Cash Flow CornerNews

Want to boost profits? Start by building the right lanes

( Photo: Shutterstock )

A lot has been spoken about how the freight industry is sluggish on the uptake with regard to adopting technology, but the truth is, the industry needs a better understanding of demographics than it does technology.

Making a company profitable inevitably boils down to two main factors – fixed and variable costs. The fixed costs don’t change the equation since they rely little on the variances of the market, the seasonal changes, or a market meltdown.

The limelight thus falls on variable costs, which solely are responsible for the profit margins of the company and therefore, its growth. It is understood that reducing variable cost brings up the profit margins – but the question is, how do we do it? 

There are a lot of parameters that could affect variable costs, like fuel, fuel surcharges, tolls, truck maintenance and driver expenses. But, in essence, most of these costs are unavoidable, and nearly all fleets are subject to similar situations. Though fuel is generally the most significant of all variable costs, it isn’t fuel cost that drags down profit margins drastically; it’s unloaded backhaul miles.

Approximately 20% of all trucks in the U.S. return empty after a haul, which essentially means that trucks traverse the country roads for billions of miles without cargo, wasting fuel and creating a massive impact on carbon emissions. This isn’t a zero-sum game, since it takes a toll on both shippers and carriers alike, with the former spending more for shipping as carriers seek to cover wasted costs.

Many startups offer services in the form of digital freight marketplaces, which bring the community of shippers and carriers closer – but that isn’t the idea behind this narrative. It is about how logistics providers and freight brokers can recognize opportunities and reduce needless miles on the road by understanding their demographics and, in particular, from where outbound and inbound freight is coming. Basically, it’s about building the right lanes.

In a vast country like the U.S., there are a large number of freight sources, but properly understanding where that freight is located, and where it is going, can help reduce empty miles.

Statistically, highly populated regions with elevated cost-of-living standards are where freight is moving to, but it is not where freight is moving from. Take, for instance, New York City, which is a pinnacle of consumerism and one of the most densely populated cities in the world. It is evident that a lot more trucks deliver cargo into the city than haul loads out of the city.

In these cases, rates need to be set to cover the cost of that truck leaving the city empty. It is also helpful when accepting loads to know beforehand if an outbound load is available in the area.

When searching for possible loads and routes to run, it is prudent to look at locations with heightened industrial activity such as the area around the Great Lakes and in general, transport hubs and ports which cater to imports more than exports.

Then again, the nature of a shifting demographic is changing the way freight moves. Around 80% of Americans live in cities or areas surrounding cities, meaning plenty of freight is moving into these areas. Sources of freight are ubiquitous as well, with agricultural and manufacturing activity spread out and the rise in e-commerce and its affiliated warehousing another example of the growing presence of sources.  

So what does this mean to the industry, and logistics providers in particular?

All it takes is to identify a matrix of inbound and outbound load locations that are near each other and grow routes around that region. The math behind it is quite simple – the closer the impact locations on the map, the lesser the need for empty truck miles, thereby increasing margins.

It’s important to take note of current rates in the area and the competition you will face for loads. Just because there are loads available does not mean they are profitable loads. If there is too much competition, or rates are too low in a region, it’s best to find another region to work within.

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Vishnu Rajamanickam, Staff Writer

Vishnu writes editorial commentary on cutting-edge technology within the freight industry, profiles startups, and brings in perspective from industry frontrunners and thought leaders in the freight space. In his spare time, he writes neo-noir poetry, blogs about travel & living, and loves to debate about international politics. He hopes to settle down in a village and grow his own food at some point in time. But for now, he is happy to live with his wife in the middle of a German metropolitan.