Strategic Planning Is Not Just for the Big Boys
The best investment for a transportation provider seeking growth and profitability could cost no more than the time required to think it through. Preparing a strategic plan is within the means of any company, large or small.
The pressures of customer service magnify the need for profitability-based strategic planning. To retain and capture business, many trucking operations offer ever-deeper discounts and add services at little or no extra cost without keeping track of the true profitability of what’s offered.
After factoring in the costs of customer incentives, a carrier may find that its most cherished business is its least profitable, or that trying to offer a variety of value-added services is disrupting operations.
Effective strategic planning begins by finding the true profitability of current customers, services and regions to understand where a company is making — and losing — money.
Next, it evaluates and ranks possible initiatives according to their economic value.
It concludes with an action plan specifying how selected initiatives should be launched, tracked and adjusted over time.
Following are the details of strategic planning’s three phases.
Phase 1: Profile Business
lthough most companies already have management schemes in place — account-level profitability, profitability by terminal or a similar approach — it is a good idea to start with a clean sheet of paper and divide the analysis into manageable pieces.
Phase 1 examines the current profitability of a carrier’s activities and assembles information essential to evaluating ideas that will surface in Phase 2 for cutting costs and capturing additional volume.
To profile profitability, segment your business by customer, service and region. Assign costs to each segment. Then determine profitability of each segment.
Within all businesses, costs fall in layers, ranging from purely fixed to purely variable.
Overhead or purely fixed costs, which constitute a distinct layer, do not depend upon sales volume or geographic regions, but exist because the company is in business and offers particular services — senior executive salaries, corporate headquarters costs, advertising expenses are examples of overhead.
Overlaying those are location-specific costs, which are infrastructure costs relating to the locations the company serves — say, the costs of maintaining an intermodal terminal in Cleveland. Each service at each location carries a discrete cost.
Next come shipment-specific costs, created by moving an additional shipment of a particular type through the carrier’s network. Some examples are fuel, driver wages and administrative expense.
A final layer, customer-specific costs, may also exist and will include outlays for retaining a particular customer’s business.
It is important to remember that these costs are mutually exclusive — a cost that appears in one layer cannot be duplicated in another. The sum of all cost layers subtracted from total revenues should match total company profitability.
This approach differs markedly from traditional accounting-based methods that tend to treat costs
s one of two extremes, fixed
r variable.
The traditional method typically counts only those costs easily tied to a particular shipment, such as fuel and driver wages, as variable. All other costs, including administrative labor and equipment maintenance, are considered fixed and are allocated across all shipments in calculating shipment-level profitability.
Traditional profitability reporting fails to provide the information needed to accurately set priorities. For example, treating administrative labor costs as a “tax” applied smoothly across all shipments ignores the fact that different types of shipments
an require radically different amounts of administrative work.
Similarly, failing to isolate the infrastructure costs associated with offering a particular service at a particular location prevents management from determining the true profit contribution of a service in a geographic area, and from projecting profitability under various growth scenarios.
Capturing these costs in a location-specific layer offers management the best of both worlds.
By associating infrastructure costs with a particular site rather than smearing the expense across the entire system, management can meaningfully compare the profitability of different regions. At the same time, keeping these costs out of the shipment-specific layer accurately reflects that these infrastructure costs will not increase directly with volume, and that margins may therefore systematically improve as volumes grow.
Of course, any additional infrastructure that incremental volume might require should be added to the location-specific cost layer.
Segmenting activities forms the basis for a cost-layer framework that rounds out the first step.
Each line item from the company profit and loss statements should be assigned to a particular place. For example, classify customer service labor as a shipment-specific cost.
he next step refines the framework by dissecting line items of cost — such as customer service labor — across the cost layers, determining how much is shipment-specific, location-specific and true overhead.
ince the majority of customer service labor is shipment-specific, the challenge is to determine how the cost to be assigned to each shipment should vary across shipment types.
The key here is tapping into the wealth of information and experience throughout the company. The academic, top-down strategic planning processes of years past did not aggressively solicit information from the field about operations and marketing, but that’s precisely where much knowledge resides.
Begin by building on existing analysis. For the example of customer service labor costs, first search for information in operations engineering or in quality studies that have probed this issue. Such studies may provide data on the average duration of a call related to a shipment of each of several types, and the average number of calls that occur over the life of a shipment of each type.
If statistics are not readily available, estimates can be quickly developed through direct research. Analyze operational data, such as call logs, or interview internal experts to form hypotheses. Then test the information.
