Over the years, many owners have suggested that full truckload trucking (TL) is operationally an easy business – simply pick up a load at point A and deliver it to point B.
Although few would suggest that trucking is easy in today's environment, many companies unknowingly continue to operate as if TL is a simple business. Surprisingly, some carriers still believe they can accept loads from shippers to random points, find loads back to their home base (usually with broker assistance) and make money.
The success of this type of operation is externally dependent upon overall supply and demand. When freight demand exceeds supplied capacity, rates provide profits; however, when the supply-demand dynamics reverse, the business falters. Many owners accept this fate as being part of the trucking business. Interestingly, however, a number of companies have developed business practices over the years that provide greater returns and more insulation from external events, such as changes in freight rates. There are carriers of all sizes and in all segments that make money in various economic environments.
The collection of business practices that allow certain carriers to earn superior returns relative to their competition can be referred to as the "Trucking Franchise." The Trucking Franchise is, of course, still evolving and finding new responses to ever-changing external factors, including those of the current environment.
At the heart of the Trucking Franchise is a successful revenue model or freight network strategy. A variety of these strategies have evolved. What appears to be more definitive than what works is what does not work, such as those original TL practices associated with a long length of haul and a "shotgun" approach to load acceptance.
Successful freight network strategies are increasingly being shaped by sophisticated mathematically based freight optimization models. Freight network optimization programs are not new and have been around for more than 30 years. They were developed in response to the reality that not only is trucking exponentially more operationally complex as it increases in size, but making optimal decisions considering the numerous variables associated with equipment, drivers, geography, and customers requires mathematical modeling assistance.
Netwise®, the TMW Systems, Inc. (formerly IDSC) network optimization program, with roots going back to the early 1980s, is one of several programs that are available. The common objective of these programs is to optimize margins by finding the set of load movements that maximize revenue and minimize costs. While they differ in their algorithms, most attempt to quantify the YIELD (i.e., network-based margin per load per day) of each load movement as a function of:
- Revenue (Rate)
- Cost (Variable and Direct Costs)
- Efficiency (Time/Velocity)
- Network Balance (Flow)
These applications can be extremely useful with the following tasks, which are associated with the formulation of a successful freight network strategy:
- Identifying toxic and franchise lanes and customers
- Understanding network imbalances and associated freight development areas
- Identifying unnecessary in-transit delays
- Identifying potential pricing adjustments on existing business
- Identifying profitable rates for new business (in context of the carrier's network)
One of the common misconceptions regarding network optimization is that the programs only work when freight is abundant (i.e., demand exceeds supply). The truth is carriers are successful when they educate themselves on the model, buy into the results and, most importantly, consistently execute the network strategies suggested by the model's results. In today's more favorable freight environment, opportunities for freight network optimization success are even greater. That said, some carriers are hesitant (complacent) to invest in their freight network strategy when prices have been increasing (and look to increase even more in 2014), while others continue to beat the market by utilizing optimization technology. Carriers should take what the market gives them – then optimize it.
David Roush is president of KSM Transport Advisors. For more information, contact David at 317.452.1390 or firstname.lastname@example.org.