Discovering the Islands of Profit in Your Network

Last year, KSM Transport Advisors (KSMTA) published a monthly article series highlighting the 12 key traits of highly profitable trucking companies. The main themes were based on many decades of observations and discussions with over 200 carriers. This series hit the mark with carriers and discussed many often overlooked or ignored business practices that could steer carriers toward important company discussions, positive change, and greater profitability.

Based on the positive feedback and requests to provide more actionable steps to implement and embody these traits, this year’s monthly series will offer a detailed roadmap for carriers to use as a guide. Instead of diluting the value of the 12 traits, we’re doubling down on them to provide inspiration to become a better employer and a more profitable enterprise.

Adapting to Industry Challenges

As the new year begins to unfold, the trucking industry unfortunately remains in a prolonged freight recession. Although there were early glimpses of recovery in January and early February, any optimism has been replaced by pessimism and renewed downward shipper pressures on contract and spot prices. Although margins remain compressed, we have identified the below tactics to help carriers re-capture some of that profit.

The traits discussed in last year’s The Strength of Weak Ties and Network Discipline serve as timeless reminders of the significance of establishing a strategic geographic footprint and then using sales, pricing, and operational levers to drive density and velocity into that footprint to increase profitability. Weak ties refer to connections that are less intimate or frequent but still hold significant potential for growth and opportunity. In trucking, a common weak tie is connector freight. Network discipline 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.

Strategic Network Decisions

In the dynamic landscape of trucking, the quest for profitability often leads companies through a maze of strategies and decisions. Of all the strategic decisions that a successful trucking company will undertake, none is more important than establishing its network footprint. Initially, this network and its accompanying revenue model are shaped by one or two foundational customers, mirroring the early stages typical of startups across all sectors. However, lacking discipline and strategic oversight, what begins as a focused market operation can rapidly expand to unsustainable coverage of “all 48 states” and sometimes 49. In our experience, this network sprawl is a classic indicator of strategic malaise and foregone profits.

As part of our FreightMath™ engineering practice, KSMTA has identified more than 200 U.S. market areas representing discrete zones of economic activity. The below examples represent the combination of financial performance and the activity of two dry van carriers of similar tractor count for the same time period but with drastically different strategies. In the networks, each area with shading represents a KSMTA market area that had loads going IN and/or OUT. In the first image, the carrier had trucks operating in 66 market areas. Conversely, the second network had load activity in 149 market areas.

Areas of above average profitability are naturally shaded in green, with load density indicated by how saturated the colors are in each area. Most importantly, the abundance of red and yellow areas communicates the areas that generate below to significantly below average margin. From the beginning of the current freight recession, we have observed network sprawl among many current and prospective clients. Without exception, that sprawl has driven gross and net margins down. Unfortunately, the strategy of making payments instead of profits will be a tough model to undo when the market turns.

To complete the comparison of these two networks, not only is the second network geographically dispersed, but there are also significantly more grey areas. These areas represent areas of low activity (very few loads in and/or out), which is a result of a mix of one-hit wonders, poor operational decisions, and the requirement to get drivers home. This final point is important. If a carrier is undisciplined in its network strategy, it naturally becomes undisciplined in its recruiting strategy. This amplifies the downward spiral in margins, as the driver domiciles dictate and anchor future network strategy.

Network Discipline

Network Chaos

Identifying Islands of Profit

Once a carrier is past the start-up phase, they must use math to identify origins and destinations that generate above-average margins or can accrue higher profits with proper business development efforts. Within our practice, we use a network value concept to ‘score’ a load based on whether it added profits to the network or degraded the profitability of the business. When aggregated into the common KSMTA market areas, we’re able to rapidly identify the market areas that we now call “Islands of Profit.” Conversely, we’re also able to identify those areas that are “Mirages of Profit” – those that look good in people’s minds but in reality are not generating the required rate of return for a whole host of potential reasons (e.g., revenue, cost, time, deadhead, etc.).

KSMTA’s core mantra is:

“Density builds efficiency, efficiency builds velocity, velocity builds profitability.”

With this in mind, and without complicated algorithms, any carrier can build a report that identifies market areas based on density in a given time frame. This is as simple as doing a count of loads into an area, as well as loads out of an area. With the areas of high density identified, carriers can use math (similar to the network value concept) to build a ledger of profit and loss by area. This exercise is invaluable in the establishment of a sustainable network strategy. Now that these Islands of Profit have been identified, the next step is to identify the most efficient manner to access those areas to drive density into a tighter network. It is impossible to have every Island of Profit in a network connected to each other with sequential movements. That is why it is important to build connections to those areas by using connector freight.

The Strength of Weak Connections

One of the core themes from KSMTA’s analysis is the significance of weak connections in a company’s network. These connections are typically marked by low one-way revenue and margins. However, because they are bridges to profitability, these connections help accrue profitability at a faster rate than otherwise possible. In fact, highly profitable carriers covet connector freight lanes with the same focus and vigor that they devote to power lanes and contract freight. By effectively using connector freight, companies can optimize their operations, filling in the gaps between their core lanes and ensuring trucks are not returning empty. Identifying and leveraging these weak ties allows companies to uncover hidden opportunities for profit, much like finding islands of prosperity in an endless sea of (growing) operational costs.

Key Recommendations for Navigating Toward Profit

1. Deep Dive into Data: Implement advanced analytics to understand the true cost-to-serve each lane by customer including the disparate load/unload times, trailer pools, and tolls. A word of caution – don’t get hung up on trying to allocate all costs (e.g., fixed overhead) against every load. Allocating the key variable expenses is more than sufficient. Adding in additional overhead will not change the results/decisions for a given area or customer.
2. Cultivate the Weak Connections (Bridges to Profitability): Explore and optimize the use of connector freight to ensure asset utilization and uncover hidden profit opportunities in less obvious areas of the network. Make sure you are using brokerage freight as connector freight as opposed to head-haul freight – a common issue in today’s market environment.
3. Strategic Customer Segmentation: Segment customers based on profitability, not just volume or revenue, to focus efforts on the most lucrative relationships. Use math, not emotion to understand who is driving your bottom line and which customers are stealing profits from your network,
4. Continuous Innovation: Stay open to innovative logistics and network strategies that can uncover new Islands of Profit within an existing framework. Staying disciplined in your network strategy doesn’t mean you have to turn down the freight that doesn’t stick to that footprint. Successful carriers leverage their asset relationships and service levels to grow their brokerage operations, which can act as a hedge against freight downturns.
5. Operational Efficiency: Focus on improving operational efficiencies, reducing costs, and enhancing service quality to elevate overall network profitability. If you can continue to drive consistent freight into your core network, additional methods for unlocking margin will unfold including the ability to pre-plan and more effective driver recruiting practices.

Charting the Course Forward

The path to discovering the islands of profit in your network is paved with strategic insights, data-driven decisions, and an innovative approach to customer and network management. By integrating the key strategies detailed above, businesses can navigate the complex seas of operational challenges and financial pressures to find their own islands of profit, and build bridges of profitability, all while avoiding the profit mirages.

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