David Roush is president of KSM Transport Advisors, LLC (KSMTA), where his focus includes clients’ freight networks, financial management, operational metrics, and optimization strategies. He also has experience in providing merger and acquisition (M&A) services to his clients.
What a difference a few months makes. The highly anticipated truckload capacity crisis and the ensuing truckload rate party lasted from late 2017 through late 2018. Beginning in early 2019 – surprise – the rate party was over. It feels like carriers have quickly gone from the best party since deregulation in 1980 to potentially the biggest hangover ever!
My firm has recently noticed a disturbing trend – freight that a shipper and carrier have reciprocally “committed” to tender and haul is now all or partially moving to the spot market channel. I see this empirically from analysis of clients’ freight networks, and anecdotally from visiting and talking to carriers. Why is this happening, what are the ramifications and is there a solution?
What is happening?
A well-known national shipper approached one of our mid-market truckload clients in January. This shipper was worried about capacity and wanted our client to commit to a specific number of loads per week on a specific lane. The carrier positioned spot trailers, secured capacity by increasing a commitment at the destination, mapped EDI, implemented service tracking metrics and trained personnel. The business worked well for our client and appeared to work well for the shipper, until last week when our client inquired why they had received no tenders as of Thursday. The shipper’s emailed response:
“The carriers that are accepting the freight are large brokers who have a lower rate, so they are receiving the tenders first and they are accepting them. Any movement on your rate to get you in a better position?”
Those few words convey a lot. This business morphed from a “commitment” and “partnership” to a transaction. It was a “commitment” when the shipper was concerned about 2019 capacity. The same business turned transactional when the supply and demand relationship changed and provided an economic incentive for the shipper to utilize the spot market.
The situation above is not isolated or unusual, and unfortunately is not surprising to industry veterans. My firm compared the business that our clients transacted with a publicly traded broker from October 2018 to April 2019; loads hauled by our clients for that particular broker increased 43 percent while the quality of those loads declined precipitously.
Why is this happening?
Shippers need trucks to move their freight from point A to point B. Transportation for most shippers is a cost item and, as with all costs, the objective is to minimize while maintaining certain operating, risk and compliance issues. It is not the brokers’ fault – they are in business to provide capacity to shippers and to provide freight to carriers. The freight belongs to the shippers, and the fragmented truckload carrier market allows them to minimize cost in most cycles.
When they need trucks, shippers talk about partnership, driver issues, reasonable scheduling, consistent freight, etc. However, when capacity is readily available, they change their tune to price, service issues and production problems. This behavior is especially heinous in this cycle because most reputable carriers have increased their cost structure by raising driver pay and investing in new equipment; the carriers are stuck with these costs. Carriers are not without blame as they bought trucks in record numbers during 2018, with the result being more capacity and downward rate pressure.
Running a compliant and profitable truckload carrier is not for the faint of heart. Hard work and attention to detail are the cornerstones of success. However, it does not stop there. The following is a partial listing of essential carrier attributes:
- Provides an enticing customer experience
- Has a culture that trains and supports driver and non-driver associates
- Utilizes a freight-tech platform to support and communicate with drivers, manage assets and compliance, provide actionable metrics, and produce accurate and timely financial reporting
- Has access to both capital expenditure funds and working capital
- Has a stomach for all kinds of risk
- Effectively uses sales and marketing skills to identify and sell opportunities and quantify and analyze results
- Works hard and pays attention to detail
Carriers that are successful at managing this complex environment are the preferred carriers of the reputable shipping industry. These shippers underwrite their carriers to make sure they meet a number of requirements, including safety and compliance, insurance, ability to provide capacity, financial stability, ability to provide drop trailers, driver quality and turnover, service, etc.
Shippers avoid their carrier underwriting responsibilities when freight is moved via the brokerage community. Typical broker underwriting of carriers is limited to operating authority, insurance and safety verification. In general, large carriers turn to brokers to fill gaps in their freight networks, while small carriers rely on brokers as their primary freight source because they do not have a sales team and do not have the ability to attract the attention of major shippers. The result for shippers is that they indirectly support the carriers with whom they would not directly engage and thereby perpetuate the overcapacity that has muted freight rates since deregulation.
