This Opinion piece appears in the May 8 print edition of Transport Topics. Click here to subscribe today.
By David Roush
KSM Transport Advisors
We keep seeing signs that things are looking up for the trucking industry. Most of the relevant economic indicators are favorable for trucking. Commodities are getting stronger, oil rig counts are increasing and the housing recovery is persisting. At the same time, small businesses are feeling a greater sense of optimism, and improvements to the tax code may boost entrepreneurialism. Low unemployment rates ultimately will lead to higher wages, giving consumers more money to spend and putting more goods on trucks.
These positive indicators for trucking are tempered by anecdotal reality.
Stifel analyst John Larkin reported from the recent Truckload Carriers Association 79th Annual Convention that “most shippers are not in the mood for rate increases, presently. Many are offering their carriers an opportunity to retain their existing lane awards provided rates remain flat at depressed levels or are sandpapered down further.”
This mirrors what our clients report and what I heard at the TCA meeting.
Truckers are an optimistic group, and most know that despite the current rate situation, the positive indicators combined with the electronic logging device, or ELD, mandate and ongoing driver issues should put capacity closer to demand than it has been in quite a while.
As capacity and demand approach equilibrium, carriers will have more options when selecting which freight to haul. Numbers rule in this industry, but picking and choosing the most valuable freight isn’t a matter of simple arithmetic. Information, technology and data analysis are going to become a more valuable commodity for carriers as they decide which shippers to give their trucks to on a regular basis.
The analytic tools on the market today, and the intelligence derived from the use thereof, make it possible for fleets to make intelligent data-driven decisions about customer and lane profitability. These tools evaluate a carrier’s revenue stream, including price, cost, velocity, time and flow, to help carriers identify the yield associated with a specific piece of business, shipper or lane. Regardless of the chosen technology fleets use to analyze their network, their strategy must be well thought out, consistent, specific and most importantly, actionable.
The leaders of trucking companies need to manage their customers the same way their customers manage them: by the numbers. Price is the common language of trucking; it is the only meaningful communication between carrier and shipper. We are amazed by how many sophisticated trucking business owners confuse the market rate — the statistical average of what all carriers reporting to the index are receiving on a given lane during a given period — with their yield-based or required rate.
Hauling freight at or above the market rate does not mean it will be profitable. It just means you are beating the index. Enlightened carriers understand their costs as well as their freight networks and calculate a yield-based rate to identify what price they need to establish to be profitable on each piece of business. The relationship among the yield-based rate, the market rate, the current rate for that shipper and the rate for all current shippers on a given lane provides pricing intelligence that leads carriers to smart pricing decisions.
Truckers tend to be loyal to their customers. However, many times, this is a one-way street. In our consulting practice, we see what we believe is a misguided loyalty to longtime shippers. Long gone are the days of selling based on long-standing personal, plant-level relationships. Today’s highly educated shippers use MBAs and sophisticated models to manage their transportation spend. Carriers need to provide excellent service and respect their customers while also using smart math for pricing and capacity allocation.
Shippers who have been shortsighted and not relationship-oriented should take the trucking industry’s positive direction as a wake-up call and become better customers. This industry is about give and take, and those shippers that have focused only on low rates will pay the price when demand exceeds capacity. Anything shippers can do to support drivers, minimize delays and increase efficiency will bode well for them as fleets use analytics to select and price their freight.
The “good times” in trucking are few and far between. Now is the time to plan for a market with tight capacity. Carriers need to develop a plan based on relationships but also — and in my opinion, more importantly — on analytics and profitability.
There is no magic bullet, but carriers need to educate themselves on their overall network and consistently execute the network strategies they have identified to improve their yield. As capacity tightens, carriers may see a bump in revenue, but unless they optimize their overall network and choose the customers with whom they want to align, they’re missing an opportunity to be strategic about engineering their freight network.
KSM Transport Advisors provides profit improvement consulting services to trucking companies. Roush has more than 30 years of experience in transportation and consulting analysis and implementation. His focus is on improving profitability utilizing freight network engineering, financial management, operational metrics and optimization strategies.