Customer service managers, for example, may observe that intermodal shipments generate twice as many calls per shipment, because the transit time is longer, and each call takes about 50% longer to handle than an over-the-road call.
Direct observations may suffice. A few hours spent with a clipboard and stopwatch can provide at least a serviceable estimate of how many worker-minutes — and therefore labor dollars — are required to handle each shipment of a given type. Use proxies and estimates as appropriate; the objective is not perfect accuracy, but timely results that are accurate enough for making decisions.
n this step sum up the costs attached to each of the segments, determine the revenue by segment during the same time period, and combine the two to estimate the profitability of each segment.
Phase 2: Evaluate Options
n Phase 2, management uses the analyses conducted during Phase 1 to evaluate the impact of various options for improving the company’s bottom line.
lternatives may include launching or withdrawing a service, opening or closing a location, or changing marketing priorities to promote or “demarket” shipment volume.
The analytical rigor of this process will provide an enormous benefit that is missing from typical “brainstorming” exercises — a methodical and dynamic tool for evaluating and comparing a wide range of options.
To select best alternatives, planners identify possible initiatives, estimate costs and revenues for each option, then rank options by profitability.
irst, generate ideas. Tactics include personnel inteviews spanning all functions and levels, focus groups, and surveys distributed internally or to key customers.
Focus groups, especially, can speed up the process. They are a low-cost springboard for discussion when worked into prescheduled meetings.
his step methodically evaluates ideas so that they can be ranked and screened during the next step.
o evaluate an option, identify the one-time and recurring costs that it will create, then estimate incremental revenue, by type of business, the carrier can expect to capture.
Translate each initiative’s projected incremental revenue directly into expected profit by applying the results of the profitability analyses completed during Phase 1. Integrating this incremental profit expectation with the initiative’s one-time and ongoing costs will project its total profitability impact.
onduct break-even analysis to double-check an option’s projected profitability impact. To find the break-even point, divide costs for implementing the initiative by the average profit margin for the type of business sought.
The result is the amount of incremental revenue the initiative must generate to avoid losing money. This lets management evaluate the reasonableness of this goal. For example, an investment that requires only a 3% increase in time-definite volume may represent a worthwhile risk, while one that requires doubling a customer’s business may be excessively risky.
By arranging all initiatives in descending order of economic attractiveness, management may more easily spot the best business risks. Interestingly, this analytical process often reinforces the importance of focusing on a carrier’s core skills — the capabilities that give it a competitive edge over its competition.
Typically, strategic moves that take a carrier away from its strengths need large investments that require substantial growth to break even. Rather than recommending wholesale changes in a carrier’s strategy, well-executed strategic planning often uncovers a number of low-risk initiatives that will let a carrier build on what it is already doing well.
Phase 3: Write Plan
his phase details the actions the company should take to implement chosen initiatives.
To craft an action plan, planners develop a timeline of implementation steps, design a way to measure the strategy’s success and specify a process for adjusting the strategy over time.
uring this phase, management commits resources to implementing the strategy. The action plan must specify the investment dollars, human resources and systems to be dedicated, assign responsibility for particular actions, and set a timetable for successful completion of each step.
Many strategic shifts run aground because management underestimates what it will take to change the company’s behavior. Effectively communicating the plan and tracking its results are major components of success.
Performance or service goals need to be a part of everyone’s job and clearly measured at the operating level. For instance, if a carrier wants to grow volume with service-sensitive customers, this segment might be given priority for equipment, exception notification and expedited service.
The success of these tactics depends on how closely they are adhered to during dispatch, customer service and pickup-and-delivery. Tying service and financial goals to the company’s strategic objectives encourages ownership throughout the ranks and provides benchmarks to evaluate how well the strategy is working.
With an ability to track performance, management can periodically revisit and correct its strategic plan. Unlike traditional budgeting and financial planning, comprehensive strategic plans do not need to be developed annually. Regular checkups and recalibration will help ensure that management learns from experience and refines its approach over time, making the strategic plan the living document it is intended to be.
Strategic planning is an excellent way to determine how a carrier should adjust its approach to grow most profitably.
A good plan enables management to foresee industry shifts and reposition ahead of change. It focuses on what the company can do best and can get employees moving toward unified goals.
A strategic plan also serves as a reference point, providing context for everyday decision making. In short, it has the potential of becoming a carrier’s best weapon to create or sustain competitive advantage.
