Carriers: This Freight Economy Downturn Is Different
The balance of power in the freight transportation industry has shifted yet again. The rates and profits that carriers enjoyed in the wake of the pandemic are on a downward path while shippers work hard to recoup the higher rates they paid at the same time. The many economic reasons underlying this shift in power have been detailed for months by industry pundits and analysts.
The great 2019 claw-back of the 2018 rate party was cut short by the pandemic. This time it’s different. Not only have rates increased, but carrier costs have also increased due to unprecedented changes in driver pay, OEM price and availability, maintenance challenges, insurance costs and coverages, and more. Since the pandemic began, KSM Transport Advisors’ (KSMTA) average client’s variable costs (not including fuel) have increased approximately 30% and these costs are not coming down in the near term. Thus, unlike previous cycles, there is very little that carriers can give back. Anecdotally, it seems that the shippers have placed a higher value on incumbency since they know the cycle will once again flip at some point.
Carriers and shippers are having difficult conversations regarding price. Many carriers believe the discussion is bifurcated with the only two answers being: haul the freight at lower rates or stop hauling the freight altogether. KSMTA recommends a third option. This option is a model that carriers can use to evaluate customers’ freight and any proposed changes through a holistic lens. This lens provides clarity around inflationary cost increases, gross margin, and shipper desirability.
The following three sections provide a high-level suggestion for carriers to construct the model mentioned above.
- Create a list of pre- and post-pandemic costs by category and calculate the increases incurred. Most of these increases are due to circumstances outside the carrier’s control and will not decrease in the near term, if ever.
- Benchmark costs to show that you are an astute businessperson and a good steward of your company’s cost structure. Use a third-party source such as the benchmarking available from the TCA Profitability Program.
- Make this an attractive one-page exhibit that can be shared with customers. Include the general ledger accounts that are mapped/allocated to each category in the exhibit to demonstrate transparency.
Lanes, Pricing, and Gross Margin for Each Customer
- Create a map that shows the lanes hauled for each customer overlaid on the rest of the lanes in the network. KSMTA uses colors to differentiate the customer and other lanes, along with arrows and line width to signify direction and volume respectively. If the customer’s lanes fit in the geographic footprint, great. If not, think about the network fit of this freight, including the possibility of using brokerage to capture margin with another carrier’s assets.
- Create a table that shows the customer freight with a row for each lane. An example of the table we use in our FreightMath™ practice is displayed below. The YIELD and MPD metrics may be missing initially; no worries, just start with “Loads.”
- KSMTA recommends using Long Haul + Fuel Surcharge for rate comparisons; see why here.
- Calculate the gross margin per mile and per day for each customer and add to the table. Calculate this metric using the methodology detailed in Using FreightMath™ To Maximize Price Impact.
Create a Shipper of Choice Model
- Is the shipper trustworthy? How are their interactions during both up- and down-market cycles? Does the shipper respect timelines? Also consider drop trailers, appointments required, loading and unloading times, etc.
- Does the shipper respect people at all levels of a carrier’s company, from executive management to back-office employees? How are drivers treated at shipper and consignee facilities? Is the RFP process fair? Are reporting and response requirements reasonable?
- The Where’s “My” Freight? blog addresses similar issues and can help create a framework to make this evaluation
Using the model above, carriers can create a composite of their cost environment, the shippers freight, and its fit with the carrier’s network. This model provides the background to analyze any customer-driven change in a carrier’s business. The analysis can be a weighting of various items to calculate a shipper score, or as simple as reviewing the information as part of the decision process.
This process is time consuming, but it’s “short term pain for long term gain.” Carriers need to create a holistic view of their customers to make an informed decision. The shipper chooses the carrier to tender the freight. The carrier decides if the rate is sufficient to haul the freight. It’s a two-way street: ultimately shippers need assets to move freight. Carriers, be empowered to ask for what is needed.
The model discussed herein will help any carrier better understand their freight and customers. To explore the KSMTA FreightMath Assessment, please fill out this form.
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