Are You A Great Freight Forwarder?
All the business advice articles and books you find today emphasize that customers care for value over price. It’s a logical concept isn’t it? You pay for shoes, get free delivery, and if they don’t fit you send them back for free. And then the replacement comes to you for free. Once you get the hang of it, you buy two pairs of the same shoes in different sizes and send back the ones that don’t fit.
The free shipping gives you access to greater selection and a huge time savings. On top of that, the price is comparable to what you would find at a store, so everyone wins. That’s the model that took Zappos from nowhere to a $900 million valuation when they were bought by Amazon. So price is important, but not the only determinant of value provided to a customer.
In the logistics business there are a lot of similar examples. We have a customer whose business is so heavily focused on consolidating, packing and shipping cosmetics that they practically own their niche. Their business is profitable and new customers simply “walk in the door” with no elaborate sales and marketing expense required.
Another customer of ours focuses on shipping cars in containers. They’ve bundled receiving, loading and customs formalities so effectively that they’ve earned a reputation as a real “go to” freight forwarder for automobiles on multiple key trade lanes.
We spoke to some of their shippers and asked them to describe their freight forwarders, and the typical comment was “they’re a great forwarder”. When asked what made them “great”, the first answer usually was “they make my life easier”. That’s a great situation to be in, isn’t it? Happy customers who feel you can solve their problems so easily that they won’t entertain anyone else. So what’s wrong with this picture? Let’s take a look:
The (Fixed) Cost of Greatness
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) is one of the most important measurements of a successful business anywhere in the world, irrespective of size.
Publicly traded companies as well as small businesses need to have a healthy, positive EBITDA in order to satisfy investors. For small businesses this is even more important as a lack of access to financing means low or negative EBITDA (losses) will ultimately kill the business.
We don’t need to get into the accounting details, but it’s pretty easy to understand that there’s only 2 ways to boost your EBITDA as a business: sell more (grow revenue) & spend less (reduce overhead). Now let’s look at EBITDA in some logistics related industries:
Looks good right?
The logistics business is cleaning up nicely compared to the airlines and shipbuilding and those are really big businesses! Wrong! There’s a problem here – every industry in this chart is asset based or asset intensive. They either own the equipment they operate or they lease it.
After paying the bank, they still have to cover the cost of fuel. Add into the mix the cost of labor, mechanical support, as well as sales, marketing and administrative costs and you begin to see how overheads eat into their massive revenues.
By contrast, most logistics companies, especially in the freight forwarding and NVOCC category, are non-asset based or “asset light”. They don’t cover the costs of fleets, fuel surcharges are usually a pass through and maintenance and repair costs are virtually non-existent.
Where does all the money go?
So where does all the money go? It’s spent on manpower. Freight intermediaries use their best talent to do what almost all other industries accomplish through automation.
Now if we did a separate analysis of freight forwarding EBITDA versus other manpower intensive businesses like law or consulting practices I bet we’ll find freight forwarding EBITDA trailing those companies because they can’t command the same kind of fees as other knowledge based, manpower intensive businesses can (high revenue minus high overhead vs. low revenue minus high overhead).
The very cost of being a great forwarder is what’s holding back profitability in the industry. And where there are low to no profits, there’s no money left to invest in business process improvement.
Variable costs in the logistics business are mostly good things – if you’re doing more business, you’re buying and re-selling more container, truck and air freight capacity and life is good.
The challenge for freight intermediaries is to bring down their fixed costs, or to better utilize their manpower in order to improve service offerings to customers. Currently, the industry treats rate shopping and quoting as a high value skill. That’s absurd! Procurement and sales are vital to the success of any business, but when the tools of the trade are still manual, there’s no way to enhance profitability.
To ensure growth, and even survival, it is imperative that freight intermediaries rapidly adopt cloud based solutions for their businesses that will address quoting, booking, documentation and payment/billing.
These are the 4 key steps of any shipping transaction and until they’re automated internally AND externally, there’s no way forwarders can be “great” and enjoy the monetary benefits of that greatness.
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By: Fauad on Nov. 28, 2016, 12:54 p.m.