Preparing To Thrive: Building a Reverse RFP Model To Fill Your Freight Network Gaps

With the ongoing delay in freight rate recovery, the KSM Transport Advisors (KSMTA) team is launching a new article series designed to help carriers “level-set.” These recommended practices should be effective in any market environment. During a recent industry presentation, industry leader Thom Albrecht, chief revenue officer at Reliance Partners, emphasized the need to “Prepare To Thrive.” This message really resonated and has since become an important reminder we share with our clients to stay the course, despite ongoing and significant challenges.

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At KSMTA, a core decision-support function is assisting clients with their responses to RFPs. In the past two years, rate increases have been rare, occurring in only a handful of bids out of approximately 500 reviewed. While some carriers have secured small increases on a limited number of lanes, the majority of shipper RFPs have resulted in reduced compensation for carriers.

The double-whammy effect we’ve observed over the same time period – and noted in previous articles – is the decline in geographic density most carriers are facing. As contract carriers remain hesitant to reduce their active tractor count, the drop in freight volume has resulted in a parallel rise in low-density “spider lanes.” Spider lanes always create an increased reliance on brokered freight. Unfortunately, carriers often recruit drivers in the spider network, creating a de facto addition to the prescribed network.

The core mantra of KSMTA’s FreightMath^TM is simple: density builds efficiency, efficiency builds velocity, and velocity builds profitability. We recognize that achieving this in the current freight environment is easier said than done, but giving up when faced with external challenges is not an option. Besides focusing on cost reduction in all key variable and fixed cost categories, working to maximize network profitability and operating ratio should also prompt a review of consistently subpar connections that may exist in your freight networks.

The Reverse RFP Concept

The frequency of rate discovery by shippers has, and will continue to, increase over time, eventually clouding the difference between “spot and “contract.” Shippers are now utilizing machine learning and AI to optimize or reduce their freight spend in both bear and bull markets. The technological sophistication by shippers has outpaced that of most carriers. Most, but not all, carriers do not have a strategic freight procurement or business development plan. As a result, the awards they receive become their freight network. That approach is the opposite of preparing to thrive and can be more accurately described as allowing external factors to dictate strategy, rather than taking proactive control.

Our recommendation is for carriers to build a strategic and surgical freight procurement and business development plan based on their unique cost and margin structure, core competencies, and driver domiciles. This business plan should be the guiding framework for every decision and action within your organization. Unlike an RFP, the results don’t necessarily need to be shared with your shippers. As you’ll see below, this tool helps solicit freight from your shippers that aligns with your business needs.

Reverse RFP Pre-Requisites

• Someone with reasonable MS Excel skills.
• A standardized geography to categorize unique lane pairs and balance.
• An understanding of your key variable costs per mile.
• Brokers and shippers are segmented by a unique identifier in the dataset.

Step 1: Evaluate Your Freight Network for Imbalances

Network balance is the ultimate goal for any OTR carrier. Balance is defined as having equal volumes of loads into and out of a defined geographic area, along with delivery and pickup times that optimize driver HOS and improve overall velocity. There is no such thing as a perfectly balanced network, but there is a wide disparity between relative balance and area chaos for every carrier.

Understanding the mix of broker freight into and out of a given market is low-hanging fruit that should be addressed immediately. Those areas with a majority of broker in and out for a given area translates into a financial loss every time.

The first step is to select a defined time period (we recommend 12 weeks) and extract all orders from your TMS that were delivered during that period. You will need order ID, customer, broker/shipper identifier, origin and destination geography, and all chronology (time) data for each stop.

This necessary starting point allows carriers to build out their freight ledger of loads in and loads out for each geographic are as illustrated in the following table:

This simple exercise starts to clarify where you are oversold versus undersold, and where you are relying on brokers or deadheads to fill customer freight gaps.

Step 2: Evaluate Your Network Connections

Since standardized origin and destination areas for each load have now been assigned, a simple next step is to count loads by lane and by shipper/broker. This is the necessary step to identify your power lanes and spider lanes.

This step aggregates your freight by lane doing a count of every load for each unique lane pair, and then also identifying the number of loads on each lane that were broker versus shipper. In parallel, each row (unique lane) should also have a value identifying the total percentage of loads for that time period.

