Opinion: ‘Making Plan’ in 2010

This Opinion piece appears in the Jan. 18 print edition of Transport Topics. Click here to subscribe today.

Millions of Americans turn their personal goals into New Year’s resolutions. In a sense, trucking CEOs also make New Year’s resolutions for their firms: the annual operating plan. But while failing to keep individual resolutions is disappointing, when a trucking company leader fails to “make plan,” the financial results can be catastrophic.

Like New Year’s resolutions, operating plans are forward-looking, defining expectations and activities for the coming year. But there the analogy falters, because a truly successful operating plan begins by being backward-looking, based on detailed analysis and an understanding of past performance.

In fact, plan development begins by answering two basic questions about the prior year’s performance: What goals weren’t made? And why not?

Understanding your company’s performance in 2009 will increase your ability to develop and manage a successful operating plan for 2010. And the best way to do that is by using a business tool called the “variance scorecard” and a process called the “variance analysis.”

Begin by listing each 2009 goal on a variance scorecard, with individual scorecards developed for each company location and department. Next to each goal, list actual 2009 performance. Then subtract each goal from actual performance to determine the variance, plus or minus.

For example, your Tulsa location had a 2009 monthly driver revenue per truck goal of $10,000, but the actual figure was $9,350. The variance for that goal was minus $650. Continue the process until all Tulsa goals and actual performances have been listed and their variances calculated.

Next, analyze the scorecards to identify reasons for each variance. Require managers to provide a detailed goal-by-goal assessment of actual-to-expected performance, and don’t limit the analysis to goals missed; analyzing goals met or surpassed is equally important because successful managers are likely to have insightful activities to share and help others make their goals.

Once each manager has completed an individual variance analysis, the results must be reviewed and further analyzed at the corporate level.

Department heads must review and incorporate into each location’s analysis their own perspective on what happened. For example, the vice president of maintenance should analyze each location’s variance analysis for maintenance cost-per-mile performance, while the vice president of operations might analyze driver miles-per-month performance.

Next, compare location-to-location performance and look for the best and the worst within each goal category. Use the analysis provided by managers and department heads to identify performance obstacles, keeping in mind that positive variances don’t always indicate superior manager performance.

For example, let’s say Chicago had a positive variance on net profit of $23,000, while Nashville had a negative variance of $27,000.

Reviewing each location’s variance analysis reminds us that during 2009, Chicago gained two key accounts generating gross revenues of $450,000 over plan. In addition, five fully depreciated trucks were transferred in to haul the freight. Nashville, however, lost a key account — and $610,000 of revenue — but its analysis reminds us that, through aggressive marketing efforts, the Nashville manager picked up four new small accounts that added $125,000 in revenue.

So which manager performed better?

Chicago’s plan projections forecast a 4% net profit, meaning that the increased $450,000 of revenue should have generated $18,000 in additional net profit. However, net profit calculations assumed average monthly depreciation of $800 for each Chicago truck. Five fully depreciated trucks were brought in, saving $48,000 in annual depreciation expense. Add those together ($18,000 and $48,000) and we should have obtained a $66,000 positive variance at Chicago; not just $23,000.

For Nashville, losing $610,000 in revenue at 4% net profit generates a negative variance of $24,400. And Nashville was hit with a not-in-plan $30,000 claim expense adjustment from a two-year-old accident occurring under the previous manager. Combining those two events suggests a negative variance of $54,400, yet Nashville’s variance was only a negative $27,000, thanks to the new accounts picked up by the current manager.

Finally, after reviewing each location’s variance analysis, make a list of the obstacles that created negative variances and a list of the activities managers employed to obtain positive variances. Brainstorm with department heads on how to remove the obstacles. Build the positive activities identified during the process into a training program to help future performance.

There’s much more to developing an effective annual operating plan than just looking at prior-year performance, of course, but space limits us to the following overview:

• Goals should be negotiated with location and department managers so they are aggressive, yet reasonable, and have buy-in at all levels.

• Resource needs must be identified so employees have the proper tools and training.

• Recognition-and-reward programs should be defined and funded to encourage performance.

• Responsibility for performance monitoring — and a SWAT-like response to underperforming areas — should be assigned to the relevant department heads.

Be prepared for a little culture shock: Analyzing variances honestly is tedious, self-deprecating and intimidating, given that explaining why assigned goals weren’t met often means pointing a finger at your own performance or, in terms of support, the performance of those to whom you report.

But unpleasant though it may be, to develop a plan that removes historical obstacles, identifies underperformers, defines resource needs and targets realistic goals, a trucking CEO must have a true understanding of past performance.

An objective and detailed analysis of prior-year, actual-to-goal performance is the single most important activity a trucking company can undertake to improve the chances of future success.

CostDown Consulting, Grayson, Ga., provides programs and training aimed at reducing the cost of trucking.