Originally published May 24, 2011
One of the most crucial and yet most challenging things for carriers to do is to define their freight network. Some carriers try to service every lane and be a one-stop provider for their customers. However, the most consistently and measurably profitable carriers year in and year out are the ones that strategically target a core network of lanes, build lane density, and yield manage those lanes over time. Changing the fundamentals of how you do business and embracing this disciplined approach can be overwhelming. A healthy dose of business intelligence and a strong logistics analyst will help you get started and pay huge dividends down the road.
In order to analyze your core network, you will first need to gather a lot of data. Depending on your capacity and customer base, you may service literally thousands of lanes over the course of a single quarter. If your business is very random or seasonal, you will have to take that into consideration when determining the sample size of freight data you want to analyze. In most cases, you will want at least a quarter’s worth of data. At a minimum, the data should include origin and destination information, rates, fuel surcharges, loaded miles, empty miles, and customer data.
This is why defining a network can be so overwhelming. The often random nature of freight patterns combined with thousands of lanes containing millions of data points to analyze can bog down even the most capable of logistics professionals. This is where a good analyst with the right tools earns his or her pay.
Once you have gathered the needed data, you will need to convert that data into usable information. Calculate your key performance indicators (KPIs): rate per mile, rate per total mile, empty percent, volume, length of haul, etc. Then, roll your order detail information up into lane totals. One of the most important considerations at this point is how to define a lane. You can define lanes as origin city to destination city, but keep in mind that the smaller the geo-zone you define means the more point-to-point combinations you will have to analyze. Also, there are dozens of individual cities in greater metro areas like Chicago that you really treat as the same market. A more efficient way to define lanes is by rolling individual ZIP codes into greater marketing areas. This alone can narrow your lanes from hundreds of thousands to a few thousand lanes to study without losing the market relevance that reflects the way you really do business.
Once you have completed building the lane intelligence you need, you then need to generate market balance intelligence. Take the inbound and outbound lane intelligence and combine them into a market balance summary. Then link your order data, lane intelligence, and market balance intelligence together in a way that allows you to test what-if scenarios on your freight network. Once you have the intelligence, you are ready to analyze your network.
There are several approaches to analyzing your freight network, but there are a few key elements that should be considered when evaluating your freight mix: rate, balance, empty miles, and length of haul. Yes, there are more factors that come into play, but if you drive the net rate per total mile up, improve balance, and reduce exposure to areas of high empty percentages while maintaining a length of haul conducive to a higher utilization of assets, you win. These high-level objectives are the place to start. You are looking for the lanes that maximize this combination of factors.
After you identify preferred lanes, you can drill down on more specific freight aspects, such as dwell times, in-transit delays, and fuel or accessorial impacts on effective rates. One other major factor to consider is lane density. This is key when defining a core freight network to build your business around. You need to know where your density exists today, and also where you want to target lane density going forward. How do you determine which lanes are best?
An effective approach is to run basic analytics on your freight to determine which lanes contribute more than others to your bottom line. The main watch-out with this approach is to not overlook the value of backhaul or connector freight. This can be incorporated into your study by adding a continuous move profitability perspective or in-out-next logic to the intelligence you already have. This allows you to evaluate whether or not low-rated lanes position you in the right markets to make acceptable margins over time. Obviously, if you’re going backhaul to backhaul, you have to question why that backhaul is good for your network.
Another angle is to target lanes that create greater imbalances on both ends. Maybe this is business that pays so well that you are willing to deal with the imbalances and freight chasing as a result; but often, too much of even a good thing can be detrimental to your network if you are unable to balance that desirable freight by filling the holes in your network. Combine these lane imbalances with high empty percentages, and you will find business that is likely causing nightmares for your planning managers. If that business is also a continuous move profitability loser, then it needs to be addressed.
On the flip side, if you find lanes that contribute to balance on both ends, have profitable continuous move yields, and have reasonable empty miles, then you have found some business you probably want more of and need to solicit. Also, if you have business you are committed to or that generates healthy margins but causes imbalances, you can identify what freight helps you support that business and strategically solicit more of it. This sounds simple, but many carriers never do the analytical work to identify what existing customers have the freight they truly desire and blast their sales force with generic needs lists, frequently leading to getting business you do not really need or want and resulting in never maximizing the return on your capacity.
A great way to simplify your analysis is to take a Pareto approach to your freight network. Determine what percentage of your business generates 80% of your revenues. This will typically lead you to what your core network is today. Density, combined with balance, leads to higher efficiency and, consequently, lower cost. What may surprise you is that often your core freight network, defined by greater density, is your more profitable business as well. If 20% to 30% of your lanes generate 70% to 80% of your business, especially if that core business is more profitable, then why are you running out of your core freight network at all?
Chasing freight only pays off at high market rates and when done so in moderation. Chasing too many spot market rates at the expense of an imbalanced network can be detrimental to your business. In the short run it may inflate profits, but in the long run it can throw your core network out of balance, have negative impacts on committed business, and damage customer relations in the long term. Tread carefully. In a carrier’s market, the spot market is very alluring. However, the carrier’s market rarely holds for more than a couple of years at a time, and supply and demand will eventually return balance. You would be better served to refine your network while capacity is tight and you are afforded a greater selection of freight at more attractive bid rates. Play the spot market, but not at the expense of customer relations or building your core freight network.
The U.S. trucking industry finds itself in a carrier’s market. Carriers will seek to take back ground from shippers in the ongoing rate wars, seizing the advantage of limited capacity and growing demand. This is a natural cycle that everyone understands. Smart carriers will take advantage of this opportunity by analyzing their freight network, determining what they want their freight network to look like in 2-3 years, and strategically building density in targeted freight lanes. The spot market will contribute significantly to profit margins, but wise carriers will maintain a strong base of committed customers that they can rely on when supply and demand rebalance themselves once again.
The most profitable organizations are focusing on what they do best by carving out the lanes they want to do business in, building density at reasonable market rates, regularizing the random environment, and driving costs out of their operations. One of the largest truckload carriers in the U.S. did this during the last carrier’s market and watched the operating ratio of their over-the-road division shrink from 102% to 89% in just two years. The key is understanding your core freight network and continuing to refine it to maximize yield.
In the increasingly competitive, accelerating cost environment of the transportation industry, you have to be more efficient than ever to survive. In order to accomplish this, you need the right data, the right tools, and a good business analyst to help you continuously yield manage your freight network. Now is the time to focus on refining your network. Do not miss the boat or you will be forced to wait several years for another economic cycle to afford you this opportunity again.
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