By Andrew Galliers, senior manager and transport and logistics expert at accountancy firm, Menzies LLP.
The transport and logistics sector is facing a tricky problem - how to balance rocketing consumer demand for goods, delivered increasingly quickly, with challenges posed by Brexit and increasing competition.
In this market, SME operators can find things particularly challenging, with what seems to be a race to the bottom for pricing putting a squeeze on margins. Whilst businesses across the board have various strategies put in place to manage this, the key element of any successful plan is creative thinking.
Price driven strategies come with a risk, as more pressure is put on the business' cash flow, which needs to be constantly managed to ensure it does not become stretched to a critical level.
One area of particular focus, which should be high on the agenda for any transport and logistics SME, is customer profiling. Business owners should ask themselves how well they know their customer base and what an ideal customer looks like. Many businesses focus on the revenue generated by a particular customer rather than the profitability of the relationship. This can skew the decision-making process and possibly lead to focus being shifted to the wrong clients.
Successful profiling can help to de-risk the business, allowing key customers to be identified, and strategies put in place to ensure the relationship is managed in an appropriate manner.
Creativity in the sector can be found in many forms and often, the business structure of SMEs is advantageous. Operating with a small chain of command means that decisions can be made in an agile manner, be it reacting to market opportunities, scaling up operations or looking for a niche market. This can also be beneficial in allowing collaboration with other operators, sub-contracting work to ensure clients receive the best service.
The lack of quality space is another issue for SMEs looking to upscale and one which can be navigated with creative thinking. For example, where businesses have been looking to rent 100,000 sq. ft. of warehousing space which isn't available at one site, they have approached a number of smaller sites to ensure that same volumes can be achieved. Whilst this comes with the knock-on effect of higher costs per sq. ft., and greater staff volumes, it allows the business to grow sustainably and incrementally. This also has a positive effect on funding requirements whilst de-risking the business in terms of having unutilised space, which is effectively a sunk cost.
Looking at value added services is also another way that the SMEs have been able to compete with larger players. For example, a high-end client may be willing to pay more to a haulier whose vehicles arrive on site in exceptional condition and whose drivers are knowledgeable and well presented. Similarly, provision of superior security services can be an excellent way to differentiate if looking to work with high value cargos.
Businesses looking to carve a niche for themselves should explore the delivery of specialist goods such as hazardous chemicals, live cargo, or medicines, which also could provide them with the opportunity to demonstrate value. These operations are likely to require the use of custom transports such as refrigerated trucks and will be subject to regular temperature checks or health and safety measures during transit. Smaller firms able to demonstrate that they can provide this level of compliance and assurance have the potential to go after and capture higher-value business opportunities.
The industry has suffered an ongoing struggle to attract young talent, and this should be considered by owners when reviewing their plans for the future. Succession planning is the key, as it is likely that there will be further consolidation in the market place. For owners looking at the possible sale of their business, to either similar-sized firms or up the chain to larger players, de-risking the business and increasing profitability should be factored into every decision.
With Britain's plans to exit the EU and the uncertainty surrounding tariffs and customs checks, SMEs are likely to experience more difficulties in the future when operating across the Channel. It is possible that Authorised Economic Operator status, an EU scheme showcasing trusted operators and importers, which has long been used by SME operators, could cease to exist after May 2019.
Acting sooner rather than later is essential and if operating within the EU forms an integral part of a business plan, SMEs should start looking to restructure now. This may take the form of opening branches or depots on the European mainland or even setting up subsidiary operations near the border to minimise disruption if customs checks become more onerous.
SME operators have some tough challenges ahead but with a bit of courage and confidence, they can find ways to compete with the dominant players. By embracing technology, exploiting advantages and thinking outside the box, scaling up and growing the business is entirely possible.