Note: This article originally appeared on tmwsystems.com.
Trucking is a business of pennies. Even the most successful carriers operate on razor-sharp margins, with the majority of carriers being “on the bubble” with an operating ratio that can easily shift from slightly positive to negative.
With such a fine line between success and failure, simply implementing more cost-effective programs and practices or trying to handle more freight might not be enough. Carriers make their money from moving freight and they need to focus on the metrics that underlie this activity.
To remain competitive – especially when capacity tightens and demand increases – carriers need to capitalize on all available opportunities to optimize margins.
Taking a More Strategic Approach
The practice of freight network engineering uses math to help carriers understand the profitability of their business, quantifying opportunities and challenges and providing carriers the strength of conviction to make the necessary changes to optimize their loads, lanes and customers.
To illustrate this approach, a recent TMW Systems webinar presented by financial advisory services provider KSM Transport Advisors (KSMTA) focused on the profit improvement potential of freight network engineering.
KSMTA’s clients beat the market rates as defined by the Stephen’s TL Rate Index and the TMW Market Rate Index (MRI) from January 2016 through June 2017. During that period, KSMTA’s clients’ linehaul rate per loaded mile increased 2.6% while the Stephen’s and MRI indices decreased by -1.5% and -3.8% respectively.
The goal of freight network engineering is to improve carrier profitability by maximizing yield. Yield is an objective, all-encompassing metric that includes revenue, variable and direct costs, and time, all in the context of a carrier’s freight network. There is a strong correlation between yield and operating ratio; as yield improves, operating ratio also improves, and vice versa.
Having the Right Tools and Attitude is Critical
Successful design and implementation of an engineered freight network depends on executive support and daily sponsorship among stakeholders in sales, marketing and operations. Leadership needs to lead by example and continually drive a yield-based culture.
Effective freight network engineering is also virtually impossible without advanced load optimization software that helps carriers focus on the root causes of poor performance. These solutions are designed from the ground up to account for every operations process and related factor affecting load profitability. They also seamlessly extract information from dispatch systems and other databases, and with access to market rate data can present yield calculations and pricing simulations.
Netwise from TMW is one such solution. For example, it reports on top and bottom performers based on operating areas, including highly detailed information on margins, yields, revenue and utilization. Network maps in the advanced optimization software help visualize cost and load distribution as well as yield and margin variances, and enable review of customers by lane or movement to show ‘Desired’ and ‘Undesired’ area flows.
Making Smarter Decisions
Once you can accurately and confidently isolate your most and least profitable loads, lanes and customers, you are empowered to identify network strengths and weaknesses, eliminate unprofitable business and transform ineffective operational practices and network characteristics.
With the dynamic, complex nature of irregular route truckload operations, driving continuous improvement is the only means of remaining profitable and successful.
Trucking is truly a business of pennies, but these pennies can add up quickly into dollars of profit by improving your ability to take every opportunity to make the right decisions.