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Let’s Talk Profitability

MT: Ted, you have more than a quarter century of experience in transportation, and are one of only 6 Canadians to have chaired the National Tank Truck Carriers. You're also a past director of the Onta...


MT:Ted, you have more than a quarter century of experience in transportation, and are one of only 6 Canadians to have chaired the National Tank Truck Carriers. You’re also a past director of the Ontario Trucking Association. Your fleet, Gorski Bulk Transport provides service in the challenging tank truck market, specializing in liquid and dry bulk transportation between Canada, the US and Mexico. In your experience, is successful rate setting more of an art, knowing what each specific client and market can bear, or more of a science, understanding your costs and acting accordingly?

Gorski: My experience is that you have to balance the two because you are dealing with competitive factors, strategic initia-tives and how to position your company in front of your customer, and the level of profitability you expect. You are going to take in all those intangible factors, and what the competition is doing, and at the end of the day you’ll say I am satisfied using that fine balance of art and science.

MT:What’s the greatest mistake that a carrier can make when they go about setting rates?

Gorski: There are a number of mistakes you can make: not considering fuel, labour, equipment cost changes. To me the biggest mistake you can make is doing nothing. Realizing that you’ve got a problem, that you are not hitting the returns that you need and then doing nothing to fix it. Taking no steps to understand why you are in that predicament, and being brutally honest with yourself about why the revenue you make isn’t giving you the profit margin that you need. That’s where good rate modeling comes in. You can turn around and say something’s not working, where is it, let me find out what it is. Is this a market I need to be participating in? How good are my rates, how good are my sales staff, , how well are my customers receiving the information that I have and are we presenting it in the right manner?

MT:If I’m hearing you correctly, in order to get to that state you really need to be able to track a lot of information to understand how your rates are affecting your profitability.

Gorski: Absolutely.

MT:How do you do it at your company?

Gorski: We have to know what’s happening with every identifiable cost area, our variable cost, our step cost, our incremental costs, the per diem per load cost, and also our fixed costs and what is our expected profit margin. Because let’s face it, if we’ve got equipment to pay for, all those payments come out of our profit margin, and without good information you really don’t know where to set your pricing. If everybody else is charging a buck and you really want to get in the market so you decide to charge only charge 90 cents, all you are doing is setting yourself up for failure.

MT:I can understand, however, the reluctance on the part of carriers to rock the boat in difficult economic times such as these. It’s natural to think that if the shipper’s happy with me I can’t afford to lose someone right now. Now suppose the carrier does their homework and finds out a particular shipper isn’t really paying what they should. Is it advisable in this kind of economic environment to address that with the shipper or should you just leave it alone, for now?

Gorski: If you’re taking scarce resources and using them for no return, you have to ask yourself why am I doing this? If you can’t get the return you need, why do it in the first place? And, does your customer really understand what’s happening? A lot of times we are caught up, as both shippers and carriers, in the day-to-day turmoil, providing good service, providing outstanding border crossing ability, providing inventory management, freight management. We’ve got drivers that are close to being saints, with all the stuff they have to control. And, when you get caught up in that, and lose sight of the bigger picture, which is generating a profit at the end of the day, you really have to stop and say is there a good strategic business decision for doing this? If you look at it and say yes, instead of 20 cents on the dollar, I’m now getting 15 and that’s acceptable, you’ve made your business decision. But if you’re looking at it and saying for every load I move it’s costing me a nickel, you’re better off giving up the customer and not worrying about the equipment.

MT:You’ve raised a very interesting point in terms of getting the customer to understand what you need as a business. And that can be an issue because sometimes shippers don’t want to hear it. How do you approach such situations? How do you go in and get shippers to understand your point of view?

