , no o f LTL shpmt, d e n s i t y 11. Dock equiprat. r e p a i r s yes no -do-12. T i r e s yes yes same as row 1. 13. Maintenance yes yes same as row 1. * 14. S a l a r i e s Br. & Term Mgrs. xxx xxx xxx 15. S a l a r i e s D i s p . & Fore. xxx x x x x x x 16. S a l a r i e s O f f i c e x x x xxx x x x 17. W e l f a r e - s a l a r i e d employees xxx xxx xxx 18. O f f i c e e q t . Lease & maint. x x x xxx xxx 19. P o s t a g e , p r i n t i n g , s t a t i o n e r y no yes no. of s h i p m e n t s 20. P r o p e r t y Maintenance xxx x x x x x x 21. U t i l i t y x x x xxx x x x 22. Telephone, T e l e t y p e yes yes no. o f sh i p m e n t s 23. B u s i n e s s & P r o p e r t y Tax xxx xxx xxx 24. S e c u r i t y xxx xxx x x x 25. Rent x x x x x x x x x 26. Rent income xxx xxx x x x 27. S a l e s & T r a f f i c no yes V l Wt+2 Wt+3 (° u t b ° u n d > 28. D e p r e c i a t i o n yes yes r e f e r t o column 6 29. I n t e r e s t xxx xxx r e f e r t o column 7 30. *** Bad Debt no yes W t 31. *** C l a i m s Symbols i n t e r p r e t a t i o n no yes Wj^  = weight of shpmt between 1-500 l b s xxx = no a c t i o n f o r f i x e d W2 " 501-2000 l b s n.a. = n o t a p p l i c a b l e o r n o t w3 " 2001 -10000 l b s a v a i l a b l e W^  = weight of shpmt above ]0000 l b s Wt = t e r m i n a l weight at time C W(.-n = t e r m i n a l weight at time t + i ( d i s t r i b u t e d l a g s ) ALLOCATION SCHEME (5) (6) (7) A l t e r n a t i v e X t explan. var. B a s i s of A l l o c a t i o n Remarks & E x p l a n a t i o n W123* W 4 ' t o t a * ' °£ shpmt 1^23* n 0" °* ^ T L s^P m t n.a. (not applicable) same as l i n e 1 same as l i n e 1 n. a. xxx same as l i n e 1 n. a. W123* n o °^ L T L 8 h P m t -do-same as l i n e 1 same as l i n e 1 xxx X X X coeff. as marginal cost -do-7. d i s t r i . of l i n e 1 + l i n e 2 see discussion i n text -do-prorata with weight xxx coeff. as marginal cost prorata with no. of shpmt coeff. as marginal cost -do--do--do-X X X X X X X X X xxx no. of a c t i v e accounts coeff. as marginal cost i f no r e l a t i o n s h i p e x i s t s p r o r a t a w i t h no. of a c c o u n t s number of a c t i v e accounts coeff. as marginal cost xxx -do-X X X n.a. n.a. n.a. n.a. n.a. Footnotes: c o e f f . as m a r g i n a l c o s t p e r c e n t a g e d i s t . o f l i n e 1 n.a. c o e f f . as m a r g i n a l c o s t c o e f f . as m a r g i n a l c o s t I f no r e l a t i o n s h i p e x i s t s , a l l o c a t e cn b a s i s o f w e i g h t . I n t . expenses i s not r e l a t e d to the amount of t r a f f i c I f no r e l a t i o n s h i p e x i s t s , based on p a s t e x p e r i e n c e one can p r o r a t e the bad debt and c l a i m s expenses over t h e y r . * Density r e f e r s to the density factor discussed e a r l i e r and can be approximated by t o t a l terminal weight handled divided by no. of l i n e haul t r a i l e r s served within a given month. ** Refer to column 6 when a r t l b r a r y a l l o c a t i o n bases i s required. L i t t l e success can be expected with the regression method for some costs. *** The bad debt or claim cost variable payment made at time t ; rather, they are costs that can be traced back to shipments hauled at time t. - 76 -merits do not require the same amount of handling. I t i s conceivable that i f a company handles a l o t of small shipments during a p a r t i c u l a r month, the number of t r i p s (made between the terminal and the customer and from customer to customer) i s increased. Concurrently, the number of shipments w i l l also increase making i t necessary to include t h i s as an explanatory v a r i a b l e . Density i s also an important v a r i a b l e to include because i t i s obvious that l i g h t - d e n s i t y commodity takes up more space and incurs more P & D wages than heavier commodity f o r the same weight. The choice O f explanatory v a r i a b l e s f o r dock wages follows s i m i l a r r a t i o n a l e . Note, however, that i s not included, and t o t a l number of shipment i s replaced by number of LTL shipment as compared to P & D wages. This i s because, i n most trucking firms, TL t r a f f i c does not require dock handling. Costs that r e l a t e to the P & D function use the same explanatory v a r i a b l e as P & D wages, and costs that r e l a t e to the dock functions use the same variables as the dock wages. Number of shipments alone i s used as an explanatory v a r i a b l e f o r postage and stationery expenses. Conceivably, the number of active accounts i s a more precise v a r i a b l e , since a piece of mail sent to a customer may possibly include i n i t the papers r e l a t i n g to several ship-ments. The sales and t r a f f i c expenses incurred now may have an e f f e c t on the volume of business f o r the next few months to come. Thus, the weight handled f o r the months at time t+1, t+2, t+3 was used to explain cost incurred at time t. If the sales and t r a f f i c expenses are only incurred to promote outbound t r a f f i c , then the variables w t + ^ » ^t+2'^t+3 s ^ o u ^ ^ be r e s t r i c t e d to outbound only. - 77 -T o t a l weight handled by a terminal over a time period i s chosen as an explanatory v a r i a b l e for both the bad debt and claim expenses. The t o t a l weight handled i s perhaps somewhat crude, but the information i s r e a d i l y accessible. Column (5) suggests the alternate explanatory v a r i a b l e s . The technique of backward-stepwise regression (mentioned e a r l i e r i n t h i s chapter), or the use of engineering studies to reduce excessive v a r i a b l e s i s often h e l p f u l . Column (6) suggests bases for a l l o c a t i n g terminal costs. When a cost-output r e l a t i o n s h i p can be established, the c o e f f i c i e n t s of the output (explanatory) variables represent the marginal costs f o r one unit increase of such output. An a l l o c a t i o n based on the percentage d i s t r i b u -t i o n of other a l l o c a t e d costs can be simple but u s e f u l . The welfare expenses use such a basis. The j u s t i f i c a t i o n i s that welfare i s approxi-mately a f i x e d percentage of the actual wages paid out to P & D and dock workers. Simple proration i s sometimes necessary when no vigorous s t a t i s t i c a l , accounting, or engineering costing methods are a v a i l a b l e . Accidental repairs and radio repairs are expenses that cannot be traced to t h e i r causes i n terms of transportation output. An important point should be noted. Whether an a r b i t r a r y proration would be d i s t o r t i n g depends on the m a t e r i a l i t y of the expense i n question. A test of m a t e r i a l i t y i s recommended for a r b i t r a r y bases. However, the cumulative e f f e c t s of t r e a t i n g i n d i v i d u a l immaterial costs should also be watched f o r . - 78 -Some Troublesome Aspects of Terminal Costs The preceeding section described the suggested cost assignment process. However, there are subtle areas that c a l l f o r more than mere general treatment i n the process. (1) Wages: Although wages are generally conceived of as a vari a b l e cost, several things make i t d i f f i c u l t to reduce costs to zero when a c t i v i t y i s at zero l e v e l . For p r a c t i c a l reasons, a basic crew must be maintained at a l l times even though l i t t l e or no work needs to be done. Problems are created by s t i p u l a t i o n s such as the minimum paid hours once a worker i s c a l l e d i n to work or the maintenance of a c e r t a i n per-centage of the previous week's working crew on .the present week's p a y r o l l . Because of these, wages are not one hundred percent v a r i a b l e . Another problem i s that of the measure of output. The p r o d u c t i v i t y of P & D drivers depends on the number of t r i p s made, the number of stops made i n a t r i p , and the time spent at each stop. Most of these data are not recorded or a v a i l a b l e i n any usuable form. The pr o d u c t i v i t y of dock workers, measured by weight moved across dock a f t e r checking f o r address and other p a r t i c u l a r s , depends on the s i z e of the shipments. To avoid the p i t f a l l of m u l t i c o l l i n e a r i t y among the variables W^ , W^* i n l i n e .2 of column (4) i n Exhibit 5,-5, indices can be developed to r e f l e c t the degree of d i f f i c u l t y involved i n loading and unloading shipments of d i f f e r e n t weight brackets. To t h i s end, time and motion study can be used. (2) Leased equipment and hired cartage: These are expenses that occur only a f t e r a c e r t a i n output l e v e l i s exceeded unless a l o t of equipment and trucks are out of order. P l o t t i n g any of these two costs against an output measure gives the following type of graph: - 79 -The marginal cost (a / b) i s only applicable to output l e v e l s above l e v e l Q. For output l e v e l s between zero and Q, the marginal cost i s zero. However, a problem arises when one i s t r y i n g to assign costs to lanes because i t i s necessary to subtract OQ from the output before applying the marginal rate. For the two-dimensional case, the distance of OQ i s equal to the absolute value of the cost-intercept divided by the slope ( OR x b / a). For a multi-dimensional case, i . e . , when cost i s regressed with two explanatory v a r i a b l e s , the region of OQ i s hard to determine. One would have to resort to other methods such as percentage d i s t r i b u t i o n based on al l o c a t e d basis developed f o r P & D wages. (3) T i r e s : Tires wear out with usage. Any time a t i r e i s replaced, i t i s the cumulative e f f e c t of work done i n the past. If one can assume a f a i r l y even usage of a l l the P & D v e h i c l e s and can assume a known f i x a d - 80 -l i f e span of t i r e s , i t i s possible to detect the r e l a t i o n s h i p between the cost of t i r e replacement and mileage. If there i s a great variance i n the p r i c e of t i r e s oyer time, the cost of a t i r e taken from the storeroom would vary, depending, f o r example, on whether the l a