Everyone knows of a trucking company that grew too fast and then went out of business. Many small trucking company owners vow to avoid this fate by staying small. But in many ways, successfully managing a company with a no-growth strategy is more difficult than managing a growing company.
A small carrier often relies too much on one major customer. That’s fine when things are going well, but a management change at the customer can easily sour the relationship.
In addition, your fortunes are tied to whatever market your key customer serves. And if the customer cuts production, you feel the revenue pinch immediately, but it may take several weeks or more for it to dispose of excess equipment and employees.
Over time, your freight rates probably must grow if you are to remain profitable. While a good key customer may agree to higher rates for a while, the higher rates go, the more vulnerable the relationship is to competition.
Despite these risks, you may still want to remain small. How can he be successful with a no-growth strategy? It’s tougher than people think, but there are three fundamentals.
Never take a key customer’s business for granted. Owners often are overly focused on the customer relationship they are most comfortable with. You might have a great relationship with the customer’s president and ignore the traffic manager. Or you might have a good relationship with the traffic manager and ignore the shipping supervisor on the dock. But remember that people move on to other jobs, and others down the ladder will take their places. Promote your services to all levels and all areas of the company.
Insist on productivity gains for wage increases. Wages are among the most difficult costs to contain. Good people may forego a wage increase in a bad year, but few will year after year. And you can’t just say no. Most carriers’ success is based on the quality and loyalty of its people.
Only through ever-increasing productivity can you afford increased wages. Increased productivity can come through technology, streamlining procedures and processes and motivation of the workforce.
The motivation element usually means establishing a bonus program tied to the performance of the individual and the company. Instead of increasing pay to drivers on all miles, for example, some carriers only increase pay on the miles driven over a target. So instead of increasing pay by 1 cent a mile on all miles, they might pay a bonus of 10 cents a mile on all miles in a month after 10,000. Another common incentive is a yearend bonus based on the carrier’s operating ratio.
Incentive pay can backfire on carriers, especially if the workforce doesn’t believe the incentive pay is achievable. But a fair system that results in sizable bonus checks in good times will encourage people to stick around during bad times.
Trade fixed for variable costs. Variable costs such as fuel go down or up by the amount of business activity. Fixed costs are those you must pay month after month regardless of business conditions. Some costs, like office salaries, are semi-fixed. You can cut them, but not immediately.
Most fixed costs, such as equipment, come with creditors. Seeking protection from these creditors is what leads to bankruptcy.
If you are overly dependent on one customer you should try to minimize fixed costs. This could mean using owner-operators for part of the operation even though company drivers may be more profitable. Or it could mean keeping equipment longer to limit the number of vehicles being financed at any given time.
Equipment is usually the largest element in a carrier’s fixed costs, but you shouldn’t ignore others. Can office space be subleased if necessary? Can certain functions be outsourced?
Staying small is no guarantee of success. It can be a winning strategy, but only if you keep your eye on the ball and costs in line.