Maintaining Profitability Through Capacity Challenges

Andrew Gulovsen | TRANSTRATEGY PARTNERS

Too often, pricing increases approved by shippers lag well behind transportation costs paid by brokers to the providers of capacity. Ultimately, broker profitability suffers. This is due to a number of factors: fear of customer attrition, lack of preparation in client communication and/or a poor carrier development and relationship program. Each of these factors alone reduce the profitability of your brokerage. When combined, they significantly affect your cash flow and ability to thrive in a volatile market.

Fear

Existing customers pay the bills – they are at the heart of your brokerage revenue generation. Service failures and disruption to their supply chain through lack of capacity can threaten that revenue. Customer rate proposals are based on predictions of limited volatility and historical wisdom, both of which can be quickly undermined by regulatory changes, weather anomalies and aberrant economic forces. When all these forces coalesce, the upward pressures of pricing push well beyond expectations and require challenging conversations with shipper customers.

Communication Planning

As the pendulum swings between extremely tight capacity and looser market pressures, brokerage businesses need to have a plan for communicating factors and execution strategies to customers. Set realistic expectations. Use your sales, marketing and customer service teams to keep your clients aware of existing and potential factors that might disrupt the flow of their transportation.

The hope that potential changes will not significantly affect the market is short- sighted and ill measured. These factors will affect the market, and the more details you provide to your clients about the possibilities, the more receptive they will be to making adjustments that will keep their supply chain intact and flowing properly. Early communication and execution of alternate solutions (and their associated rate adjustments) will protect against loss of profitability. Early communication will also position your company as a proactive resource in combatting volatility and provide useful information for shippers to share within their own organizations.

Carrier Development and Relationship Program

The need for a carrier development program is rooted in the understanding that transactional brokerage, while effective at times, is not a long-term solution for securing capacity. Transactional brokerage is too heavily affected by the daily market swings of pricing variability. As the intermediary in the transaction, the broker cannot maintain consistent and predictive profitability.

Limiting the variability of transactional brokerage requires a methodology to establish consistent capacity options across the spectrum of client needs. To this end, brokers must understand three important pieces of information: shipper goals, carrier goals and their own goals. The alignment of all three will provide a long-term solution that serves as a framework for future opportunities and growth.

By understanding the true goals of the shipper – beyond just transportation price sensitivity – the broker can have visibility of broad ranging needs. These needs may be related to on-time requirements, just-in-time inventory requirements, space limitation requirements, data/visibility requirements and/or other pricing drivers. Defining the overall priorities of the shipper customer, where transportation is just a portion, can provide a larger contextual knowledge to help find solutions.

By understanding the goals of the carrier – again, beyond just the price per mile – the broker can find the right matches each shipper/carrier connection. The carrier’s goals are related to the maximized utilization of drivers and equipment to drive profitability. Maximum dollars on each shipment is an aggregation strategy that is both time consuming and relatively inefficient for the carrier.

The need to simplify management of the entire fleet and its resources is a stronger need than each truck’s revenue total. Building solutions that limit driver downtime, deadhead miles and variable cost outlays are important to the carrier goals.

Matching shipments to trucks is a myopic strategy for brokers. Unforeseen changes in shipping patterns from either side can disrupt this revenue flow. Matching shippers (and shipper pools) to carriers (and carrier pools) and their respective needs can provide deeper solutions that are less affected by the volatility in any given market. The resiliency in these solutions keeps shippers and carriers tied to the broker longer to provide more predictable revenue and profitability.

Change is inevitable. Markets surge and contracts are dependent upon a myriad of factors. Establishing clear communication of these factors and developing solutions and networks elastic enough to withstand changes will help protect you from client attrition, provide enough new business to overcome natural attrition and continue growth.

Andrew Gulovsen is Director of Business Development with TranStrategy Partners, which helps entrepreneurs maximize the value of their brokerage business through data-driven coaching, training and strategic planning programs. He may be reached at andrew@transtrategypartners.com.