s t - i n - f i r s t - o u t (LIFO) or f i r s t - i n - f i r s t - o u t (FIFO) inventory valuation basis i s used. (4) Repair and mantenance: The s i t u a t i o n f o r maintenance i s s i m i l a r to that f o r t i r e s . The time lag between an upsurge i n t r a f f i c volume and i n increase i n maintenance cost i s indeterminate. V i s u a l p l o t t i n g of the cost and output variables sometimes helps, but does not promise r e s u l t s . In the case of an overhaul, maintenace i s c l e a r l y a resu l t of accumulated usage. In theory, the overhaul cost should be spread out over the past years, but i n p r a c t i c e t h i s i s never done. Depending on the s i z e of a p a r t i c u l a r trucking firm, the percentage-dis-t r i b u t i o n method based on some developed a l l o c a t i o n basis l i k e P & D wages i s reasonable. (5) Bad debts and claims: These are not a case of f i x e d time l a g , but a case of d i s t r i b u t e d lag. Since bad debts and claims can be d i s t r i -buted over a very long time period, the equation f o r the d i s t r i b u t e d l a g model has many var i a b l e s which use up many degrees of freedom and thus hampers the r e s u l t s . I t i s obvious that the methods suggested i n l i n e s 30, 31 of Exhibit 5-5 does not i n v a r i a b l y give a workable model. (6) Depreciation: Depreciation of t r a c t o r s , t r a i l e r s , and trucks i n a trucking f i r m i s a s i z a b l e cost item. G.L. Wilson c l a s s i f i e s depreciation of equipment as a v a r i a b l e cost when depreciation v a r i e s - 81 -with use. Depreciation can be estimated on a per-mile basis. Consder the case where a hew piece of equipment cost $X has a salvage value $Y with a l i f e expectancy of N years. In t h i s case, the annual depreciation expense on a s t r a i g h t - l i n e basis i s equal to ( $X - $Y ) /N. If the t o t a l number of miles the equipment has run i s recorded, the depreciation expenses can be determined on a per-mile basis. Consequently, the depreciation expense for each month can be estimated. Thus f a r , the discussion has mostly centered around terminal cost. The task of assessing lane p r o f i t a b i l i t y would not be complete without discussing the treatment of l i n e haul costs and determining the contribu-t i o n margin of a lane. Ca l c u l a t i n g Line-haul Cost on a Per-mile Basis The two methods to determine a per-mile l i n e haul costs have been discussed previously i n t h i s chapter. The methods suggested deal with highway l i n e - h a u l cost. In some cases, the l i n e - h a u l function i s performed by means of piggyback. That i s , the l i n e - h a u l t r a i l e r i s c a r r i e d on top of the f l a t deck of a t r a i n from one c i t y to another. The cost on a per-mile basis to perform the l i n e - h a u l function v i a piggyback i s usually given. George L. Wilson, Essays on Some Unsettled Questions i n the  Economics of Transportation (Indiana U n i v e r s i t y : Foundation f o r Economics and Business Studies, 1972), p.100. - 82 -Determining the Contribution Margin The contribution margin can be determined by following the algebriac equations given e a r l i e r i n the chapter. It i s not enough to determine the p r o f i t a b i l i t y or contribution margin of a lane f o r a short time period, such as one or two months i n order to evaluate i t s performance. Performance evaluation of a lane f o r a period of at l e a s t over a vear i s recommended. - 83 -CHAPTER 6 A MANAGEMENT INFORMATION SYSTEM FOR LANE PROFITABILITY STUDY Background A management i n f o r m a t i o n sy s tem i s a sy s tem f o r p r o v i d i n g i n f o r m a -t i o n to s u p p o r t the o p e r a t i o n s , management, and d e c i s i o n - m a k i n g f u n c t i o n s . . 23 xn an o r g a n i z a t i o n . The s y s tem u t i l i z e s computer ha rdware , s o f t w a r e , manual p r o c e d u r e s , management and d e c i s i o n m o d e l s , and a d a t a b a s e . I t i s the p r i m a r y i n t e n t o f t h i s c h a p t e r t o d i s c u s s t he k i n d s o f a c c o u n t i n g r e c o r d s t h a t make t h e d a t a base a p p r o p r i a t e f o r the d e c i s i o n ' m o d e l , i . e . , t he l a n e p r o f i t a b i l i t y s t u d y . The s e c o n d a r y pu rpo se o f t h i s c h a p t e r i s t o d i s c u s s how d a t a , wh i ch a r e i n s t r u m e n t a l t o t he s t u d y , s h o u l d be s t o r e d i n o r d e r to be r e t r i e v e d ; e a s i l y . Much o f the d i s c u s s i o n w i l l emphas ize the i m p o r t a n c e o f m a t c h i n g the r e c o r d i n g o f c o s t s w i t h t h a t o f r e v e n u e s , i n o t h e r words , " c o o r d i n a t i n g " the a c c o u n t i n g d a t a . I n f o r m a t i o n i s a v i t a l i n g r e d i e n t t o management. The i n f o r m a t i o n sy s tem i s sometimes hampered by the c o s t s o f o b t a i n i n g , p r o c e s s i n g and s t o r i n g d a t a . In g e n e r a l , t h e " v a l u e " of i n f o r m a t