The Hidden Threat of Sunk Costs in the Transportation Industry

Trucking giant Yellow created shockwaves in early August when the company declared bankruptcy. The 12,000-truck fleet incurred $200 million in losses in the five years leading up to 2023. Burdened by debt and a burgeoning union labor contract, even a $700 million government-backed PPP loan couldn’t keep it out of the red.

While the Yellow bankruptcy isn’t necessarily a canary in the coal mine for what lies ahead, the closure does offer an important reminder to motor carriers and logistics providers of how sunk costs can sink a business. For more proof, ask the hundreds of operations that have closed their doors in the past few years. 

With freight volumes currently low and trucking costs higher than ever, carriers and logistics firms must make the most of every penny. This is especially true when it comes to TMS technology. Making big investments in a new platform during an uncertain economy can quickly put you underwater. Yet holding onto an outdated one that underperforms can cost even more. 

Is this a catch-22? Not if you know how to navigate the iceberg of sunk costs.

The Sunk Cost Fallacy

“You have to spend money to make money.” Sound familiar? This phrase acknowledges that some of your expenses, like equipment, salaries, insurance, and various technologies, are unrecoverable or sunk. Investing more in these areas may still benefit the business, until the costs outweigh the benefits.

Finding the inflection point can be difficult, which makes it easy to get caught up in a “sunk cost fallacy.” This happens when businesses pursue projects with diminishing or absent returns. Fleets can throw good money after bad even when a better alternative exists because “we’ve already invested so much time, effort, and money.”

The fallacy plagues businesses due to the human nature of loss aversion. People would rather avoid losing than risk winning. For example, a research study asked participants to imagine they accidentally paid for two trips on one weekend. One cost $50 more than the other. Even though researchers told people they would enjoy the cheaper trip more, most selected the pricier vacation because of the higher investment. 

Information systems are a prime target for the sunk cost fallacy. Teams perceive the threat of investing in better technology (and creating disruption) as riskier than throwing money at systems that no longer fully meet the business’s needs.  

Everyone likes a safe bet, but these systems may cost more than you think.

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Spotting the Sunk Cost Iceberg

Carriers often take sunk costs at face value for what they spend yearly in licensing and support for their TMS. However, at least three additional costs lurk below the surface if the platform is outdated or missing critical features.

• IT Resources: Consider the annual cost of supporting a subpar system. Patching the existing TMS with minor fixes creates technical debt. The practice steals IT resources from other projects important to the business. Minor fixes also delay an inevitable upgrade.
• Separate Systems: TMS platforms not integrated throughout the organization often create redundant work, force staff to operate across multiple systems, and create data silos that hinder decision-making. The challenges produce costly inefficiencies across the company.
• Manual Tasks and Workarounds: Traditional TMSs typically create manual work for staff, from planning loads to dispatching drivers and issuing customer updates. The problems may extend to the cab and back office, affecting on-time service, prompting driver turnover, and delaying billing. Staff also develop workarounds when a TMS does not meet the operation's needs. A research study found that technology workarounds can add as much as 10 hours to each employee’s workweek.

Investing in a new TMS comes with a huge price tag. The sunk cost iceberg shows that maintaining the status quo does too. Is there another choice?

A Third TMS Option: Integrate and Automate

Carriers no longer need to “rip and replace” their existing TMS to implement something better. Instead, they can “integrate and automate” by adding a middleware solution with access to pre-built software components they can be customized as your own. This option expands your current system's capabilities with new features by integrating with other platforms and add on new capabilities.

Fleets benefit from keeping a system they know while gaining enhanced capacity to support evolving needs. The outcome is more efficient and intelligent functionality. No huge expense. No downtime. No major business disruptions.

Investing in a SaaS-based middleware and development platform, rather than a new TMS, delivers key benefits for any cost-conscious carrier:

• Extending the TMS lifespan – Adding new integrations and capabilities to an existing TMS makes consolidating separate systems into one platform easy. The facelift also creates new opportunities to eliminate manual tasks. The system can better support the fleet's needs while scaling as the business grows.
• Preserving capital – Cash flow is critical, especially in a down market. Investing in a SaaS-based platform of this kind costs a fraction of what a new TMS does. Carriers retain the ability to invest their capital elsewhere to advance the business.
• Saving time – Fleets wanting to develop an integration with another system often must enter the TMS provider’s lengthy queue. Using a middleware solution lets carriers skip the line to manage integrations directly. The fleet can capitalize on real-time information sharing and advanced system capabilities much quicker.
• Creating flexibility and customizations – SaaS-based solutions can make one-size-fits-all TMS platforms 100% customizable. By joining the TMS, telematics devices, and trading partner systems with the ability to add and customize new components, fleets can gain end-to-end visibility and control their technology strategies. They can automate repetitive communications populated with real-time information, connect TMS tasks with driver app features, or develop load-specific workflows. The possibilities become endless.

The most advanced (and expensive) TMS platforms boast about these features. Investing in a SaaS-based middleware and development platform for your TMS creates possibilities to save money and generate higher returns on your capital.

 
Transform Your TMS with Tranztec

Tranztec Extend helps any TMS go further. The SaaS-based platform combines extensive pre-built integrations with cutting-edge, user-friendly applications that can be easily customized for adding new functionality to prepare your business for the distance. Tranztec brings innovation without reinvention. Get your existing TMS up to speed and ready for the long haul with Extend.