Transportation intermediaries allow shippers to move cargo without in-house logistics employees, rolling stock, an extensive network of intermodal service providers or the associated overhead. These transportation intermediaries are called "freight brokers," "brokers," "3PLs" or "property brokers."
Good freight brokers professionally arrange for the movement of goods by rail, motor, air and ocean carriers. Besides helping to move goods efficiently, they will also handle cargo claims, obtain specialized equipment, carry significant automobile and cargo liability insurance, use dependable carriers, track delivery in real-time, and possess mode, lane and carrier expertise. Conversely, bad freight brokers expose a shipper to significant liability, risk the double payment of freight charges, reduce on-time delivery rates, and harm reputations. Accordingly, shippers must carefully screen and select their freight brokers.
Battling Basement Brokers
Regulation has shaped the landscape of the freight brokerage industry over the last three decades. By way of background, the Motor Carrier Act of 1980 reduced the onerous licensing requirements for freight brokers. Its relatively simple licensure process resulted in thousands of new brokerages. Licenses were provided to anyone who could pay a minimal filing fee, post a $10,000 surety bond with the Federal Motor Carrier Safety Administration, appoint an agent to receive service of process, and prove that they were "fit, willing and able" to provide transportation services to the general public.
Thus, the number of brokerages increased dramatically. Brokers could obtain a license and solicit shippers for freight with a home office, no formal training and minimal capital. While some "basement brokers" were successful, many financially-unsound brokers could not pay carrier charges.
Regulations designed to address these problems are changing the industry. Congress increased brokerages' licensing requirements in 2012 with the Moving Ahead for Progress in the 21st Century Act. This act will require, by October 1, 2013, every broker to post a $75,000 surety bond and, if a broker defaults on payments to carriers, the carriers will be able to file a claim against the surety, recover from a much larger bond, and increase their chance to be paid in full. The increased costs of compliance and licensing have disadvantaged smaller brokers.
Conversely, larger brokers are gaining market share by reducing transportation costs through scale, offering more intermodal options, insulating shippers from liability, and specializing in niche markets.
Reducing Transportation Costs
Shippers can reduce their costs significantly by outsourcing to freight brokers. According to Sean Dwyer, an investment banker with EVE Partners, an investment bank focused on transportation and logistics, outsourcing to freight brokers can reduce total transportation costs, offer more responsive customer service and increase visibility and efficiency within the supply chain. Dwyer notes that "shippers are seeing outsourcing as an opportunity to focus on their core competencies.
"By eliminating in-house transportation divisions, shippers are able to focus more on their core services which in turn promotes profitability and efficiency within their organization," he says.
Thus, shippers can turn fixed costs (i.e., paying employee salaries regardless of when freight is transported) into variable costs (i.e., paying a freight broker only when freight is transported). In addition to having economic reasons for outsourcing, shippers are increasingly relying on freight brokers for expertise on intermodal transportation.
Profiting from Intermodal Transportation
Freight brokers can help shippers reap the benefits of intermodal transportation. Intermodal is the fastest-growing segment of domestic transportation, partly because it avoids the pitfalls of trucking. Regulation of the trucking industry has reduced hours of service. Fuel costs have risen. Driver turnover affects profitability and reliability. Truckload capacity has diminished. Intermodal transportation can minimize these risks.
Specialist freight brokers can enhance the rewards of intermodal transportation. Some freight brokers, such as Indiana-based IDS Transportation Services, move 70% of their freight intermodally.
"There are numerous advantages to working with a broker focused on intermodal," explains Rick LaGore, IDS Transportation Services' executive vice president. "IDS is dedicated to the intermodal market, offers fixed fees, interfaces with EDI, and maintains connections with senior management for all Class I railroads. A shipper that wants to transport intermodal freight on their own will need to develop a relationship with CSX, Union Pacific, Norfolk Southern, and it is hard to get tied into all Class I railroads in some form or fashion."
Intermodal transportation also yields more on-time deliveries, fewer carrier detention charges and fewer late delivery penalties. As LaGore explains, "You can drop a box within 100 miles from most points of delivery. Driving 100 miles to deliver freight gives you flexibility to work within a time slot and make a delivery window, as opposed to trying to work within a time slot while you drive cross countryand are exposed to numerous variables that could cause delays."
