Maximum Profitability Blueprint (Part I)

In 2019, we published a landmark article titled "How to succeed in the most profitable industry in the world." This referred to freight forwarding, measured by the return on capital employed (ROCE). ROCE gauges a company's profit (EBIT) relative to the capital it requires to operate (capital employed = fixed assets + working capital). While the high levels of ROCE in freight forwarding are partly due to low capital requirements, this doesn't guarantee world-class performance. The profitability differences between freight forwarding companies are significant.

Here is an overview of the 2023 ROCE performance of key industry players:

1. Kuehne + Nagel - ROCE: 33.9%
2. Expeditors International - ROCE: 32%
3. DSV A/S - ROCE: 21.7%
4. DHL Supply Chain & Global Forwarding - ROCE: 13.5%
5. DB Schenker - ROCE: 15.3%
6. H. Robinson - ROCE: 12.9%
7. Nippon Express - ROCE: 11.2%
8. Sinotrans - ROCE: 10.8%
9. Ceva Logistics - ROCE: 9.6%
10. Geodis - ROCE: 8.9%

These numbers can be misleading as they include the contract logistics businesses of these companies, which generally have higher capital requirements and, therefore, significantly lower ROCE than top-performing freight forwarding businesses. For example, Kuehne + Nagel does not publish capital employed by business segment. However, I estimate the 2023 ROCE of its Air and Sea freight forwarding business to be about 48%. While this is not as high as Apple's 2023 ROCE of 56%, it surpasses other prestigious and highly profitable companies like Microsoft (35%), Saudi Aramco (30%), Alphabet (18%), and UPS (13%).

Freight forwarding remains one of the most profitable industries in 2024, with the ROCE gold standard around 50%. Achieving a 50% ROCE involves four key levers. Some of them I discussed in previous articles, notably in “How to Maximize Profitability." These four levers are:

• Volume (scale)
• Gross profit per file
• Selling, general, and administrative expenses (SG&A)
• Working capital

There are best-in-class processes and tools to optimize each of these four levers. With optimal management, companies can achieve a profit & loss statement and working capital with the following structure:

This means, a best-in-class freight forwarding company has a gross profit margin of about 25%. SG&A expenses don’t exceed 60% of gross profit (or 15% of revenue), leading to a conversion rate (EBIT % of gross profit) of 40%. In terms of working capital, best-in-class DSO is 45 days, and DPO is 60 days. This structure results in a ROCE of 50%

I will discuss each of the four profitability levers in detail in subsequent articles. Essential elements can already be found in previous articles, especially in:

How to Maximize Profitability

Cash Management

The Case for Eliminating Regional Management Structures

Accounting Quality is a Huge Value Driver

What Does Digitalization Really Mean?

What Can Be Automated?

Optimizing Receivables Collections

Ontegos Cloud's Operational Control Dashboard and Workflow Management