i o n i s the v a l u e o f t he change i n d e c i s i o n b e h a v i o u r caused by t h e i n f o r m a t i o n l e s s t he c o s t o f o b t a i n i n g Gordon B. D a v i s , Management I n f o r m a t i o n Sys tem: C o n c e p t u a l  F o u n d a t i o n s , : S t r u c t u r e and Development (New Y o r k : McGraw H i l l Book Co. 1974 ) , p. 5. - 84 -the information. Discussions i n t h i s chapter are based on the premise that information should be gathered only i f i t s value i s greater than zero. Data Versus Information Data are i s o l a t e d facts and f i g u r e s . Information i s processed data used f o r decision-making. The two d e f i n i t i o n s simply suggest that the analysis of data or the processing of data i s able to y i e l d information valuable f o r decision-making. C r i t e r i a of Data to be Collected Data should be c o l l e c t e d f o r a purpose and be decision impelling. To conduct a lane p r o f i t a b i l i t y study i n the future, data c o l l e c t e d should be accurate, regular and coordinated, i . e . , able to match costs with t h e i r associated revenues. Needless to say, the value of the information derived from the data should exceed the cost of recording them. Ibid, p. 168. - 85 -Da ta Base i n R e l a t i o n to t h e Lane P r o f i t a b i l i t y S tudy T h i s s e c t i o n d e p i c t s the p o r t i o n o f the d a t a base o f the model c a r r i e r t h a t r e l a t e s to l a n e p r o f i t a b i l i t y . The i m p o r t a n t q u e s t i o n s a r i s i n g out o f the c o l l e c t e d d a t a a r e ; (1) what d a t a s h o u l d be r e c o r d e d , (2) when d a t a s h o u l d be r e c o r d e d , and (3) how d a t a s h o u l d be r e c o r d e d . As f a r as p r o f i t a b i l i t y i s c o n c e r n e d , t h r e e ma jo r c a t e g o r i e s o f d a t a a r e o f i n t e r e s t . These a r e r e v e n u e s , c o s t s , and ou tpu t measures such as we i gh t h a n d l e d , number o f s h i p m e n t s , and number o f t r i p s . Each o f t he major c a t e g o r i e s w i l l be d i s c u s s e d i n some d e t a i l i n a l a t e r s e c t i o n . The d i s c u s s i o n a d d r e s s e s t he q u e s t i o n s o f when d a t a s h o u l d be r e c o r d e d and how d a t a s h o u l d be r e c o r d e d . E x p o s i t i o n o f t he Mode l C a r r i e r ' s Da t a To f a c i l i t a t e d i s c u s s i o n on the i s s u e s a r i s i n g out o f t he c o l l e c t e d d a t a ment ioned above , i t i s perhaps h e l p f u l t o s t a r t w i t h a d i s c u s s i o n o f the model c a r r i e r ' s a v a i l a b l e d a t a . The model c a r r i e r ' s d a t a a r e i n g e n e r a l no t u s a b l e f o r c o n d u c t i n g a l a n e p r o f i t a b i l i t y s t u d y . R e g a r d i n g the i n v a l i d i t y o f the c o l l e c t e d d a t a , the f o l l o w i n g o b s e r v a t i o n s can be made. (1) Da t a a re . i n g e n e r a l no t u s e r - o r i e n t e d . In many c a s e s , t hey have to be a g g r e g a t e d o r d i s a g g r e g a t e d m a n u a l l y b e f o r e t h e y can be u s e d . (2) Some a c c o u n t i n g r e c o r d s a r e no t k e p t p r o m p t l y . F o r example , s p o r a d i c n e g a t i v e s i g n s i n d i c a t e t h a t r e v e r s e e n t r i e s have been made to nega te the expenses p r e v i o u s l y o v e r - r e c o r d e d . The i n t e r e s t expenses r e c o r d e d i n the T o r o n t o t e r m i n a l , f o r example , have a v a l u e o f -10687 - 86 -d o l l a r s . (3) Reasonableness i s lacking i n some cost items. For.example, the o i l and f u e l expenses i n the Calgary terminal f o r the month of September 1976 were as low as $80 while for most other months were over $2000. (4) Accounting p r i n c i p l e s and procedures were not followed c l o s e l y . For example, the depreciation expenses for November 1975 and January 1976 were recorded as "zero" i n the Calgary branch. (5) Wages are recorded as they are paid out rather than on an accrual b a s i s . This makes the matching of costs with revenues d i f f i c u l t . The harmful e f f e c t s of unsatisfactory data are as follows. F i r s t , the cost-output r e l a t i o n s h i p determined by using the f a u l t y data i s bound to be misleading. In many cases, such r e l a t i o n s h i p cannot be established at a l l . Second, the cost of performing a p a r t i c u l a r function, such as dock handling, i s grossly under or over-estimated depending on the amount of wages paid out i n the time period examined. Third, i t i s impossible to compare the performance of a lane over the months. The next section suggests ways to record and c o l l e c t data which are usable and useful f or a lane p r o f i t a b i l i t y study. The discussion centers around ways to avoid the above p i t f a l l s , and means to f a c i l i t a t e the deter-mination of lane p r o f i t a b i l i t y by the i n c l u s i o n of pertinent information i n the data base and modification of the e x i s t i