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.