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The Six Stages of Network Dilution

May 23, 2024

Defined freight networks are essential table stakes for the profitable operation of truckload management regardless of size. However, due to pressures to grow (and maintain) tractor count and the roller coaster of the truckload rate cycles, these networks can suffer from significant and rapid dilution.

The six stages of network dilution are detailed below, covering symptoms/attributes and implications of each stage along with strategies for mitigation and realignment towards profitability and operational efficiency. By understanding these stages, carriers can take proactive steps to avoid the pitfalls associated with unchecked growth. Further, understanding these natural stages of a truckload carrier will better prepare companies for the next downcycle.

Stage 1: Start-Up and Diversification

The typical evolution of a trucking company begins with securing a core contract customer. This customer provides the necessary load volume and rate consistency to build the initial fleet. The relationship with this customer is strong, and their delivery network becomes the de facto network for the carrier. During this startup phase, the carrier can identify methods to become more efficient operationally and develop some direct backhaul freight options.

Post start-up, there is an inflection point where they realize that they need to grow, diversify, or both. In a free market, this is natural evolutionary process. Long-term sustainability requires businesses to not put all their eggs in one basket.

However, without a defined strategy, attempts to diversify and grow can develop into anchors which may lead to business failure in down markets. Here are the key attributes of carriers in this phase:

  • Operating in an increased number of unique lanes and geographic market areas
  • Adding capacity, including drivers and tractors
  • Adding new contract customers – broker load percentage rises
  • Utilization (productivity) declines slightly
  • Number of deadhead (unpaid) miles increases

Stage 2: Operational Complexity

As the freight network expands and the customer base becomes more diversified, lanes and planning efforts become more complex. Companies may not be able to find direct backhaul freight, increasing reliance on brokers and resulting in convoluted routes to get back into network. This phase introduces the “spider lanes” concept, where the pressure to keep drivers moving and a higher rate of deadhead movements for driver home time can lead to compound margin erosion.

Spider lanes are defined as the lowest density unique origin and destination pairs (unique lanes) containing approximately 25% of load volume within a carrier’s network. As these are the lowest density lanes in a carrier’s network, it is quite common to observe as little as one to five loads per lane over the course of a month. Empirically, these lanes also yield the lowest profitability of all lane categories.

Spider Lanes

The Six Stages of Network Dilution - Image 1

Stage 3: Margin Compression

Cost inefficiencies start to emerge prominently in this stage. As a carrier’s network becomes more dispersed geographically, and the percentage of direct (customer) freight declines, margin compression emerges. Instead of freight patterns where there are two direct customer loads for every one broker load, that ratio slowly changes and can flip – especially during times such as the current freight recession. However, the cost per mile (CPM) remains the same, as this ratio is changing.

Market fluctuations and increased competition lead to pricing pressures, lowering margins on increased volumes. Depending on the freight cycle, many carriers will also experience situations where their core customers may start diverting their volumes to brokers and other carriers which exacerbates the financial strain. At this stage, some more decisive carriers may jump to stages five or six to stop the bleeding. However, many remain stuck in this phase, which can lead to a realization that remaining solvent is unlikely.

Stage 4: Loss of Focus

In the fourth stage, companies may find themselves making payments instead of profits, straying from their core competencies, and diluting their brand and service quality. There is often a misalignment with strategic goals, and rationalizations for poor decisions become commonplace. During this phase, KSMTA commonly observes two key symptoms emerging:

  • Rationalization of Status Quo: It is commonplace during freight recessions for carriers in this stage to shrug their collective shoulders and begin to accept the misguided assumption that there is nothing that can be done – and they must simply wait out the current downturn.
  • Bad Decision Making: During this stage, without a defined network strategy, some carriers use their current customer mix and geographic footprint to drive additional decisions which create anchors in their operations. These anchors are negative, not positive. A key example would be starting to recruit outside their core (profitable) network. This drives additional empty miles and broker loads, leading to further margin compression.

Stage 5: Re-evaluation of Network

Acknowledgment of the existing problems leads to a thorough analysis of profitability by lane and customer. This stage involves identifying power versus spider lanes and underperforming areas, leading to strategic decisions to refine operations. Companies may consider reducing truck counts or overhead to regain focus and efficiency. It’s understandable that this stage – especially during market downturns – takes so long to emerge. Going backwards in free markets seems so counterintuitive; however, in industries with low (or no) barriers to entry, it is imperative that carriers keep capacity reduction as a primary strategy to remain competitive and profitable.

Reducing capacity also means eliminating both driving and non-driving roles and people. This is understandably a tough decision to make. However, if the company has a defined strategy including their desired network, it will assist in intelligently right sizing their operations.

For driving roles, this equates to two things:

  1. Do not allow any driver to be recruited outside the core network regardless of how long he/she has stated they are willing to stay on the road (it’s always less in reality).
  2. Conduct a thorough analysis of each current driver, based on productivity, safety, and profitability. This will be the guidebook if further rightsizing must occur and if capacity cannot be reduced due to natural attrition.

Power lanes are the opposite of spider lanes. Power lanes are the highest density lanes in a carrier’s network, marked by a relatively low number of lanes with significant volume per lane over the course of a month. Loads on these lanes generate the highest profitability, relative to average loads in a network.

Power Lanes

Stage 6: Network Consolidation

The final stage is a decisive move toward realignment. Unprofitable lanes and customers are eliminated or fixed, and involuntary departures of drivers outside the core network occur. Truck counts are adjusted to reflect a more realistic and focused utilization of tractors and trailers. The network refocuses on high-density, profitable areas and streamlines operations to enhance efficiency.

Over the past three months, there have been multiple public reports of enterprise carriers, such as Knight, Marten, and Heartland Express initiating or executing on their network consolidation efforts.

Successfully Navigating Network Dilution

The six stages of network dilution serve as a warning and a guide for transportation networks. By recognizing these stages early, companies can implement strategic measures to prevent or mitigate dilution, aligning operations with core competencies and strategic goals for sustained profitability and operational efficiency. The core mantra of KSM Transport Advisors is ”density builds efficiency, efficiency builds velocity, and velocity builds profitability.” For a trucking company, this translates into maintaining operational and geographic discipline. Understanding the six stages of network dilution empowers companies to navigate the challenges of expansion and maintain a robust, efficient transportation network.

To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.

Chris Henry Chief Operating Officer, KSM Transport Advisors & KSMTA Canada

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