My thoughts on rate cutting
Richard Branson famously once said “you must always protect the downside”. And in a high risk, cut throat industry like transport, managing this financial and safety risk becomes an every-day, hour to hour focus of many operators.
Of late we have noticed an alarming increase in both transport receiverships and also rate cutting bought about from the downturn in the WA economy and mining bust. Many carriers, who geared up heavily for the boom, are now returning to Perth, cutting rates and trying to poach work from other companies that have been upholding their service levels to their clients over many years, through thick and thin, all because they like many others suffered from short sightedness thinking the boom would never end and failed to manage risk.
Rate cutting is detrimental to the industry and only creates a negative spiral affect that impacts all other providers. Now many well established carriers are being forced to cut their freight rates, because other companies are throwing unsustainable rates at clients only to try and steal some work and cover some of their costs.
Don’t get me wrong, competition is natural and good for all industries otherwise we end up in a monopoly industry like Telstra for rural WA (and I can tell you first-hand how frustrating dealing with them has been of late). The process used during comparison of products should question price vs value, to ensure that we compare apples with apples.
Price vs Value
With any purchase, be it goods or services, there is a direct cost and there is consumer perceived value of that product. Sometimes when comparing products this is seen as cheap vs expensive, but if your thinking shifts to one of value, the equation becomes much simpler.
World renowned value investor Warren Buffett once stated
“Price is what you pay, value is what you get”.
Value = quality or benefit of product delivered / period of time of intended use or holding.
Applying this mentality to goods and services or even share investing as I have learnt to do from studying Warren Buffet, has enabled a shift in my thinking to one of purchasing for value to deliver higher returns/benefits over the long term. (Side note for those interested, google Buffets work or visit www.rogermontgomery.com.au for more insights into Australia’s leading value investor)
Producing value in a cut throat industry is tough; even more so in the current economic environment. A major focus of late has been assisting our clients and suppliers gain clarity on the cost of their service expectations from a compliance and operational perspective. It is through this re-education process that all parties are discovering what is actually involved in getting freight from A to B safely, efficiently and legally.
Recent legislative changes have put supply chain compliance front of mind and forced the majority to learn more about what is actually required to run a safe, compliant operations and the risk they are currently exposed to in there supply chain. There is still an uneducated mentality out there that feels “we can always save money by cutting freight rates, increase our margin, and then move onto another carrier once they go bust or even do it ourselves, this transport game can’t be too hard”. Hopefully in the coming years this will change.
There are several industry groups that I am involved in taking to lead towards improving professionalism by changing the training requirements of heavy vehicle drivers licencing and restructure WA Accreditation to include all vehicles with GVM >4.5tonne, to name a couple of potential game changers.
I find it difficult for anyone to argue against the safety and performance benefits to all from these planned changes.
Coming from a sporting background I am very familiar with the importance of having role models in life, whether it is personal or business. These people champion a message in an attempt to inspire a greater community to improve, grow or work towards a common goal.
Well, at Clarkson Freightlines we are one of many companies taking the lead to drive professionalism and our company vision is clearly stated as “delivering world class service linking rural WA”. So what does the cost of world class and professional service look like? Some of the key ingredients that enable us to strive toward our vision are but not limited to:
Cost of compliance
Training of employees
Proactiv maintenance on equipment to improve equipment condition and minimise downtime
Documented and implemented compliance systems and processes
Equipment to enable safe operating
Cost of professionalism
Operating with modern, state of the art trucks and trailers decreasing our environmental emissions footprint and eliminating breakdowns
Hiring A-Grade employees who handle and deal with your freight
Utilising technology for innovation to constantly improve service levels
High capital overheads, whether it be property, plant and equipment to again, provide world class service to customers
In between managing and mitigating risk in my business, I am heavily focussed on improving professionalism in all aspects of the transport industry to drive more value for clients within our service geography (more blog posts to follow). The flow on effect to this, I hope, is that other carriers catch on and champion professionalism to drag the industry to the higher standards it deserves and there are many other carriers in the same position as mine, of which I hope to share their insights in future blog posts.
At the end of the day, it is ultimately up to client to calculate their price vs value on an overall service package for a partnership that is going to provide benefits to their business and end customer.
That’s my view on how disappointed I am about rate cutting in our industry. Interested to hear your thoughts on the matter, if it occurs in your industry and even the other side of the story from the consumer’s perspective.
Email me at firstname.lastname@example.org