Expensive insurance you don’t need

user-gravatar

Does anyone in your company ever use the phrase “tap account”? Typically, it’s a customer that the carrier can contact when it needs extra freight. Salesmen usually use this term to label an account that has poor rates, lanes or equipment utilization.

Sometimes operations buys into this idea by hauling freight for such a customer in order to have more customers out of a freight area. The logic is that it’s OK to give up some profits now if you can avoid idle trucks when things get slow.

When your company accommodates a tap account to keep it as a future customer, what it’s really doing is buying a very expensive insurance policy. Let’s call it the “Slow Freight Days” policy. Unlike liability or health insurance, you don’t write a check for this insurance policy’s premium. Unfortunately, that means that the very real cost usually remains hidden.

How much can a Slow Freight Days policy cost a company? Out of a typical good freight area a load of freight will generate on average an additional $150 of profit. This extra profit out of a headhaul area pays for getting the truck out of the inevitable backhaul areas.
Now assume that the tap account’s rates don’t allow the carrier to generate that additional $150 of profit. Suppose, for example, that on a 1,000-mile load the rate is $1.15 a mile versus an average of a $1.30 out of an area.

If operations takes one load a day from this customer 250 days a year, the lost profit comes to $37,500. Average 20 loads a week, and the cost in lost profits is $150,000!

Let’s assume your company bought the $37,500 policy. Each additional load the shipper gives you during the slow period is worth $150 of profit to you versus not using the truck that day. In other words, the shipper pays enough to cover the cost of the equipment for the day and helps pay some of the overhead costs.

In this example, to become whole on your investment of $37,500, the shipper needs to allow you to tap into 250 additional loads during your slow days.

How many slow days does a carrier have out of one of its strong freight areas? Let’s say 12 weeks worth, of which eight occur in late December, January and early February. The other four weeks probably occur during the plant shutdown periods around July. That is 60 slow days a year.

In order to fully cash in on the Slow Freight Days policy, the shippers need to provide your company with about four additional loads on each of those 60 slow days or 21 additional loads for the week. How many customers do you have that can go from five loads to 26 loads a week whenever you want them to?

Of course, the Slow Freight Days policy isn’t enforceable. It is simply an understanding that may – or may not – exist between your company and the shipper. But even if the customer intends to honor its end of the bargain, it will have to stop shipping with some of its other carriers to do so. But chances are that your slow freight days are the same as the rest of the industry’s slow freight days. So other carriers probably will be begging for loads too. And if freight is slow for you, it may very well be slow for your tap accounts. There may simply be no extra loads to give out.

If this all sounds familiar, take two actions immediately. First, stop accepting the tap account or Slow Freight Days rationale for poor-paying customers. Don’t add any more such customers. Second, raise the rates for existing Slow Freight Days accounts to acceptable levels. Who knows? These customers might even value your service enough to pay those rates. Or they may use you occasionally at those rates so they can tap your capacity when needed. After all, shippers have been known to buy expensive insurance called a Busy Freight Days policy.