The end result of the second step is a table similar to the one below:

In today’s market, the typical carrier should expect to identify hundreds of unique lanes through this exercise. Among these, valuable insights can be gained into your power and spider lanes.

Power lanes represent the most heavily trafficked routes in your network, accounting for 25% of your freight volume within any given period. Spider lanes also make up 25% of the volume. However, the key difference lies in their distribution. Power lanes are usually limited to just a few, often in the single digits, whereas spider lanes can encompass hundreds of unique lanes.

This distinction is important because we’ve consistently found a strong correlation between lane density and profitability. Power lanes, being the most concentrated, tend to drive above-average profitability, while spider lanes are often associated with below-average returns.

Step 3: Estimating Margins

The next step to building out your reverse RFP is adding margin to the mix. Like every other analysis in trucking, this decision must be made holistically.

Every carrier should have a well-established and regularly updated general ledger (GL) built on an activity-based costing model that provides an accurate estimate of the costs associated with each load, each related dispatch, and the corresponding miles and time under dispatch. If your general ledger is segregated by fleet or load/order, calculate the following costs for each division. If not, calculate one number of costs per mile (CPM) for each category of the fleet.

• Driver compensation, benefits, and payroll taxes
• Fuel
• Maintenance
• Insurance
• Variable on-road expenses

CPM note: For the sake of clarity in this discussion, we have not addressed how owner-operator or lease purchase arrangements should be addressed in this costing model.

Once the variable CPM values are identified, apply those costs to each order or load extracted at the beginning of this exercise. This will provide a one-way margin for each load in the dataset. To accurately account for all miles and time, it is important to connect the empty movements associated with each load.

• Calculate Revenue per Lane: For each unique lane, calculate the total revenue by summing up the income from both shipper and broker loads. Pay close attention to how the revenue from shipper loads compares to that from broker loads, as brokered freight tends to generate lower rates.
• Apply Costs per Mile: Use your variable and fixed costs per mile to estimate the cost of servicing each lane. Break down the cost for each load and multiply it by the total number of loaded and empty miles to calculate the total cost for each lane.
• Calculate the Margin: Subtract the total cost for each lane from the total revenue to estimate the margin. This will help identify which lanes are boosting your bottom line and which are underperforming. Pay particular attention to lanes where brokered freight dominates, as these may represent areas of low or negative margin.

Example Table:

These margin estimates will highlight opportunities to optimize, replace, or eliminate unprofitable lanes. In some cases, a lane might be unprofitable due to low volume or poor balance between loads in and loads out. Many times, a lane will have a combination of profitable and unprofitable shippers or brokers.

Step 4: Building a Target Lane Plan

The reverse RFP model isn’t just about identifying areas of weakness – it’s about taking action to improve your network. After evaluating the balance and margin of your current lanes, a “target lane plan” can be developed to help fill gaps in your network and eliminate inefficiencies.

• Identify Key Market Areas: Use your analysis of power and spider lanes to identify regions where your network is either underutilized or overly reliant on brokered freight. These are prime targets for network improvement.
• Develop Target Lanes: Create a list of target lanes to add to your network. This could be based on high-volume lanes where there is currently not enough density, or lanes where it’s possible to increase the percentage of shipper-direct freight.
• Refine Your Offering: Once the target lanes have been identified, ensure that you have outlined competitive pricing strategies and service levels for these lanes. Adjustments to recruiting or sales efforts may be needed to focus on these areas.
• Present to Key Shippers: As part of an overall business development strategy, take your target lane plan to key shippers in those markets. Even though it’s a reverse RFP model, communicating this strategy to shippers can open the door to conversations about long-term, mutually beneficial contracts that build density in your power lanes and reduce reliance on spider lanes.

Step 5: Continuous Monitoring and Adjustment

The final step of the reverse RFP model involves continuous monitoring and adjustments as the reverse RFP plan is implemented. Watch your freight network evolve as a result of your efforts.

External factors like freight volumes, rate fluctuations, and customer needs will require ongoing adaptation. Regularly revisiting your freight ledger, adjusting your target lane plan, and refining your cost and margin estimates will help maintain network profitability even in difficult market conditions.

Thriving Through Strategic Planning

Building a reverse RFP model allows carriers to take control of their freight networks, focus on profitable lanes, and eliminate inefficiencies. In an increasingly competitive market, this kind of strategic planning is key to ensuring your business doesn’t just survive, but thrives.

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