The Evolution of Truckload Pricing and Network Engineering

As the KSMTA team prepares for the upcoming launch of significant enhancements to our FreightMath^™ network profitability platform, it’s the perfect time to reflect on how our focus has evolved over nearly two decades. It’s also fitting to evaluate the core principles of truckload success that remain timeless as well as those that require consideration.

I recently revisited Truckload Transportation: Economics, Pricing and Analysis by Leo Lazarus, a foundational book for many profitable trucking companies. This book was recommended by a trucking company owner who called it his “truckload Bible” and whose highly profitable company was one of the role model businesses for our 12 Traits of Highly Profitable Trucking Companies series.

This led to further reflection on Chris Caplice’s whitepaper, Reducing Uncertainty in Truckload Transportation Procurement, which is an analysis from an MIT professor and DAT chief scientist that offers valuable perspectives on the evolution of truckload pricing methodologies and future trends, particularly in dynamic pricing strategies. It is geared toward shippers, but it is relevant to carriers and shippers alike.

Comparing Lazarus’ “truckload Bible” and Caplice’s whitepaper presents a compelling narrative of the evolution of network engineering within the trucking industry.

Understanding the Competitive Landscape

To fully appreciate the evolution and historical and current challenges of operating a successful trucking enterprise, one must consider the broader competitive landscape of the truckload sector. Deregulation significantly intensified competition, forcing truckload carriers to develop sophisticated network optimization and engineering strategies to survive. The continued competitive pressure has driven the transition from Lazarus’ foundational principles to Caplice’s dynamic, data-driven approaches.

Caplice references the Herfindahl-Hirschman Index (HHI) to reinforce the intense competition in the truckload industry, noting that a high HHI score indicates potential antitrust violations by commercial enterprises. The HHI scale ranges from zero to 2,500, and as of 2019, truckload recorded a score of six! Based on industry dynamics since then, it’s realistic to assume that this score is now even closer to zero, making it almost impossible for truckload collusion to occur. This reinforces the concept that successful carriers must leverage cutting-edge technology and strategic insights to adapt to extreme levels of market competition.

Foundational Principles of Network Engineering

Lazarus identified several critical principles that form the foundation of network engineering:

• Network Balance: Emphasize the reduction of empty miles and maximize asset utilization, a concept still crucial today.
• Cost Analysis: Differentiate between fixed and variable costs, vital in route planning and operational decision-making.
• Market-Responsive Pricing: Advocate for pricing strategies that reflect market conditions rather than standard markup approaches.
• Operational Efficiency: Focus on backhaul optimization and understanding the impact of haul length on profitability.

These concepts have long been cornerstones of network engineering, but as industry complexity grows, so does the sophistication of our approaches.

Contemporary Network Engineering: Evolving the Fundamentals

Caplice’s work illustrates how modern truckload has advanced. Specifically, it focuses on the strategies shippers use to attempt to optimize their transportation spend and builds upon Lazarus’ framework with innovative strategies:

• Combinatorial Auctions: Allows carriers to bid on lane packages, which offers a sophisticated approach to network balance challenges. This has been a cornerstone of RFPs for years.
• Guaranteed Capacity Contracts: Agreements where shippers commit to capacity payments regardless of utilization, representing a novel approach to asset management and risk mitigation. This only exists in the dedicated truckload space and has further diminished in the current market.
• Floating Capacity: Flexible capacity allocation that can be dynamically assigned across the network. Most carriers cannot afford to have floating assets to shift between contract and spot markets, which are equally and dramatically depressed. Carriers must choose the lesser of the two evils – contractual loads that provide consistency over the long term.
• Hybrid Procurement Strategies: Combine various freight movement methodologies to balance certainty and flexibility which are now automated using algorithms. This is probably the most important component of the whitepaper, a prediction that the frequency of rate discovery by shippers is going to increase. This has proven to be true and will likely continue until pricing becomes fully dynamic.

The Enduring Importance of Network Density

Throughout the evolution of truckload pricing and network engineering, density remains a critical factor. Whether employing traditional methods or advanced techniques, the objective is consistent: to maximize freight concentration within defined geographic operational areas. Modern approaches leverage data analytics and flexible strategies to achieve and maintain network density, enabling more informed decision-making regarding lane selection and service pricing.

The Maturation of Network Engineering

The progression from Lazarus’ work to contemporary network engineering reflects broader industry transformations:

• A shift from operational to strategic focus in transportation management
• The dominance of data analytics in network design and pricing decisions
• Enhanced emphasis on risk management and market volatility mitigation
• Increased focus on developing robust shipper-carrier partnerships
• Implementation of advanced network engineering

Network Engineering Today

In today’s truckload landscape, success hinges on balancing time-honored wisdom with cutting-edge innovation. Lazarus’ principles of network balance, cost understanding, and density optimization remain crucial, but companies must also embrace novel strategies and technologies for a competitive edge. This blend of traditional and modern approaches allows carriers to navigate contemporary trucking challenges while driving margin growth.

Central to this approach is leveraging credible data for informed decision-making. Refining manual and automated data collection through best practices in data entry, standardized protocols, and validation rules significantly reduces errors. Automated technologies like OCR,  telematics, and IoT sensors provide accurate and credible real-time operational data.

Cultivating strong supply chain partnerships is equally important. Successful companies seek mutually beneficial arrangements with shippers and stakeholders, leading to stable volumes, better rates, and increased efficiency. These trust-based partnerships provide a foundation for long-term success. Our strongest clients invest in relationship building with core customers, while those struggling often dismiss the value of relationships in today’s marketplace.

Lastly, adaptability is crucial in a rapidly changing industry. Companies must swiftly respond to market fluctuations, regulatory changes, and technological advancements. Combining flexibility with fundamental principles and a data-driven approach positions firms to thrive in the evolving world of trucking and logistics. The key challenge for industry leaders is not whether to evolve, but how to effectively synthesize historical insights with future innovations to stay ahead.

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