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The Value of a Freight Transportation Broker

Greg Sanders – Vice President – Schneider Logistics

The simple definition of a freight transportation broker is an entity that arranges for the movement of freight between a shipper and a carrier.  A broker makes money on the spread between what they charge the shipper minus what they pay the carrier to move the goods.  For example, a broker may charge a shipper $1,400 for a full truckload movement from Portland to Los Angeles, and hire a carrier to move the freight for $1,200.  The difference, in this case, is $200 – a fee a broker earns for his services.  This fee is defined as the Gross Margin, and most brokers operate their business with 13-15% gross margins.  But what value does a broker provide for the 13-15% gross margins?  Let me explain with the aid of chart below:

The market price is established where the supply and demand lines intersect.  So, why would a shipper pay a premium to a broker to move freight above the market equilibrium price?  And, for that matter, why would a carrier use a broker to haul freight below the market equilibrium price?  The reason has to do with the cost structures of both shippers and carriers.  Large shippers often have transportation departments and infrastructure to seek the market equilibrium price.  Large carriers often have national sales and marketing teams to enable them to establish direct shipper relationships, therefore ensuring prices that more reflect market equilibrium.  Where the broker really adds value to the market is with the small to mid-size shippers, and the small to mid-size carriers who do not have the cost infrastructure built out to seek the market equilibrium price.  Rather than build out logistics departments and national sales teams, shippers and carriers in the small to mid-size market segments rely on brokers to help bring efficiencies to their operations. 

So, since brokers bring more efficiencies to the small to mid-size market segments, they must play a rather minor role in the broader market, right?  Just the opposite!  Let me explain by introducing the marketing concept of “the long tail” in the chart below:

The “long tail” is the concept of selling less of more.  I will use an example to illustrate this concept.  Wal-mart is in the music retail business.  They have enough shelf space in their music section to carry about 3000 CDs.  What type of CDs do you think they carry?  Like any large retailer, they carry the hits!  They look for inventory turn, and the only way to do this is to sell what is hot right now.  So, an older guy like me who is looking for that favorite band he used to listen to in high school, may have a hard time finding it at Wal-mart.  But, thanks to technology, and the longtail concept, it is very easy for me to purchase my outdated music!  Business models such as Rhapsody and iTunes have figured out there is a market for this music – as long as you can efficiently match up the buyer with the seller.  So, instead of carrying 3000 hits, Rhapsody can carry millions of hits because of technology and the ability to electronically store and transmit music in data files.  Rhapsody employs the concept of selling less of more to the longtail market (the long tail created by carrying hits that sell less, but they still continue to sell).

So, what does the longtail concept have to do with freight brokerage?  Let me explain by looking further into the longtail chart above.  First, 85% of the Gross Domestic Product is created by small business.  As logistics professionals, we often think that large shippers and carriers dominate the freight transportation landscape.  This is simply not true.  Small to mid-size shippers and carriers dominate this space.  However, it is true that the “big” like to deal with the “big” – so large shippers and carriers often have very strong partnerships.  Where brokers add great value to marketplace is by efficiently matching up players in the longtail market space.  Great brokers have invested millions of dollars into technology that allows them to match shippers with carriers in an efficient manner.  Shippers get access to carriers that they have no visibility to, and carriers get access to shippers that they have no visibility to – and as such, a more efficient market is created.  As technology continues to improve, brokers will only bring more value in this space!

THINKING GREEN, COST EFFICIENTLY

EXPANDED EMISSIONS MODEL ENCOURAGES
“GREEN” DECISION MAKING FOR SHIPPERS

Many retailers and manufacturers assume that implementing environmentally-sensitive practices will strike a blow to their bottom line. Fortunately, that’s not the case. Shippers now can offset an environmental impact and still meet their cost, service, and capacity goals by understanding the environmental effects of their shipping activities and measuring their environmental footprint.

Greenhouse gases and the environment...

Greenhouse gases (GHGs), such as carbon dioxide (CO2) and nitrous oxide, are emitted from many sources around the globe. What’s astonishing is the percentage of some of the most prevalent greenhouse gases attributed to fossil fuel combustion. For example, in 2005, 94 percent of CO2 emissions could be traced back to fossil fuel combustion. Of this 94 percent, 33 percent of CO2 emissions could be attributed to combustion associated with the transportation sector¹.

Greenhouse gases have been strongly linked to what many refer to as “global warming.” As greenhouse gases are emitted into the atmosphere, they create a blanket between the Earth’s surface and the Sun. As solar radiation passes through the Earth’s atmosphere it warms the Earth’s surface. Naturally, a portion of this solar energy bounces off of the Earth’s surface and attempts to escape into space only to be trapped by the blanket of greenhouse gases.

“Global temperatures increased by approximately one degree Fahrenheit over the course of the last century, and will likely rise even more rapidly in coming decades. Scientists predict that unless global warming emissions are reduced, average U.S. temperatures could rise another three- to nine- degrees by the end of the century – with far reaching effects”².

Effects of global warming on the movement of goods...

