FInAnCE

Many of the larger contracts that involve manufacturing companies reducing or eliminating their ‘own-account’ fleet and moving to third party logistics providers to work as business partners use an open-book system of costing. Put simply, the haulier needs to approach the customer with all details of how the rates are arrived at, including what overheads and profit margin are included. This approach to rate negotiation is based on three headings. Reason for Open Book Costing, Benefits as a Haulier & Logistics provider, and finally, Drawbacks to the Haulier & Logistics provider.

The main reason customers request the open-book approach to costing is that they have detailed information on what costs are or should be, which they know from operating a fleet and from external consultants. These customers want to see how realistic the haulier’s costs are, what margin is included and what economies/cost savings are brought to the table. Logically, there should be a lower cost base than an own-account fleet can provide (but this may not always be the case). Having an open-book approach to costing means the customer can compare costs with competitors. They can assess what margin is expected from the contract, what level of overheads the contract is expected to carry, and what benefits these overheads actually give to the efficient operation of work performed.

BEnEFIt to HaulIErs

If a potential customer will give accurate information to cost a contract, then the open-book approach to rate negotiation will allow a fair margin based on details given. If some of the variables change, such as overall volume, waiting time, allowed gross weights, loading and discharge times, then these variables can be adjusted in the original costing template and fair rate negotiations going forward are possible. In open-book negotiation trust must be forthcoming from both sides, but the advice is do not include 4 mpg when the reality is 8mpg or expect a gullible customer to swallow a tractor-unit and trailer combination’s economic lifespan to be 300,000 kms. When dealing with a customer on an open-book approach to pricing, they must understand that accurate and truthful information during rate negotiation is also in their best interest. In the current crisis of fuel and labour cost increases, be sure to build in a diesel surcharge and a fair and reasonable system to review contract performance and operating costs on an annual basis.

Open Book Costing Benefits and Drawbacks

DrawBaCks For HaulIErs

The client may take the information and feed it back to a preferred supplier. Details on costs such as driver rates, fleet replacement cost, insurance and specific overheads are highly confidential to the business and a customer must not allow a haulier’s competition to gain such advantages. Another drawback of open-book costing is that the customer may attempt to cherry-pick parts of the service that is most cost effective for them without the benefit of increased margin to the service provider. Open-book approach to costing may demonstrate to a customer a weakness in costing where it is apparent that the costing template and basis of calculations was devised by an external expert and the haulier had little or no input in the process. Sometimes the customer has access to future data that they have not disclosed (i.e., increased gross weights when the rate is based on a full load, where all benefits will go to customer) or the customer may see a future change in market requirements leaving the supplier with specialised equipment without the required usage.

For open-book costing to work fairly, both parties have to provide realistic data, assumptions for both customer and haulier have to be clearly defined (e.g., the customer assumes only their product is being carried, while the haulier assumes maximum utilisation of assets). Small issues such as livery on vehicles entail additional costs (again the customer must realise this requirement restricts interchange of units for service and emergency cover). All extras have a price, and once both parties understand the process of open-book, negotiation can be fair and equitable and lead to a win/win situation for all concerned.