Gorski: It starts with the first contact. We approach all business relationships as a partnership. Everybody has to understand what keeps the business whole. What service level you are going to provide, what equipment you are going to provide, how all this comes together and most importantly what drives this? If you are a carrier hauling international freight priced in US dollars, chances are today you’re not very happy with that choice. You need to be able to explain the extraordinary circumstances and then you have a business decision to make and they also will have a decision to make. But if you’ve maintained the right level of communication, they’ll understand the value of the partnership, the value of your company and be more willing to turn around and have that heart to heart talk with you about what freight levels will support today’s business. The last thing the customer would like to do is lose an established carrier and have an untried carrier, which may cause them all kinds of production problems.

MT:CEOs and CFO’s are becoming more knowledgeable about the importance of supply chain management and of the important role of transportation in it. The buyers of transportation as a result are becoming more interested in that side of things. Has that translated further down the line when you are speaking to them about your costs and what you need to be a profitable company? Are they more willing to listen?

Gorski: It depends on how you approach it. There’s a lot of ways to get your message across. Today’s transportation media is read not only by the carriers but also by the shippers. They pay a lot of attention to this and they have to make their judgments and their decisions based on what they see. If they’ve got information coming in from three and four independent sources, The Globe and Mail, The National Post, the truck media and so on, that there’s changes happening, carriers are not surviving, they’re not doing well financially, and then you come in saying I need an increase because of the foreign exchange issue or because of excessive border delays, there’s already a lot of background supporting information that the customer has. So if you’re able to build on that, you can be very successful.

MT:We speak about educating the shippers but I also wonder if we need to educate the carrier sales force? Do we sometimes get into trouble because the sales team, in trying to make that sale, offers things that perhaps they shouldn’t be?

Gorski: We have to start there. That should be part of the ongoing process. In any business you need to understand what are the key factors that indicate success. Like your key performance indicators. And if the salesman has to generate loads with a profit margin, hopefully you’ve given him the tools to use so he can understand what is a reasonable profit margin or what is a reasonable return on a lane. That way you don’t get surprised. Because if you just tell the salesman get the account, regardless of the price, the person at fault is yourself for making that decision.

MT:What you are saying is in order to make your salespeople behave in a more intelligent way as far as profitability is concerned, you’ve got to share information with them?

Gorski: You have to share some details. Understand, you’re dealing with a lot of private businesses and there’s information that is for the shareholders eyes only. But in terms of the gross profitability for a lane, that should be common knowledge. What is the revenue target? What signifies success to the salesman? If they go in armed with that information, then they could make good decisions.

MT:One of the things we see in trucking, perhaps more than with the other modes, is some real fluctuations in pricing. From 1990 to 2001 rates were really depressed. Then we saw some real increases when capacity became an issue by the last quarter of 2003 until about 2006. Now we are back down the other side the mountain. Is this simply the way things are in this market place or does trucking need to do a better job of providing a level of consistency to rate structures?

Gorski: To a certain extent it depends on how your pricing is set up. If you’ve got a long term contract with a customer, hopefully you’ve set it up so you’ve got the flexibility in there that you can have discussions about variable costs and you have a mechanism that when there are seasonal fluctuations in pricing, that you can deal with those. We’ve had natural disasters in the last few years, the hurricanes down the Gulf Coast, spikes in energy cost, etc. There’s a lot of people that think why should I pay you a fuel surcharge? Well, unfortunately it’s needed to move the truck.

MT:What’s interesting too when setting rates is that it’s not done in isolation. A fleet can do all its homework, make sure it knows all its costs, etc but it is still competing against other companies and modes. How do you determine whether your rates are actually competitive with what’s available out there?

Gorski: That’s probably one of the toughest things today. Obviously the shippers are not going to turn around and say guess what: here’s where you scored and everybody else was 3% or 4% below you. You’ve got to deal with the information that you have. Whether or not you’ve secured the run with the rate quote; if you did secure the run, did you get your expected profit margin? If you’re making the return that you plan to get and the run is profitable for you then you really don’t care what anybody else says about how much it could have been or should have been. This is part of your long term partnership with the customer. I believe there’s got to be a fair level of pricing. You need mechanisms in place that address the fact that as situations change, prices have to change. In the absence of that it’s supply and demand. As demand decreases the price goes down, and as supply shortens price goes up.


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