n g data base. Discussions on S c r u t i n i z i n g Data C o l l e c t i o n Revenue: As the time i n t e r v a l was chosen to be a period of four or f i v e weeks - 87 -for sampling purpose, i t i s necessary to use the same time period f o r recording revenue. When examining what kinds of revenue data are a v a i l a b l e , i t i s necessary to understand the r e l a t i o n s h i p between the kinds of revenue data recorded. See page 26 i n Chapter 3 f o r discussion of revenue. Revenues are given i n the form of terminal revenue as w e l l as revenue of t r a f f i c moving from one c i t y to another (such as R. B' ). The former i s not broken down by weight categories while the l a t t e r i s . See Figure 4 and 3 res p e c t i v e l y f o r reports that include revenue data. Revenues are recorded when a b i l l of lading or a f r e i g h t b i l l i s prepared. This i s roughly the time pickup and dock a c t i v i t i e s take place. At the s t a r t i n g point of the haul, the revenues and costs necessary to produce them f a l l into approximately the same time period. However, when the shipment a r r i v e s at the other:'terminal, unloading and deli v e r y and other re l a t e d a c t i v i t i e s take place. These a c t i v i t i e s incur further costs a few days l a t e r when the revenues are recorded at the point of origin.; For a period of a month, such a time l a g does not create problems, since the time lag i s a r e l a t i v e l y small percentage of a month, except when the time lag straddles over two months. However, i f the time period for sampling i s a week, the time lag i s detrimental. Thus, a longer time period for sampling i s preferred to diminish the undesirable e f f e c t s of time lag. There i s no simple so l u t i o n to t h i s problem. Recording part of the revenue when the commodity i s at the o r i g i n a t i n g terminal and the other part when i t i s at the receiving terminal i s not p r a c t i c a l . In the f i r s t place, the revenue-recording procedure w i l l become unduly complicated. - 88 -Secondly, there Is no r e a d i l y a v a i l a b l e mechanism to s p l i t the revenue for every shipment. Terminal Cost: Table 3-1 i n Chapter 3 (page 33) i s a l i s t of the terminal costs for the model c a r r i e r . Each of these w i l l be discussed with respect to how and when they should be received. See Table 6-1 for a summary of th i s discussion. - 89 -TABLE 6-1 Sugges ted Cos t R e c o r d i n g Methods C o s t s i 1. Wages - P & D i 2. Wages - dock 3. W e l f a r e 4. L e a s e d equ ipment 5. H i r e d c a r t a g e 6. A c c i d e n t a l r e p a i r s 7. L i c e n c e s 8. F u e l & O i l 9. R a d i o m a i n t e n a n c e 10. Dock s u p p l i e s 11. Dock equ ipment r e p a i r s 12. S a l a r i e s 13. O f f i c e Equipment R e p a i r s 14. Po s t a ge and S t a t i o n e r y D i s c u s s i o n D a i l y o r w e e k l y a c c r u e d wages s h o u l d be r e p o r t e d . A t t he end o f each month , t h e s e a c c r u e d wages can be summed u p . - do -R e p o r t the same t ime wages a r e r e c o r d e d . P o s s i b l e t o i d e n t i f y t h e c o s t w i t h e the days d u r i n g w h i c h equ ipment i s l e a s e d . - s i m i l a r to 4 -The c o s t canno t be r e p o r t e d a t t he t ime o f t h e a c c i d e n t . No r e p o r t i n g c an be done u n t i l t h e t r u c k i s r e p a i r e d o r t h e r e p a i r c o s t i s a s s e s s e d . However, e s t i m a t e s o f a c c i d e n t a l r e p a i r s can be p r o r a t e d w i t h r e s p e c t t o we i gh t h a n d l e d by month. I t i s a s e t amount to be r e p o r t e d e v e r y month. Measurement o f the d i e s e l pump meter d a i l y g i v e s an a c c u r a t e a s se s sment o f the amount o f f u e l u s e d . I f f u e l i s p u r c h a s e d f r om gas s t a t i o n s i n t he c i t y , P & D d r i v e r s s h o u l d t u r n i n r e c o r d s o f money spend on f u e l e v e r y day. R e p o r t as soon as the r e p a i r c o s t i s a s s e s s e d . R e c o r d the s u p p l i e s t a k e n out o f t h e s t o r e r o o m e v e r y day . - s i m i l a r t o 9 -These do no t p o s t any t i m e - l a g p r o b l e m s i n c e s a l a r i e s a r e a f i x e d c o s t . Shou ld be r e p o r t e d as soon as p o s s i b l e . F o r p o s t a g e , c a r e f u l r e c o r d s o f t h e p o s t a g e mach ine e n a b l e one to d e t e r m i n e how -much p o s t a g e was u s e d . P r i n t i n g & s t a t i o n e r y s u p p l i e s a r e r e c o r d e d as t h e y a r e t a k e n out o f t h e s t o r e r o o m . C o s t s D i s c u s s i o n 15. P r o p e r t y m a i n -t e n a n c e 16. U t i l i t y 17. T e l e p h o n e and T e l e t y p e 18. B u s i n e s s Tax 19. S e c u r i t y 20. Rent 21. S a l e s & T r a f f i c 22. D e p r e c i a t i o n 23. Bad Debt s A c c r u a l b a s i s i s i r r e l e v a n t h e r e s i n c e i t i s a f i x e d c o s t . - do -The l o n g d i s t a n c e t e l e p h o n e s a r e t h e v a r i a b l e p o