Buyer Be Aware

July 30, 2009
A healthy relationship between shippers and non-asset third party logistics providers requires care on both sides

From Logistics Today's Digital Edition

Choose your non-asset 3PL well and you can see cost savings and better service.

If you want to start a heated discussion among logistics professionals, bring up the topic of transportation brokers. You'll get reactions from “We'll never use a broker” to “They're great; we can't live without them.”

Despite its longevity and growth as an industry, the non-asset third-party logistics provider (3PL) is still often the subject of some strongly negative opinions. While some bad actors have earned that reputation, there are a number of strong, viable, ethical players providing critical services to the logistics community. The 3PLs and carriers would also point to some bad practices on the part of shippers and, in the current economy, financial viability is on everyone's minds, shipper, carrier and 3PL alike.

Judging by the number of times the advice is repeated to treat a transportation intermediary the same way you would treat any business partner, some of the responsibility for the way the relationship plays out rests with the shipper. During sessions facilitated by the Logistics and Supply Chain Forum over the last couple of years, logistics executives joined free and open discussions of outsourcing. Veterans repeatedly advised newcomers to outsourcing not to skimp on credit checks, references and all of the other elements of due diligence they would perform before entering a contract with any business partner.

The image of “a phone, a FAX machine and a $10,000 bond” may be a little scary for the risk averse who look only at the low barriers to entry for brokers. Robert Voltmann, president and CEO of the Transportation Intermediaries Association (TIA) points out that when TIA started its voluntary $100,000 broker bond program, 38 member companies signed up. But even those member companies who have not elected to increase their bond to 10 times the legal requirement have had to pass muster with the association and agree to follow a code of professionalism. A Watchdog service and an Ethics Committee that regularly receives complaints, reviews and responds to individual cases, and provides some industry self regulation.

Voltmann provided some redacted decisions from the TIA Ethics Committee, and each one restates the requirement (since 1978) that members adhere to the TIA Code of Ethics. Though a decision of the Ethics Committee has no legal force, as a peer review with a possible consequence of exclusion from TIA membership, there are potential market consequences.

The cases Voltmann provided were each instances of carriers filing complaints against broker members. All were non-payment disputes. Often the dispute turns on offsets, claims or penalties the broker withheld and which the carrier felt were owed. But there is also a rising concern over shipper non-payment, and one of the sample cases involved a broker who withheld carrier payment because the shipper had not paid the broker. The consignee had, in fact, filed for bankruptcy, so the payment dispute quickly became very complex. Not so for the Ethics Committee. The carrier had a clear delivery receipt, and so it was the determination of the Committee that the broker owed the carrier payment for the freight charges.

Voltmann steps back to put the cash-flow question into context. Many members responding to the TIA 3PL Market Report survey are showing margins that are tracking better than their volumes. On closer examination, Voltmann says, this is because the brokers are paying carriers faster and taking advantage of discounts. Non-asset 3PLs are also much more variable-cost businesses and they've been able to shed some cost as well. The brokers have become the industry's bankers, says Voltmann. He explains that past practice had been for the shipper to pay the carrier, and the carrier would pay the broker commission. But the 3PLs learned to take advantage of their free cash flow and the practice shifted so that the shipper pays the broker and the broker pays the carrier.

With shippers under pressure to reduce costs and delay payments, they aren't qualifying for those early-payment discounts. But the time between the broker paying the carrier and, in turn, receiving payment from the shipper is getting longer as many shippers move from 30-day to 45- and even 60-day payment cycles. The weak economy has exacerbated the situation, creating more risk for all of the parties along the supply chain. As important as it is for shippers to vet their 3PLs, the transportation intermediaries have found it is also important for them to examine the financial health of shippers. And everyone is watching what is happening with carriers.

It started during the last recession, says Voltmann, that the intermediaries began looking for a way to evaluate the economic health of shippers. While credit reports might offer a broad view of the shipper company's financial health and payment history, Voltmann notes this often only indicates how the company pays its largest vendors. TIA began working with the Truckload Carriers Association, Transcredit and the National Association of Credit Managers to develop more transportation-specific credit reporting tools. At the same time, it developed the T-Check system for brokers to advance payments to carriers/drivers.

Brokers may have a legal requirement to carry a $10,000 bond, Voltmann says, but there is no shipper bond. As the Ethics Committee examples show, if a shipper doesn't pay the broker, that doesn't negate the broker's responsibility to pay the carrier. And since the carrier has already been paid, it is the broker who is out the cash.

In this context, TIA has been working to develop a credit scoring system for shippers. With an objective system for scoring shipper performance, the intermediaries should be able to identify problems and reduce some of their financial risk. There is a longer-term consequence, however. As the economy recovers and the volume/capacity equation shifts, brokers and carriers could be in a position to be more selective about which shippers they serve.

As freight volumes dropped during the current economic recession, carrier bankruptcies increased, and carriers who were still operating reduced capacity. Much of the rolling stock that was taken out of service wasn't just parked awaiting a rebound in freight volumes. As the downturn gained momentum, the US dollar lost value on the world exchanges, and many of those trucks were sold to overseas buyers. Carriers will be slow to add capacity as volumes return, say Voltmann and other industry observers. One reason is this sell off of assets.

Another factor that will affect capacity as volumes return is the new emissions standards that will be in effect. This tends to add cost to the purchase price of tractors and reduce efficiency. Carriers made pre-buys before the last change in emissions standards. They accelerated replacement cycles and purchased equipment before they would be required to conform to the higher standards. That's not the case in the current cycle.

Freight volumes may have stabilized at a low level, but there are few indications of a significant or rapid rebound, so demand for additional capacity will likely increase slowly. Credit may also be tighter, making it difficult for carriers to add capacity and also making it tougher for new carriers to enter the market.

On the volume front, Voltmann and others have observed the seasonal peak, which typically occurs ahead of the holiday retail season, has all but disappeared. Those volumes, such as they are, are spread out, making it even more difficult to forecast or gauge the degree of recovery.

On the positive side, the Institute of Supply Management has been showing steady improvement in new orders since January. But, while its index is pointing in the right direction, the number was below the threshold 50, which indicates growth. It stood at 42.8 in May and 44.8 in June, which is above the overall economic breakeven point of 41.2. To put that into context, the new orders number bottomed out in December 2008 at 23.1.

Despite this and some other positive indicators, consumer confidence, as reported by the Conference Board's Consumer Confidence Survey, fell from 54.8 in May to 49.3 in June, possibly reflecting a changing mood in the wake of higher unemployment figures.

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