3PL Perspectives
David Letourneau | Carggo
Way back in 2016, I ran operations for a small freight brokerage. I say ‘way back’ because 2016 seems like 30 years ago rather than three, doesn’t it? If you’re reading this article, you’re probably well aware of the day-to-day or even load-by-load nature of the transportation business.
We did our best to grow the business (and did). We built a dynamic website and installed a cloud-based TMS. We even evaluated some new digital tools that just hit the market. But the reality was that the majority of our waking hours were spent interacting with customers and carriers in one way or another. Time passes quickly when you’re covering freight!
Digital Solutions & Threats
Meanwhile, heavy hitters – armed with truckloads of cash and teams of computer scientists – worked to drastically change the logistics industry. Progress was slow at first, but has since gained significant momentum. Looking back, it is astounding how far the industry has come in such a short amount of time.
Would you have ever thought that the transportation industry would boast multiple $1B+ unicorns? Did you think you’d be reading about ELD companies in The Wall Street Journal? Who would have imagined that OCR, NLP, ML or AI would be mentioned in transportation publications!?1 Billions of venture dollars – previously earmarked for the next “Uber for Dogs” – was invested in transportation, and the impact on brokerages was meaningful.
Most visible was the rise of the “digital broker.” It is estimated that the leading two companies now account for $1.3 billion in annual revenue or >1% of the total market.2 Other technology solutions popped up including pricing engines, tracking platforms, payment processors, new TMS systems, load boards and document collection tools. In parallel, although with much less fanfare, major incumbents developed their own proprietary platforms.
In a very short amount of time, the transportation world virtually exploded with digital solutions, potential threats and an array of opportunities to improve one’s operations.
Margins Compressing
At the same time, the amount of invested capital no doubt contributed to the compression of freight brokerage margins. We noticed it at our company and, unfortunately, this is a trend that industry expects to continue. According to a recent Sonar Report, the 15.7% average brokerage margin that exists today is forecast to drop to 10.6% over the next 10 years.3
Without doing the math, it’s clear that most brokerages can’t afford a 5% drop in gross margin!
An Expanding Market
The good news is that the brokerage market is expected to continue growing. As a reference, in 2000 about 4% of all truckloads were brokered.4 In 2017 brokerages handled 19% of all loads. The most recent load origination surveys conducted by FreightWaves and CarrierLists showed that in mid-2018 brokers increased their market share to 23% of all loads. (FreightWaves)5
So, the market is growing. Margins are shrinking. And technology is everywhere. Where do we go from here?
Operating in 2019 and Beyond
I’ve since moved on from operating a brokerage. My new role as Director of Partnerships at Carggo allows me to speak with forward-looking freight entrepreneurs from all over the country. I try to learn as much as possible about their operations – and almost always get a few lessons along the way. While each organization is different, there are some common themes that emerged from these conversations.
Looking back, I would offer a few pieces of advice to my 2016 self:
The Good Customer Comes First
This is a slight, but important adjustment to the oldest axiom in the book. While it would be great to service all types of customers (and freight), successful organizations are careful about who they work with. Identify and evaluate the decision makers within your client listing. Do they value service or are they instead driven only by the bottom line?
While competition is natural and healthy, a shipper-broker relationship should be sustainable. Is your margin less than ideal? Is your customer delinquent in paying bills? Cancelling freight on a regular basis? If so, it’s worth evaluating whether it is a mutually beneficial relationship. Sometimes, it’s best to fire a bad customer.
Stay in Your Lane(s)
In a similar vein, great operators know that they can’t be everything to everyone. Bid on the freight, equipment types and lanes where you are strongest and can provide the best service. It’s that simple.
Let Others Be Loss Leaders
Believe it or not, and despite what you might read in the news, there is also value in operating a profitable business! Saying things like, “I want to make sure this relationship is successful in the long run,” adds credibility to your business. While some brokerages have been built on the practice of “loss leading,” it isn’t sustainable unless you are incredibly large and well-financed.
SO, THE MARKET IS GROWING. MARGINS ARE SHRINKING. AND TECHNOLOGY IS EVERYWHERE. WHERE DO WE GO FROM HERE?
Embrace Challenging Projects
Relish opportunities to work on unique or challenging projects. After all, sourcing a dry-van on the open market isn’t what it used to be – and you probably won’t get paid for doing it. Companies that operate with above-normal margins typically have more specialized work and in my opinion are far less likely to be disrupted by competitors.
I like to use the travel industry as an analogy. Travel has been disrupted beyond recognition by digital technology. Did you book your last flight with a travel agency? “Run-of-the-mill” travel agencies no longer exist, but more focused agencies continue to thrive as healthy businesses.
While it’s true that more specialized opportunities aren’t without risk, they are worth exploring. Feel free to reach out to the industry for help. In my experience, there are plenty of individuals who are willing to collaborate and offer advice.
Find Technology that Improves Your Variable Cost Ratio
Notice that I didn’t write “find a new TMS.” It’s important to look at technology holistically to evaluate if it actually improves your bottom line. A good measure of this is your variable cost ratio (variable costs as a percentage of net sales). In an industry as cyclical as transportation, the idea is to increase variable costs (relative to fixed costs) as much as possible. After all, variable costs are variable. They are only incurred if freight is actually moved.
In practical terms, what does this mean?
As a simple exercise, try dividing the total shipments you processed last year by the overall fixed costs at your business. Use this “unit cost” as a basis for evaluating potential partners and tools. This way, you can quantify each new tech opportunity in real dollars. Does it reduce the unit cost of each shipment? Great!
If not, are you willing to pay the premium? By treating each opportunity as an investment, with quantifiable costs and benefits, you can take the guesswork out of your technology selection.
On the systems side, it’s worth evaluating how flexible your platform is. Does your TMS easily integrate with other solutions? Is that company nimble enough to let you work easily with a new vendor? Whether it is tracking, fulfillment partners, document collections, outsourcing vendors or payment processors, the most important thing is to make sure that you are not encumbered by your existing system.
A good technology strategy should allow you to take advantage of opportunities to shift toward variable costs. This way, your company can provide great service when it’s busy and painlessly scale back during slower times.
Back to the Future
The changes to our industry have come, in relative terms, in the blink of an eye. The good news is that the brokerage sector is poised to increase its market share during this digital revolution, and the challenge will be how to protect margins from fierce competition.
It would be great to jump into a DeLorean freighter, zip all the way back to 2016 and give myself the operational advice contained in this article.
However, there is still plenty of time ‘back’ here in 2019 for all of us to thrive in this new market. It just takes a clear view of the playing field, some focused operational decisions and the right technology.
David Letourneau is Director of Partnerships at Carggo a digital freight fulfillment platform, located in Naperville, IL. He may be reached at [email protected] or 347-865-1693.
References
1 Optical Character Recognition, Natural Language Processing, Machine Learning, Artificial Intelligence
2 FreightWaves, https://www.freightwaves.com/news/technology/digital-freight-brokerage-growth-to-accelerate-sharply-over-next-five-years
3 Freightwaves, John Paul Hampstead, Goldman Sachs: digital disruptors will compress brokerage margins
4 Matthew Reustle, Goldman Sachs, Commoditizing Logistics: Assessing ‘Disruptive’ Links in the Supply Chain
5 Freightwaves, John Paul Hampstead, Goldman Sachs: digital disruptors will compress brokerage margins
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