With a rise in temperatures, the global society could begin to suffer consequences such as more frequent deadly heat waves, droughts and wildfires, flooding, and powerful hurricanes. There are obvious health concerns associated with these consequences of global warming, but the less obvious connections are between global warming and goods movement activities.

¹ United States Environmental Protection Agency. The Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2005. ES 6-8. 30 July 2007 http://www.epa.gov/climatechange/emissions/downloads06/07ES.pdf.

² “The Consequences of Global Warming.” 09 Jan. 2006. Natural Resources Defense Council. 22 May 2006 http://www.nrdc.org.

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Author:  Don Thornton, Vice President, Freight Business Services, TransCore Inc.

After a couple of tough years of rising costs and shrinking business, truckload carriers appear finally to be getting a break! While cost pressures haven't let up, the number of tractors and trailers hauling loads hasn't increased enough to keep up with the growth in freight. American Trucking Associations' Truck Tonnage Index is hovering near all-time highs as manufacturing ramps up and the economy picks up steam. This index looks at all freight hauled and is based on surveys of ATA member carriers. To get a better picture of the current imbalance between available freight and equipment, it's instructive to look at the exception freight market. More freight enters this market when third-party logistics providers and brokers cannot manage loads through existing contractual relationships and when carriers get more freight orders than they can handle with the equipment they have. Through our DAT freight-matching network, TransCore monitors total postings of exception loads as well as the total amount of equipment available to take them. We also monitor searching trends by carriers to understand markets where carriers need shipments. Recent data illustrate how much of an imbalance we are in now and suggest that we may not climb out of it any time soon, even with the recent spike in truck and trailer sales. In April, total searches for trucks on the DAT network - where 3PLs and brokers are looking for equipment to haul specific loads - were up 129% against the same month last year, while truck postings were down 26%. That means the demand for trucks far outstripped the supply of them; load volume is also skyrocketing. The total number of load postings on our network in April was up 93% against the same month in 2003. Such a huge jump indicates renewed economic activity and it also tells us that 3PLs and brokers are scrambling to find equipment. Looking at load-to-truck ratios confirms this. Each year, the ratio normally spikes toward the end of the year as manufacturers and retailers scramble to fulfill orders generated by Christmas sales. Then it drops in January and February and begins climbing again in the spring. This January, the ratio was just under three loads for every truck, the highest it has ever been in any January since 1996. In April, it skyrocketed to more than 7 to 1, another record high. Before this year, the highest ratio for this time of year was in 2000 when the economy was steaming along. Even then, the ratio was around 2 to 1. The big difference back then was higher equipment availability. The load-to-truck ratio trends also indicate that seasonal freight swings have commenced early. The normal March-May seasonal peak came early and trucks were scarce this spring. Based on current trends, we believe the usual March-May freight peak is going to be higher than ever. Federal tax cuts have put extra cash into the hands of consumers and there will be a flurry of shipping in May and June to restock after people spend their tax refunds. Also adding to equipment demand will be citrus and other early agricultural crops that start getting harvested in April and May. Florida, California and Mexico will all be tough places to find trucks when these crops come on stream. The high load-to-truck ratios that occurred last fall will look mild by comparison. We see the ratios easily topping the 5-to-1 levels they reached in September and October last year. Brokers and shippers should be screaming for trucks to meet delivery commitments. All this means that carriers will be in the driver's seat when it comes to choosing the best freight and setting desired rates. To take advantage of this opportunity to profit, carriers should stay focused on keeping a solid team of drivers, trucks that are well maintained and dispatchers and systems that will efficiently support them. There will be ample opportunity to pick up backhauls on difficult lanes by posting trucks on load-matching services. Carriers should be negotiating to maximize their rates per mile, minimize deadhead miles and improve payment terms with shippers and brokers. The biggest challenge for carriers will continue to be drivers. The economic slowdown over the past few years masked a fundamental driver shortage. The recent construction boom has drawn away many potential new drivers; and the recent changes to driver hours-of-service regulations limit daily miles driven and, therefore, driver pay, thereby contributing to turnover and further shortages. However, in an attempt to compensate drivers, many of the large carriers are passing on stop charges and detention fees to their drivers. Carriers that can manage their driver workforce effectively will be the most successful. There's certainly no shortage in demand for their services. TransCore, of Hummelstown, Pa., provides technological services and products, including freight matching, asset tracking and communications. This story appeared in the June 14 print edition of Transport Topics.

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Author: Logisticstoday.com...Port Authority of New York Prepares for 8,000 TEU Ships

An historic $1.6 billion project to deepen channels at the Port of New York and New Jersey will allow the ports to handle 8,000-TEU ships. The Port Authority of New York and New Jersey finalized an agreement that outlines funding commitments and a timeline to deepen the ports' channel to 50 feet, an action it says will improve navigational safety and allow the port to accommodate the next generation of cargo vessels. The channel deepening is scheduled for completion in 2014. "In 2003, we made a record level of investments in capital improvements in our port," said New Jersey Governor James E. McGreevey. "The Port of New York and New Jersey plays a crucial role in New York State's economy, brining in more than $100 billion worth of cargo last year," added New York Governor George E. Pataki. This is from logisticstoday.com

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