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Optimizing Portfolio Mixes in Logistics and Transportation

transportation providers carry shipments of export cargo and import cargo in international trade.

Optimizing Portfolio Mixes in Logistics and Transportation

Companies in every industry know the importance of effectively managing a diverse portfolio mix, but logistics and transportation companies can particularly benefit from rethinking their current strategies. The industry has struggled in recent years due to several issues, including overcapacity, lack of analytical automation, and unsophisticated pricing strategies.

A well-managed portfolio mix could be part of the solution to these problems, when applied to customers, segments, and products. For example, a logistics company might want to analyze the mix of its portfolio of customers based on their need for current volume/revenue generation, or for more profitable long-term business and maximizing customer lifetime value.

Before shipping and transportation companies can increase volume while improving profitability, they will need to re-examine their short-term, long-term and spot contracts to more efficiently and cost-effectively manage their portfolio mix.

All Contracts Are Not Created Equal

There are three different contracts generally used in the logistics and transportation industries, each with different volume, revenue and profitability considerations. While companies discriminate somewhat when making portfolio mix decisions, there should be a greater amount of sophisticated and predictive analysis applied to contract negotiations, to ensure higher profits and revenue growth.

1) Long-term contracts tend to be larger anchor customers that provide a consistent base of business and revenue. They typically generate high volume for a business, but less profit than other customer segments.

2) Short-term contracts involve customers who contract for shorter periods of time, usually for several months to one year. They are typically mid-sized businesses, but generate more profit than large, strategic customers.

3) Spot contracts are the most profitable but least dependable business. These are customers with a specific need that bring short-term or one-time business. Cost isn’t the issue for them, but rather the availability and speed of delivery. Because of their immediate need, these customers tend to be less price-sensitive and ultimately more profitable.

Portfolio Mix Optimization Strategies

It’s vital to have a mix of these contract types to ensure a company diversifies its business. In order to maximize potential profitability, companies should follow these steps to create a data-driven, analytically-based portfolio mix.

First, companies should apply foundational analyses to determine the true value of their customers. Companies can then use those findings to segment customers, painting a more accurate picture of which customers and contracts will make the most sense for the business.

In addition, decision-makers in these industries need to look at the bigger picture of each market. Some companies offer different pricing depending on location, season, local laws and regulations, and many other factors. These factors should be taken into consideration when calculating the optimal contract price.

Moreover, another subset of market consideration is in agriculture and seasonal commodity markets. These will be places where there are only one or two products that are shipped consistently from a region or geography, but with little demand into those markets. Business into those areas could be largely unprofitable and prices should be raised if a company chooses to drive volume out of these areas.

Shift from Survival to Sustainability

With the logistics and transportation industry continuing to struggle financially, companies have largely been taking business at extremely low-price points, and sometimes even unprofitably. Instead of continuing this approach, which is unsustainable in the long term, companies that more actively discriminate contracts based on segmentation and statistical forecasting will enjoy a stronger negotiating position and see higher profits.

Shipping companies need to be looking beyond survival, and setting themselves up to capture increased business when it returns. In many markets, volumes have bounced back and rates have shown potential for increase. By taking on a more rational and data-driven approach to portfolio mix strategies, the logistics and transportation industry will create low-risk contract opportunities that drive sustainable, higher profits and ensure their long-term success.

Michael Bentley is a partner at Revenue Analytics. He manages client relationships and leads engagements with Fortune 500 clients on pricing and Revenue Management strategy, analytics and business process issues.

Price war for shipments of export cargo and import cargo in international trade.

Are Freight Forwarders Stuck in a Perpetual Pricing War?

It happens every single day in boardrooms across the world. Shipping executives huddle in the morning and decide how much they must lower prices in order to remain competitive and attempt to turn a profit.

Unfortunately, the vast majority of these decisions are made based on a short-term view of driving volume. They also rely on a stunning amount of gut instinct rather than hard data. The cycle results in a race to the bottom of an irrational price war that is completely unsustainable.

In fact, we’ve already seen one shipper disappear. Last fall, Hanjin Shipping, South Korea’s biggest container carrier and the world’s seventh-largest, filed for receivership, leaving 66 of its ships, loaded with $14.5 billion worth of goods, stranded at sea. Furthermore, consolidation is occurring across the industry, best illustrated by the merger of Japan’s three largest carriers in November of 2016. More bankruptcies & consolidation are sure to come.

To better understand the freighting landscape – and avoid Hanjin’s fate – shipping companies must understand what determines the price of their cargo. The following pressures are the main culprits in today’s price war.

Irrational Competition. The global shipping industry has been in survival mode. As overall capacity has increased, competitors constantly try to undercut each other with lower prices in an effort to drive volume in the short term. Companies are largely unaware of potential opportunities to increase prices (and profits) due to a lack of strong analytics.

Overall Declining Demand. Between too many vessels being built (and not enough scrapped) and the global economy weakening following the Great Recession, freighting companies have seen a continual decline in demand for the past several years. Additionally, due to a lack of forward-thinking in both the type of cargo vessels and the products in them, companies are sometimes forced to sail empty containers across hundreds or thousands of miles of ocean at a loss.

But what can container shipping lines do to break the cycle and strengthen their business models?

The two best strategies for companies to implement are data-driven segmentation and better forecasting. More often than not, freighters will still be facing downward pricing pressure in most markets. But a segmented pricing strategy based on a mix of competitor, market, and internal data will show companies exactly how low they need to go and when.

This kind of predictive analysis will allow companies to more accurately predict price response, mitigating the risk of pricing actions by eliminating some of the unknown around price sensitivity. For other markets, such as commodities, companies can cherry pick opportunities for higher-margin prices and increase overall profitability.

For example, sending a container from Shanghai to Europe costs half what it did in 2014, according to figures from the Chinese city’s shipping exchange. In this case, companies will largely have to take the price reduction since it’s a popular route and there are fixed goods each party wants.

However, in locations where markets have bounced back, there is an opportunity to better optimize what products are being shipped and at what time, so that containers are not sailing empty, but filled in both directions with profitable products. Along many routes to Latin America, companies send non-refrigerated containers that cannot carry back produce, resulting in a big missed opportunity on the return routes. If companies could find a better balance in the types of cargo they sent to this region, they would see a significant increase in volume and profits.

The situation is reminiscent of the hospitality industry following the 9/11 attacks. Many hotels dropped prices drastically as people became much less likely to travel in the immediate aftermath, but prices stayed low for years. Price optimization analysis showed there were opportunities for some locations to maintain higher prices, even when hotels were at low occupancy levels. This data-driven insight into customer price sensitivity was a boon for one major hotel chain, allowing them to price rooms at their properties at pre-2000 levels for the first time in over half a decade.

For container shipping companies to truly succeed in 2017 and beyond, they need to think bigger picture and longer term rather than just being concerned about their next quarter’s earnings. By understanding both where they need to be tactically aggressive or more competitive based on market-specific data, shippers can ensure they’re not simply driving volume while leaving money on the tables.

To survive, shippers must pick their battles, look at all the potential trade-offs, and rely on multiple sources of data and insight in order to emerge successfully from this pricing war.

Michael Bentley is a partner at Revenue Analytics. He manages client relationships and leads engagements with Fortune 500 clients on pricing and Revenue Management strategy, analytics and business process issues.