In an industry characterized by complex supply chains and global uncertainties, maintaining profitability as a freight forwarder has become more challenging than ever before.
As we’re almost halfway through 2023, freight forwarders are facing several challenges for transport management, meaning they need to carefully navigate their strategic choices affecting profitability. A big success factor is being able to manage external market conditions, such as road freight rates and capacity shortage.
With this in mind, let’s discover what shippers actually are expecting from freight forwarders in the current climate and how your business can adapt to stay profitable. We interviewed rouvia's co-founder and CEO, Benjamin Noyan, to learn his thoughts on staying profitable in a volatile market.
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What are shippers expecting from freight forwarders in 2023?
Shippers turn to freight forwarders to facilitate the movement of goods from the point of origin to the final destination. The relationship is built on trust and collaboration, as freight forwarders take on the responsibility of managing the entire transportation process on behalf of the shipper.
As a freight-forwarder, you may choose to compete on price and make a highly competitive service fee the main differentiating factor for your business. Providing a premium service or offering extra value added services are other possible differentiating factors.
“When you boil down freight forwarding operations, it comes down to providing a service, ensuring that cargo is picked up from the shipper at the required time and delivered to the consignee at the required place and time. Price is often the determining factor to win tenders and acquire new customers, but more than anything, service quality and customer experience are the key drivers for long-term relationships and customer retention.”
Offering additional services to suit your customers’ requirements creates an attractive service offer, and at the same time adding revenue streams for your business. Especially, being able to offer tracking information and status updates for shipments are big selling points.
Though digitalization has been a trending topic in the last few years, it seems little progress has been made in terms of automation. Benjamin believes this aspect is still missing from many freight forwarding businesses: “I believe it is key to have a digital interface with integrated and automated processes and data sharing.”
That is to say, there is still a big opportunity to leverage digitalization and provide your customers with an improved service feature that competitors are not. Something to consider as we search for profitability drivers.
Freight forwarding cost and revenue structures
Understanding profitability factors means also understanding what cost and revenue structures look like for freight forwarding businesses. For this, we need to first distinguish between asset-light and asset-heavy freight forwarders, as their cost and revenue structures are different.
As an asset-light company, the majority of the costs are related to subcontractors, meaning the direct costs for transport services. Here follows a typical cost breakdown of the shipper’s end-fee:
- Direct transport costs: 65-80 %
- Overhead costs: 10-20 %
- The remaining amount is the profit margin
As an asset-heavy business, the cost structure changes as you have tried to minimize your external subcontractor costs. However, you need to instead account for the following cost factors in your service fee:
- Depreciation
- Fuel
- Maintenance
- Drivers
Depending on how your business is set up, your actions may be different to tackle the impact of fickle shipping rates.
Profitability affected by volatile shipping rates
“The market is affected by volatile shipping rates quite heavily”, Benjamin states. What needs to be understood is that:
“If you are an asset-light business, you are fully dependent on the price that your carrier charges you.”
Being an asset-heavy business, however, your fixed costs remain the same. When the fees for the market go up, you can charge more for your service, effectively increasing your profit margin.
“Usually, direct transportation costs are lower when you don’t need any external subcontractor capacity. That is because you no longer are paying for the subcontractor’s profit margin.”
Additionally, in an upturn market with high customer demand, you are able to put your assets to use effectively. Meaning, you are able to maximize the productivity of your assets associated with your fixed costs to maintain a profit.
This can of course go the opposite way too. Benjamin notes, “in times of a recession, owning assets that are not used effectively may lead to an unprofitable business. The fixed costs are still the same, but now rates are much lower. If you want to keep up with the market, you might potentially have to run your business at a loss in order to at least partially cover some of your costs.”
As we continue to face lower market rates, we want to know what a freight forwarder can do to navigate their business successfully through these market conditions.
Reduce costs to maintain profitability in 2023
If you are noticing decreased profits, it may seem like the obvious choice to raise the prices. However, as Benjamin says, “there is only so much you can charge for your services until your clients turn to another business. Therefore, you need to look beyond fee increases to maintain profitability.“
Benjamin continues: “I think what is core to maintaining profitability, especially in these volatile times, is to reduce fixed costs.”
He explains, “it doesn’t necessarily mean sell all assets and that every business should become asset-light. It means finding a balance between asset-light and asset heavy. It means finding a good diversification of your portfolio.”
Diversifying your transport portfolio as an asset-heavy freight forwarder helps you to adapt to a changing market. If you outsource some or all of your transports, you will be able to remain flexible by adapting volumes and placing your own assets in high density regions and, by that, make your assets productive.
However, this is only possible if you have already established relationships with pre-negotiated rates. Your internal structure must also be set up to work with different modes of transport. For which digitalization is the key, as Benjamin says: “technology can be a great help to work effectively and efficiently with different modes of transport.“
Fixed costs include your overhead costs. Meaning costs for admin and staff not directly performing transports, but needed to keep your business running. While office and general administration costs are usually difficult to change in the short-term, increasing overall efficiency is inevitable to remain competitive and profitable.
“If you can enable staff to work more efficiently and productively, you can run a more lean, but still quality focused organizational structure whilst at the same time reducing your overhead fixed costs.”
Save time and money with the help of technology
Freight forwarding is a complex operation and very sensitive to when processes are not being correctly followed. Therefore, it is necessary that operational processes related to shipments are mapped and recorded properly. No business is without mistakes, of course, but digitalization greatly minimizes the risk for many of these mistakes.
Benjamin in closing says, “It really comes down to digitalization. This does not only concern the logistics industry, but actually every industry. It is crucial to digitize processes, to digitize how we exchange data and information, and digitize how we make decisions. This is how you in the end can run more productive processes, reduce your overhead costs and still provide a high customer service.”
Consider the amount of time you could free up with dedicated software to autofill shipment information instead of entering the data manually. By automating processes, one also reduces the potential for costly mistakes like incorrect quotations and incorrect documentation.
As a freight management system, rouvia helps freight forwarders to source and manage hinterland transports effortlessly. Using our solution will free up time and reduce operational costs through automated processes, dynamic shipment tracking, and e-management of documentation. Learn more about rouvia or contact us directly to schedule a free demo.
