Transportation

Rich, poor or balanced?

By David Goodson

Furniture, cabinet and other manufacturers with trucking division profit centers can improve profitability by identifying lanes that are profit winners and losers. Here’s how.

Two of the toughest jobs a small truckload carrier faces are understanding how to set rates and identifying whether a lane is a profit winner or loser. Knowing which lanes are winners lets you direct your marketing efforts into lanes with the highest payoff.

Although truckload pricing takes skill, at its heart is a simple table. When you understand this table, you will know how to price a lane and how to determine which traffic is profitable.

The table lists the freight rates that a truckload carrier must charge to haul loads from one type of freight area to the next. The average rate is what the carrier must average throughout its operation to achieve profitability. Other rates are higher or lower, depending on where the freight is moving. There are three types of freight areas:

• Poor, or backhaul, areas, which have too many trucks for the available loads. Typically, poor freight areas are those in which the population is large in relation to the volume of goods produced. New York City is a poor freight area.
• Balanced areas, in which the numbers of trucks and loads are fairly equal. Ohio is an example of a freight area that usually is balanced.
• Rich, or forehaul, areas, in which the available loads exceed the supply of trucks. These areas typically have heavy manufacturing operations. Chicago is a good example of a rich freight area.

  For most truckload carriers, the average profitable rate is around $1.20 per revenue mile for a moderate-length haul. A premium rate is significantly higher (perhaps $1.40), and the top rate is the most a carrier hopes to receive (say, $1.60). A discount rate is below the average profitability rate (perhaps $1), and the bottom rate is the amount a carrier charges in hopes of recovering running costs (80 cents, for example). These rates may change from carrier to carrier and vary according to length of haul.

  Although most truckers understand the need for backhaul and forehaul pricing, they become confused by the need to charge just the average rate when they are going to equivalent freight areas. When going from a backhaul area to another backhaul area, for example, most carriers want to charge a premium. Carriers that understand that only an average rate is needed can improve profitability by filling their trucks faster.

  I recently worked with a carrier hauling from Kansas to the Northeast for a premium rate of around $1.50. The carrier then discounted rates to 90 cents to move the trucks to the Carolinas, where it had a backhaul to Kansas at a rate of $1. This freight pattern violated the rules on the table. The carrier was discounting the rate into a freight area where it was picking up discounted freight. A look at the actual numbers showed that this pattern was indeed unprofitable.

  Working with the carrier, we found an East Coast shipper with loads to Denver at $1.20 a mile. In this case, the carrier was going from one poor area to another at an average rate. That’s a profitable operation, according to both the table and that carrier’s actual performance. In fact, we found the pattern profitable even if the carrier ran 400 miles empty back from Denver to Kansas.

  The carrier had difficulty finding loads going from the Northeast to the Carolinas because it had to compete with hundreds of carriers. But finding loads to Denver was much easier, because few carriers wanted to go into a poor freight area at less than a premium rate. By thinking of freight in terms of rich, poor and balanced areas, you can make money on freight others won’t touch and stay away from freight that others unwisely accept.

  David Goodson is a management consultant specializing in the transportation industry.

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