r t i o n o f t h e co s t i t e m . Record t h e expense a t t he t ime t h e phone b i l l i s p a i d i s n o t a good p r a c t i c e . A c c r u a l b a s i s not r e l e v a n t f o r a f i x e d c o s t . - do -- do -Due to the d i f f i c u l t y o f i n v e s t i g a t i n g t h e e f f e c t s o f s a l e s expenses on the amount o f t r a f f i c , an a c c r u a l b a s i s i s d i f f i c u l t t o imp lement . R e c o r d d e p r e c i a t i o n expense ba sed on m i l e s t r a v e l l e d d u r i n g a month and d e p r e c i a t i o n c h a r g e on a p e r - m i l e b a s i s . See p r e v i o u s d i s c u s s i o n o f d e p r e c i a t i o n i n page I t i s v i r t u a l l y i m p o s s i b l e to r e c o r d bad d e b t s expense on an a c c r u a l b a s i s s i n c e t h i s c o s t o c c u r s a few months a f t e r the s e r v i c e was r e n d e r e d . However, i f d e t a i l e d r e c o r d s o f bad d e b t s a r e k e p t i n computer r e c o r d s , i t i s p o s s i b l e t o r e d i s t r i b u t e the bad deb t expense s a t t he end o f the y e a r t o the t ime the s e r v i c e was r e n d e r e d . 24. C l a i m s - do -- 90 -Output Measure and S u p p o r t i n g D a t a : As d e s c r i b e d i n the p r e v i o u s c h a p t e r s , the d a t a used t o r e f l e c t o u t -put o r work done as a r e s u l t o f d i f f e r e n t k i n d s o f expenses a r e : 1. we i gh t h a n d l e d by d i f f e r e n t we i gh t c a t e g o r i e s i n a month 2. number o f sh ipments h a n d l e d i n each month 3. Number o f t r i p s o r m i l e s t r a v e l l e d i n each l a n e i n each month 4. a c c e s s o r i e s such as (a) the number o f p a r c e l s p e r sh ipment and (b) number o f a c c o u n t s h a n d l e d by t e r m i n a l and l a n e F i g u r e 2 o f t he a p p e n d i x g i v e s d a t a f o r t r a f f i c o r i g i n a t i n g a t C a l g a r y . In o r d e r t o f i n d the t o t a l we i gh t h a n d l e d by the C a l g a r y t e r m i n a l i n the we i gh t c a t e g o r y 1- 500 pounds (weight code 1 to 5) i t i s n e c e s s a r y to add t h e f i r s t f i v e l i n e s o f each l a n e ' s we i gh t h a n d l e d and sum o v e r a l l r e l e v a n t l a n e s . I t can be seen f r om f i g u r e 2 t h a t t o r e p e a t the above p r o c e s s f o r o t h e r we i gh t c a t e g o r i e s , the amount o f manual work i n v o l v e d i s d i s c o u r a g i n g . C l e a r l y , i t i s e a s i e r and l e s s e r r o r - p r o n e to e x t r a c t d a t a f r om computer s t o r a g e than to add f i g u r e s m a n u a l l y . I f d a t a shown i n f i g u r e 2 o f the append ix a r e s t o r e d i n o f f - l i n e s t o r a g e f a c i l i t i e s , such as t a p e s , t h e a c c e s s and r e p r o d u c t i o n o f m o d i f i e d d a t a wou ld be more e f f i c i e n t and a c c u r a t e . A l t e r n a t e l y , one can p r o d u c e " cus tom-made" and more u s e r -o r i e n t e d r e p o r t s f o r t h e pu rpo se o f c o n d u c t i n g a l a n e p r o f i t a b i l i t y s t u d y . F i g u r e 5 i n t he a p p e n d i x i s a week ly r e p o r t on r e v e n u e , w e i g h t , m i l e s and t r i p s on a p r o v i n c e - t o - p r o v i n c e b a s i s . In t h i s f o r m , t h e i n f o r -m a t i o n i s too g e n e r a l f o r the s t u d y . P r o v i n c e - t o - p r o v i n c e i n f o r m a t i o n i s n o t n e c e s s a r i l y t he same as t e r m i n a l - t o - t e r m i n a l i n f o r m a t i o n becau se t h e r e - 91 -may be more than one terminal i n a province. A s l i g h t modification of the data i s recommended. The revenue, weight, miles and t r i p s information a f t e r the modification i s very h e l p f u l to the study. Accessories, such as the number of pieces per shipment and number of accounts per lane, are not too d i f f i c u l t to obtain and record. Many of the pro b i l l s i n use now have a column to record the number of pieces i n a shipment. This information i s v i t a l to control the phys i c a l movement of the shipment to avoid shortage or losses. This information i s also important as an explanatory v a r i a b l e for dock labour costs. The number of active accounts was recommended as an a l l o c a t i o n basis for some costs so i t i s e s s e n t i a l that such data are a v a i l a b l e . The number of shipments can be recorded i n l i e u of the number of active accounts, but the two are not the same because a shipper may ship many times i n a month. - 92 -CHAPTER 7 CONCLUSION AND RECOMMENDATIONS Conclusions To r e a l l y appreciate the d i f f i c u l t i e s involved i n the determination of lane contribution one would have to look more deeply into how costs occur and the ways the transportation outputs are produced. To do so requires a general understanding of the organization and day-to-day operation of a trucking form or the fir m i n question. L i k e -wise, a precise and clear understanding of the concept of the d i f f e r e n t kinds of costs (such as f i x e d cost,, v a r i a b l e cost, d i r e c t cost, i n d i r e c t cost, common cost, j o i n t cost) as well as the nature of the various cost elements (such as P & D wages) i s important to r e a l i s e the problems involved. The quest f o r methodologies that can do a competent job on t h i s topic i s challenging. The i n t r i c a t e nature of the trucking costs and the d i f f i c u l t i e s i n measuring the transportation output are the two major deterrents to the area of costing or p r o f i t determination. At the present state of the ar t . even the best developed methods cannot escape a r b i t r a r y assignment of costs. Whether the determination of p r o f i t a b i l i t y . c a n be done s u c c e s s f u l l y depends on how u s e f u l and v a l i d the accounting records and other re l a t e d data are. It i s nothing but disastrous to conduct a study without asking about the underlying accounting procedures that produce most of the cost - 93 -and revenue figur e s . One has to r e a l i z e that accounting data are prepared f o r a v a r i e t y of purposes. Invariably, i t c a l l s f o r some planning i f one wishes to imple-ment a lane p r o f i t a b i l i t y study i n the future. I t i s important to decide before hand: (1) What kinds of data are e s s e n t i a l to a lane p r o f i t a b i l i t y study? and (2) What format should data be presented? One can avoid laborious manual work,, unnecessary adjustments, and above a l l , c o s t l y errors, and f a u l t y conclusions from t h i s study with some c a r e f u l l y thought out planning. However, i t i s up to management to decide i f a lane p r o f i t a b i l i t y study i s of importance to one's operation and i f the e f f o r t i s worthwhile. Recommendations While t h i s study can be instrumental to many types of dec i s i o n making, i t s importance should not be over-emphasized. In the f i r s t place, the a r b i t r a r y a l l o c a t i o n of costs expose the study to c r i t i c i s m . Secondly, decisions as v i t a l as the delet i o n of addition of lanes cannot be done without g i v i n g due regard to the o v e r a l l e f f e c t of such action. T h i r d l y , the study cannot be used i n d i s c r i m i n a t e l y as a cost control device. This i s because the p r o f i t a b i l i t y of a lane i s dependent on the cost occured at the terminal. In the process of doing t h i s study, i t was r e a l i z e d that several things need to be done now i f future studies of t h i s kind are to be f a c i l i t a t e d . 1. Costs should be recorded on an accrual basis as f a r as possib l e . - 94 -2. Revenues, costs and other supporting s t a t i s t i c s should be i n formats r e a d i l y usable without having to sort them out manually. 3. Data for the past two or three years should be i n o f f - l i n e computer storage f o r easy r e t r i e v a l and manipulation. U. There should be documented a l l o c a t i o n bases of past studies for future reference. - 95 -BIBLIOGRAPHY Books Benston, George. "Multiple Regression Analysis of Cost Behaviour", Contempory Cost Accounting and Control. Belmont: Dickenson Publish-ing Co., 1970. Davis, Gordon. Management Information System: Conceptual Foundations, Structure and Development. New York: McGraw H i l l Book Co., 1974. Gilman, Stephen. Accounting Concepts of P r o f i t s . New York: The Ronald Press Co., 1956. Horngren, Charles. Cost Accounting: A Managerial Emphasis. New Jersey: Prentice H a l l Inc. Englewood C l i f f s , 1972. Kane, Edward. Economic S t a t i s t i c s and Econometrics. New York: Harper and Row, 1968. Kerlinger, Fred & Elazar Pedhazur. M u l t i p l e Regression i n Behavioural Research. New York: Holt Rinehart & Winston. Meyer, John, e t . a l . The Economics of Competition i n the Transportation  Industry. Cambridge Mass: Harvard Un i v e r s i t y Press, 1969. Meyer, John, and Mahlon Straszheim. Techniques of Transport Planning. Vol. 1, P r i c i n g and Project Evaluation. Washington, D.C: The Brooking I n s t i t u t e , 1972. Nie, Norman. S t a t i s t i c a l Package f o r the S o c i a l Science. New York: McGraw H i l l , 1975. Pardy, H.L. Transport i n Canada, Composition and Public P o l i c y . Vancouver: U n i v e r s i t y of B r i t i s h Columbia, 1972. Poole, Ernest. Costs — A Tool f o r Railway Management, New York: Simmons-Boardman Publishing Corporation, 1962. Solomon, Ezra. The Theory of F i n a n c i a l Management. New York: Columbia Uni v e r s i t y Press, 1963. Warner, Stanley. The Cost of Trucking: Econometric Analysis. Iowa[', ..Dubuque: Wm. C. Brown Co., 1965. Wilson, George L. Essays on Some Unsettled Questions i n the Economics of  Transportation. Indiana: Un i v e r s i t y Foundation f o r Economics and Business Studies, 1972. - 96 -Pe r i o d i c a l s A l l a n , F l o t . t , ' e t . a l . "The Ton-mile, Does i t Properly Measure Transporta-t i o n Output?" Transportation Research Record. Vol. 577, 1976. Dean, J o e l . " S t a t i s t i c a l Determination of Costs with Special