Trucking is a cyclical business and after most carriers enjoyed some record financial quarters, the economy seems poised to turn south.
“It’s scary out there,” Lee Klaskow, senior analyst – transportation and logistics with Bloomberg Intelligence, said during a panel on managing cash flow in an uncertain economy, held at the American Trucking Associations’ annual Management Conference & Exhibition. “There are lots of things going on in the world that are going to hammer economic growth.”
Publicly traded transport companies have seen their stock prices plummet, war in Ukraine has driven up energy costs including diesel, and inflation and interest rates are high. The risk of a U.S. recession is now 60% according to consensus estimates, which tend to be overly optimistic, Klaskow noted. But there are things trucking companies can and should be doing to safely weather any kind of looming economic storm.
1. Be transparent
Chris Henry, chief operating officer with KSMTA Canada, formerly ran a truckload fleet benchmarking program for the Truckload Carriers Association. “One of the things we realized early on is, there’s very little transparency from the C-suite to the front line,” he said. “The [companies] that were very transparent tended to have a lot better performance over the long term.”
Henry suggests carriers survey everyone in the company and ask them how much out of every $1 in revenue they think is left after covering all expenses. Often, front line employees think as much as 65 cents out of every dollar in revenue is leftover profit.
“If they think they have 65 cents left on the table, they’re not seeing the full implications of every decision they’re making on a day-to-day basis,” he said.
Zack King, former executive vice-president and chief financial officer with USA Truck, said that company held a meeting with all employees during the last down-cycle to ensure everyone understood how their specific roles affected the bottom line.
“When you meet with your people and they know their roles and you have a plan and they buy into it, they’ll accept a bump in the road,” agreed Steve Smith, president of Smith Transportation Consulting Services.
2. Don’t stop investing
The worst thing to do in a downturn is to stop investing, Smith said. “You can’t cut your way to profitability. You have to have a plan and stick to the plan.”
Investments in IT projects, facilities, and new equipment should not be shelved, he stressed.
“Every time the economy starts to slow, we want to extend the life of our equipment,” Smith said, adding that repair costs will ballon, putting the carrier in a hole that’s difficult to emerge from. “Continue to invest in your good people, your drivers, your employees.”
IT is an area that should see continued investment in a downturn. Smith estimates just 5% of transportation companies spend enough on IT, which can automate tasks such as document scanning. Henry urged fleets to do more with their existing transportation management systems (TMS) to make operations more efficient, noting most fleets just scratch the surface of their TMS’s capabilities.
Don’t hoard cash and leave projects unfinished, Smith said. “Spend the cash now. If you have technology [upgrades] you are two-thirds of the way into, finish the project. If you are building a new facility, don’t stop. Finish that, because it’s part of your plan.”
And don’t give up on growing in a slowing economy, either. “Invest in your salesforce, put money into improving training. No company I ever worked for had a mantra that they were too big to grow.”
3. Continue to recruit
Investments into driver recruiting should also continue during a downturn, even if your fleet isn’t adding trucks.
“When times get tight, don’t pull back [on recruitment] or you’ll kill it,” Smith said. “You can be more selective, but don’t kill it.”
Henry said benchmarking has shown the hard, soft, and opportunity costs of replacing a driver amount to as much as US$23,000 for a typical truckload dry van fleet. King said referrals are one of the most effective ways to bring in new drivers. A driver referral program at USA Truck was responsible for 15-20% of new hires the company made.
4. Optimize your network
Examine your network and focus growth and investments in the most profitable lanes, Smith said. Discuss with customers which lanes are a good fit and which aren’t, and allocate available capacity to those that make the most sense for both parties.
“Once you have the information and show it to your customer base, they’ll buy in,” he said. “All they want is capacity. They’ll find someone who has a better way to skin a cat on those lanes you don’t like.”
King suggested ranking lanes by tiers. “Build density into the lanes that serve you well and get rid of the ones that don’t,” he said, noting USA Truck spent three years optimizing its network.
Henry said fleets need to assess each load and lane in their network, based on the revenue they generate and the cost and time it takes to service those lanes.
“One thing a lot of carriers don’t have access to is accurate transit times,” he said. “Take that into account. Give a profit score to every load. Right now would be a good time to start if you’re not already doing that. If you’re responding to RFPs (requests for proposals) without this data, you’re behind the 8-ball.”
5. Educate your customers
If shippers are asking for rate cuts, ensure they know your costs are going nowhere but up.
“Educate them continuously on how much costs have gone up,” Henry said of talks with customers. He says many shippers overestimate how much carriers have made over the past couple years due to significant rate increases, without taking into account the extent to which operating costs have also risen.
“Educate them on the individual costs of equipment, drivers, insurance, maintenance and fuel,” he urged.
King said shippers can relate to rising compensation costs for drivers.
“Whenever we went to a customer with a driver wage increase, we were never told no,” he said about his time with USA Truck. “We may not have gotten as much as we wanted, but we always got something at that point. The shipper understands the market has changed of late with regards to driver pay.”
Make sure fuel surcharge programs are updated and appropriate, King added.
“Relationship with customers will get you through rate pressure times as long as you’re giving good service,” Smith added. “We don’t make anything – all we do is move things, so service is number one.”
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