Despite the advantages offered by intermodal, some deliveries cannot be made by rail. Accordingly, IDS Transportation accommodates shippers by offering both truckload and intermodal service, which reflects a growing national trend by freight brokers to add service verticals for value.
Freight brokers with service verticals and complimentary modes of transportation offer shippers a single source provider for transportation. As Dwyer notes, "The broker's goal is to touch or manage as much of a customer's freight spend as possible. Thus, having multiple lines or modes of transportation offers the ability to deepen the customer relationship and drives value through customer stickiness."
However, integrating multiple service lines poses IT challenges for brokers that want to provide intermodal options to shippers. Tom Heine, CEO of Aljex Software, a transportation management software company, notes the inherent difficulties in integrating software for a new service vertical because "no one software system can be great at everything," he says. "If you are moving air freight you need fields for dimensions of every piece and dimensional weight, and if you are moving freight by rail you need fields for container and ramps. Brokerage software has fields for carrier insurance, operating authority and names of dispatchers, while trucking companies need to track driver qualifications, equipment and escrow accounts."
In the past, brokers used different software programs for different intermodal delivery segments. Using multiple programs caused interface issues and prevented shippers from tracking their deliveries in real-time. To solve this issue, Aljex developed software that changes screens and fields in correlation with the mode of transportation used by the broker. Brokers using this bespoke software can provide better intermodal service to shippers, who in turn can track their loads from one service provider to the next.
While intermodal options reduce transportation costs, using several unaffiliated service providers to transport freight increases the likelihood of an accident or cargo claim. Thus, hiring a broker that carries significant insurance coverage becomes increasingly important.
Insulation from Liability
Good freight brokers can also insulate shippers from liability. Accidents and cargo loss invariably occur. In the wake of catastrophic accidents, plaintiffs' lawyers often "sue the world" and typically join brokers and shippers as parties to any litigation filed against the carrier that caused the accident.
Grant Goldsmith, vice-president of Avalon Risk Management, notes that "modern shippers are looking not only for business advantages when hiring a freight broker, but also for additional risk management value and insurance protection. Ideally, a freight broker will have solid insurance coverage that is not "following form," that adds another layer of protection for the shipper in case the insurance provided by the actual carrier is insufficient or non-responsive. This scenario happens more than most would think and claims are often complex."
Therefore, a freight broker's insurance coverage can add value for shippers. It can facilitate the quick payment of cargo claims. It provides another layer of insurance, in addition to the carriers' policy, to insulate a shipper from claims. In addition to adding value with risk management practices and insurance protection, some brokers also offer specialized expertise to shippers.
The goal of every freight broker is to forge a lasting partnership with a shipper. Some brokers are successful in forging partnerships with shippers by offering specialized services that target a certain market.
For example, Mississippi-based Eagle Transportation, specializes in arranging refrigerated transportation services for products such as meat, poultry, fruit and vegetables. Matt Arender, national sales manager for Peco Foods, believes that using a freight broker with expertise in moving sensitive products has helped fuel company growth.
"Peco Foods has benefited greatly by using Eagle Transportation on our most demanding customers that have challenging requirements in regards to timely deliveries and temperature control," he says. "They have allowed us to market our products in areas of the country where our presence was minimal to non-existent in the past."
While some brokers are successful in forging partnerships with shippers by offering specialized services, other brokers create successful relationships by employing skilled executives with corporate backgrounds. For example, Kevin Nolan, president of Nolan Transportation Group, hired a managing director of The Blackstone Group who can help Nolan focus on servicing and communicating with customers. In turn, shippers benefit from listening to a successful banker's financial insight and business acumen regarding profitable distribution channels.
Ultimately, shippers that hire freight brokers can reduce transportation costs, obtain intermodal options, add risk protection and consult with experts in specialized equipment and distribution channels. By exercising some due diligence, finding the right freight broker and carefully documenting the relationship, a shipper can outsource their transportation needs and focus on their core competencies as the market trends up.
Enan Stillman is an attorney with the law firm of Graham & Penman LLP (www.grahamandpenman.com). He practices in the areas of transportation and logistics, insurance, mergers and acquisitions, debt and equity financing, fund formation and investment management, land use and general corporate law and governance. He may be contacted at (404) 842-9380.