The 12 Traits of Highly Profitable Trucking Companies: Network Discipline – Practicing the Art of Saying No
KSM Transport Advisors (KSMTA) has worked with over 200 trucking companies since our inception. Our primary service focuses on guiding trucking company leaders in understanding their freight network and determining strategies to improve the density, velocity, and ultimately the profitability in their geographic footprint. In delivering this service, the KSMTA team has observed and documented 12 key traits of highly profitable trucking companies.
This article is part of a series highlighting the key traits and focuses on trait number eight of 12.
As the deterioration of the freight market has accelerated, the number and urgency of requests for assistance that KSMTA has received has greatly increased. There is no typical profile for these carriers other than a desire to improve. However, there is a wide disparity between the desire for change and the discipline and willpower to affect change.
To determine how (and if) we can assist these companies, we schedule a call and ask them to complete a detailed questionnaire to provide a clear picture of the carriers’ operation (e.g., operating model, geographic footprint, customer mix, mode, equipment, maintenance, and technology). This questionnaire is extensive by design. It takes work to complete, forcing the executive to break down the current state of their business including challenges, opportunities, threats, etc. How many companies complete this questionnaire? Less than 25%. For those that do finish, a common theme has emerged – a tendency to try to be everything to everyone.
Like every business, trucking companies go through multiple stages in their lifetime. The stage where we connect with most of them is what we call the “distilling” phase. The distilling phase immediately follows the accumulation phase. During accumulation, carriers take on diverse contracts, lanes, and customers while acquiring multiple tractor and trailing types, ultimately culminating in an opaque view of the business. The original TMS (if they even have one) has overstayed its welcome. Their original team has either elevated with the growth of the company or reached a terminal velocity in competence.
Unfortunately, at this stage the bank balance may be the only definitive signal for the company owner(s). Is it going up? Must be good. Is it going down? Need more freight. Many carriers can transition into and through the distilling phase on their own if they have experienced managers. Others need a bit of outside guidance.
During the accumulation phase, carriers are experimenting with different freight, pay scales, and business models. While doing so, the company’s strategy is being unknowingly crafted by their customers. What begins as helping a customer in a bind – on lanes taking them to the edge of the freight world – culminates in higher turnover, deteriorating margins, and pricing leverage.
Although some carriers don’t go through this phase, the rare exceptions are typically niche operators with a painfully high exposure to one or two large customers. For the rest, the best way to make it through the distillation phase is to emulate one of the key traits of highly profitable trucking companies – learning network discipline and practicing the art of saying no.
Network Discipline Explained
Network discipline for a truckload carrier refers to the strategic and operational practices that ensure efficient and effective freight network management. These practices include optimizing the movement of trucks, trailers, drivers, and freight to meet customer demands while minimizing costs, maximizing resource utilization, and adhering to regulatory compliance. Network discipline is essential for maintaining high service levels, reducing operational inefficiencies, and improving the company’s profitability.
Density builds efficiency, efficiency builds velocity, velocity builds profitability.
The mantra above coincidentally distills network discipline. Excelling at any task requires a lot of practice. Efficiencies will never be built if they are not tested through iteration, such as isolating the operational pinch points on a lane for a specific shipper. Due to constant functional iteration on a small segment of lanes, the throughput of production (more freight delivered in the same or less time) can be increased. Once you can transit faster and safer than the competition, better profits are the reward.
The concept of “power” versus “spider” lanes reinforces the mantra above. No one is sure who coined the phrase “power lane,” but it is ubiquitous in the trucking community. Power lanes are the moneymakers for a truckload company. Spider lanes, conversely, are the exact opposite – they are where margins go to die. To illustrate further, here are the definitions for each:
Power Lane – An origin/destination pair, each comprised of 3-digit zip clusters (market area), which is in the top quartile based on company load volume compared to other lanes. Due to the density of freight in those lanes, economies of scale develop. In a typical OTR truckload carrier, a high proportion of margin is generated in power lanes relative to all other lanes.
Spider Lane – An origin/destination pair, each comprised of 3-digit zip clusters (market area), which is in the bottom quartile based on load volume compared to other lanes. Due to sparse volume, spider lanes typically demonstrate attributes of high one-way margin, but poor overall network performance – low profitability. A typical scenario with a spider lane is high one-way rate out and then poor-performing freight returning. Further, it takes many additional dispatches (loaded and empty) for trucks to re-enter the core network once they’ve taken a load in a spider lane. Within our practice, we also add the element of time as a common denominator, and express revenue, cost, and margin as a function of time (i.e., margin per hour). When time is factored into the power versus spider comparisons, the results are further amplified.
To segment the power and spider lanes (and everything in between), a carrier must establish a standardized geography for their analytics and reporting. During the distillation phase, establishing standardized geography allows the construction of power versus spider lanes and allows carriers to compare their pricing versus external and internal means. KSMTA has developed its own standardized geography, which carriers can adopt free of charge (click here to request). The next step is to extract at least 90 days of TMS load data. The required fields are:
- Origin zip
- Shipper name
- Destination zip
- Miles – both loaded and empty for each load
This data will then allow you to assign a standard market area to each origin zip and each destination zip for each order. As a result of this transformation, instead of 612 (Rock Island, IL) as an origin, and 688 (Kearney, NE) as a destination, the simple swap (use X or Vlookup) will result in a load with a market area of IL-CHI to NE-KEA. The next step is to simply pivot the data to group the common lanes (origins to destinations), with a count of each. This will help to quickly segment the lanes by quartiles (top quartile/highest density = power. Bottom quartile/lowest density = spider).
Now that the list of top and bottom-performing lanes has been identified, assign a cost to the miles associated with each load to understand profitability. We call this a Standard Cost Profile. This GL-derived calculation considers driver compensation, fuel, maintenance, insurance, and other variable costs. To learn more about how to calculate these, see “Using FreightMath™ To Maximize Price Impact.”
Once a standard cost per mile has been established, our FreightMath methodology can be used to easily calculate the estimated profitability on each load. Multiply the standard cost per mile by the total of the empty and loaded miles associated with each order in the dataset. To calculate the margin, simply subtract the total cost from the revenue of each load. This leaves a resulting margin for each load in the dataset.
If the magic trick works, you will likely see a linear relationship between density and proportionally lower margins when viewing the average margin associated with each of power, in-between (middle quartiles), and spider lanes. This exercise will reinforce the mantra of “Density builds efficiency, efficiency builds velocity, velocity builds profitability.”
What to do with this data? Highly profitable trucking companies will start with the spider lanes and establish the pricing opportunity for each lane and for each customer. If nothing can be done for some lanes and customers in this group, highly profitable carriers have become very effective at saying no (or, more accurately, “no more”).
For those customers that are willing to work with them, the rising tide lifts all boats. When shippers are unwilling to negotiate, carriers can re-allocate that capacity to other opportunities in their power lanes.
Completing the power versus spider lanes exercise is one of the most valuable activities any carrier can undertake during the distilling phase. From here, carriers can add increasingly more complex calculations to better understand where profit is leaking from their operations. KSMTA’s proven FreightMath methodology can do just that – typically saving carriers hundreds of thousands of dollars in having to develop their own model.
Our next article in The 12 Traits of Highly Profitable Trucking Companies series will highlight the key trait of “Maintaining Your Way to Better Profits.”
To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.
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