What can businesses do to combat eroding profit margins? Follow five simple steps: strategize sales, manage risks, optimize business, centralize tasks, and engage employees.
Buzzwords like digitization, artificial intelligence, IoT, big data, predictive algorithms, and drone deliveries have dominated each logistics conference I have attended over the last five years.
In reality, most freight forwarders and logistics providers still operate on 30-year-old legacy systems. The crown jewel of their IT applications is MS Excel.
Simultaneously, we are witnessing the disruption of the logistics industry through new technology and new players. According to Forbes, a new digital logistics start-up is born every five minutes – this translates to 288 digital logistics start-ups every single day, or just over 100,000 per year.
The introduction of these start-ups increases competition and contributes to margin erosion.
Although customer expectations have increased, a number of logistics providers still operate on legacy systems. These providers face increased costs-to-serve because legacy systems require workarounds and manual intervention.
On the other hand, we witness rate volatility in both air and ocean freight. Volatility is produced because markets no longer behave according to the principles of supply and demand. A decade ago, rate levels could be predicted a year ahead; however, this is now not reliably possible.
So, what can you do to combat margin erosion?
Your market positioning essentially determines your level of profitability and your level of specialization required. There are four pillars represented in the chart above: industry sector, customer type, geography, and trade lane.
Among these pillars, you want to focus on those industry segments, customer types, geographies, and trade lanes that can provide you with higher profitability than others. For example, focusing on hi-tech industry rather than commodity traders will likely return higher margins.
Should you then focus on multinational customers or on local SME? In which geographies should you execute your business?
Generally, your customer type and size both have an impact on your productivity and profitability. Furthermore, niche and emerging markets tend to be more profitable than highly competitive and mature markets. Finally, you want to target trade lanes that generate higher margins than others, e.g., exports to US inland points vs. imports ex China.
Throughout these four pillars you also want to see a sustainable product mix. Air freight and LCL tend to generate higher margins than FCL. Door-to-door deliveries, including customs clearance at both sides, are also usually more lucrative than focusing on port-to-port or airport-to-airport movements.
Lastly, do you deliver any quantifiable value to your clients, or do you focus on purely transactional clients, where all you do is offer a rate and a payment term. Obviously, your chances of success increase by quoting lower rate levels and longer payment terms.
But is this a sustainable business model?
First ask: can you quantify your value, i.e. do you reduce the cash-to-cash cycle and working capital intensity, take complexity and costs out of your client’s supply chain, reduce lost sales, and ensure optimal inventory levels?
If you can quantify real value, you should be in a good position to demand management fees per shipment, which are higher than margins generated with transactional clients.
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