Reference to Marginal Costs, The Journal of Business. No. 4, Oct. 1936. Edwards, Ford. "The Role of Transportation Costs and Market Demand i n Railroad Rate Making", Journal of Transportation. Vol. 9, No. 6, F a l l , 1969. Walter, C.K. "Measuring Pickup and Delivery Costs f o r Small Shipments", Transportation Journal. V o l. 14, No. 1, F a l l , 1974. Waters, W.G. " S t a t i s t i c a l Costing i n Transportation", Working Paper No. 17, Centre f o r Transport Studies, U n i v e r s i t y of B r i t i s h Columbia. Government Publications Canadian Transport Commission. The Canadian Trucking Industry: Issues  A r i s i n g Out of Current Information. Ottawa: Queen's P r i n t e r , A p r i l , 1975. Economic Research Committee, I.C.C. Cost Revenue and Small Shipments. Washington, D.C: Regular Common Ca r r i e r Conference, 1972. Interstate Commerce Commission. Formula f o r the Determination of the Costs of Motor C a r r i e r s of Property (Highway Form A). Statement No. 2F1-73. Section of Cost and Valuation. Washington, D.C: GPO, March, 1973. Interstate Commerce Commission. Si m p l i f i e d Procedures f o r Determining Cost of Handling Freight by Motor Carri e r s (Highway Form B). Cost Finding Section. Washington, D.C.: GPO, July, 1962. Min i s t r y of Transport. An Interim Report bh Freight Transportation i n Canada. Ottawa: Information Canada, June, 1965. - 97 -P e r s o n a l I n t e r v i e w Bawa, Chub, J o h n s t o n T e r m i n a l , V a n c o u v e r , B r i t i s h C o l u m b i a , May, 1977. C a t h p o l e , T e r r y , A l l t r a n s E x p r e s s L t d . , Burnaby, B r i t i s h C o l u m b i a , A p r i l , 1977. D a l l i s o n , F r a n k , A l l t r a n s E x p r e s s L t d , , Burnaby , B r i t i s h C o l u m b i a , O c t . , 1976. S impson, R o b e r t , Canad i an P a c i f i c T r a n s p o r t , V a n c o u v e r , B r i t i s h C o l u m b i a , May, 1977. W h i t e , H a r r y , A l l t r a n s E x p r e s s L t d . , Burnaby , B r i t i s h C o l u m b i a , O c t . , 1976. - 98 -APPENDIX Figure 1. Weight Code Table 2. Monthly S t a t i s t i c a l Report - Inbounds 3. Monthly S t a t i s t i c a l Report - Outbounds 4. Terminal Report on Weight, Revenue and Pros. 5. I n t e r p r o v i n c i a l Weight, Revenue, Mileage Report - 99 -Figure 1: Weight Code Table ALLTRANS EXPRESS LTD. - NON-EXPEDITED DOMESTIC LTL TL (BASE) IMPORT LTL TL (BASE) STATISTICAL REPORT /EIGHT FROM TO CODE LBS LBS 1 1 100 2 101 200 3 201 300 4 301 400 5 401 500 6 501 1,000 7 1,001 2,000 8 2,001 5,000 9 5,001 10,000 10 10,001 20,000 11 20,001 30,000 12 30,001 40,000 13 40,001 ABOVE 101 1 100 102 101 200 103 201 300 104 301 400 105 401 500 106 501 1,000 107 1,001 2,000 108 2,001 5,000 109 5,001 10,000 110 10,001 20,000 111 20,001 30,000 112 30,001 40,000 113 40,001 ABOVE % OF DOM TOTAL O O % OF DOM TOTAL % OF LANE TOTAL % OF STN TOTAL • % OF DOM TOTAL Figure 2: Example of Model Carrier's Monthly S t a t i s t i c a l Report CALCARY INHOUND Inbound Traffic WEIGHT FROM - TO CODE CY _ EN 01 CY - EN ' 02 CY - EN 03 CY - EN 04 CY - EN 05 CY - EN 06 CY - EN 07 CY - EN 08 CY - EN 09 DOM LTL CY - EN 10 CY - EN 11 CY - • EH 12 CY - EN 13 DOM TL DOM TOTAL LANE TOTAL CY ML 01 CY ML 02 CY ML 03 CY ML 04 CY ML 05 CY ML 06 CY ML 07 CY ML 08 CY ML 09 DOM LTL CY - ML 10 CY ML 11 CY ML 12 CY - ML 13 WEIGHT WEIGHT LBS $ CUT COMPANY REVENUE REVENUE REVENUE PER PRO NO. PRO % OF DOM TOTAL % OF LANE TOTAL % OF STN TOTAL DOM TL DOM TOTAL LANE TOTAL Figure 3: X OF DOM TOTAL 1 i H O I % OF DOM TOTAL % OF LANE TOTAL 2 OF STN TOTAL % OF DOM TOTAL Example of Model C a r r i e r ' s Monthly S t a t i s t i c a l Report - Outbound T r a f f i c CALGARY OUTBOUND WEIGHT FROM TO CODE CY EN 01 CY - EN 02 CY - EN 03 CY EN 04 CY - EN 05 CY EN 06 CY - EN 07 CY - EN 08 CY - EN 09 DOM LTL CY - EN 10 CY - EM 11 CY - EN 12 CY - EN 13 DOM TL DOM TOTAL LANE TOTAL CY - ML 01 CY - ML 02 CY - ML 03 CY - ML 04 CY - ML 05 CY - ML 06 CY - ML 07 CY - ML 08 CY - ML 09 DOM LTL CY - ML 10 CY - ML 11 CY - ML 12 CY - ML 13 WEIGHT % WEIGHT LBS $ CWT COMPANY REVENUE REVENUE % REVENUE PER PRO NO. PRO % OF DOM TOTAL Z OF LANE TOTAL Z OF STN TOTAL DOM TL DOM TOTAL LANE TOTAL Figure 4: - Terminal Weight, Revenue, Pro Repor Analysis of S t a t i s t i c a l Reports for: Period Ending: Period Number: Station Weight Revenue Revenue per cwt Calgary Edmonton Montreal Toronto Vancouver Winnipeg Outbound Inbound Outbound Inbound Outbound Inbound Outbound Inbound Outbound Inbound Outbound Inbound Figure 5: - Inter Province Weight, Revenue, Milage Reports ALLTRANS EXPRESS LTD. - D.A.R. ANALYSIS AS AT REVENUE WEIGHT MILES REV.CWT REV.MILE REV.TRIP WT.TRIP TRIPS ACTIVITY THIS WEEK TO-DATE B.C. - ALBERTA B.C. - MANITOBA B.C. - ONTARIO B.C. - QUEBEC ALBERTA - B.C. ALBERTA - MANITOBA ALBERTA - QUEBEC MANITOBA - B.C.-MANITOBA - ALBERTA MANITOBA - ONTARIO MANITOBA - QUEBEC ONTARIO - MANITOBA ONTARIO - ALBERTA ONTARIO - B.C. QUEBEC - MANITOBA QUEBEC - ALBERTA QUEBEC - B.C. TOTALS 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0093963/manifest

Comment

Related Items