Thoughts and Suggestions
There are no out-of-the-box simple answers to eliminate this cycle, but here are some suggestions that might help:
- Carriers need to hold their shippers accountable by monitoring and managing shipper commitment compliance
- Carriers should develop a Shipper of Choice rating mechanism and use that as an input when calculating freight desirability
- Carriers need to use smart math to understand their freight networks and know with certainty what freight is and is not profitable
- Shippers should develop a Carrier of Choice rating mechanism and use that as an input (even when capacity is loose and the spot market beckons) in freight allocation
Carriers and shippers need to get on the same page and support each other. Fortunately, there are shippers and carriers that currently enjoy this relationship. The long-term success of the industry depends on fair rates, driver-friendly freight, and most importantly real and binding agreements that specify freight lanes and volumes. Unfortunately, until something changes to lower the entry barriers to the industry, the invisible hand of economics will continue to favor the shippers and impede consistent and long-term carrier profitability and viability. Thus has it always been, and thus shall it ever be.
Jim L
This article is well written and accurately describes the macro economics of the state of the trucking industry. The comments that are being mentioned show specific issues that some have taken offense to but will not fix the problems on a single issue basis. David Roush has identified the best solution but getting to that solution, I am afraid, will never happen.
Lets face it, trucking has become a commodity, there are some freight payers (I like to call them Beneficial Freight Owners or BFO) that identify in having a good carrier through thick and thin is the best option but the spreadsheet function of SORT Z-A is the tool of choice when it comes to the decision makers. These decision makers usually are compensated or are graded by the money they save and in today’s market, they are saving a ton. In the example above, the carrier whose loads are being brokered out by the BFO due to cost, the carrier might even be picking them up through the broker to keep the trucks moving. Every carrier utilizes brokers to fill in the gaps and this example just shows how fluid this becomes.
The solution mentioned by David Roush is to rate the BFO and the BFO to rate the carrier – in the long run, both parties will win. Both parties need to look at the long term advantage to this kind of thinking but the reality is that most companies base their decisions off the results of the quarterly reports. Rarely does the cost analysis dive deep into the other line items which may be affected as well. Sure, the freight line may be lower but if you look closely, you may find that other line items or metrics may have increased. Think about the dock personnel that had to stay overtime to load the late carrier, or the damaged freight that may have had to be reshipped, or the customer who is freaking out because it didn’t arrive on the correct day. These line items should be considered but are almost always overlooked because they are hard to measure.
The other aspect to consider for the BFO is what they are really accomplishing. Sure they may shave off a couple points on their freight line item but the real crunch comes down to broker and the carrier. This process takes the profit out of the bottom line of the carrier and places a large portion into the profit of the freight broker. The carrier takes on a mountain of risk and has much more capital invested per freight dollar than the freight broker. As soft freight prices extend over the long term, carriers are forced to make the decisions outlined in many of the comments above which is decrease their spend on maintenance, training and in house support staff – all items that should not be cut.
I do not know if any solution is available. As long as freight is considered a line item cost at the BFO level, and a commodity that is purchased at the time it is needed, you will continue to have these ebbs and flows of freight pricing. Small pricing changes are inevitable in any market but we are reading and commenting on it this time because of the definite see-saw action between 2018 and 2019 and it is definitely painful for carriers. My final question is weather or not there will be a whip-lash effect. Will the price rebound and when? Maybe by the end of 2019 or beginning of 2020 we will see BFO’s writing in blogs about how bad carriers are for taking advantage of the lack of trucks and costing them too much money that makes their product unaffordable.
David Roush
Jim …
Thanks for your insights ….
For a peek at how this may play out, please read Craig Fuller’s excellent FreightWaves article: https://www.freightwaves.com/news/conditions-for-fleets-are-deteriorating-and-it-will-get-bloody
Eric J Emerson
Wow this commentary is desperately needed. Finally a sober disciplined identification of a profitable – reciprocal – self sustaining – safe shipper carrier relationship. I was privileged to run a TL carrier and the most important meetings were with our shipper customers that had zero tolerance for their product being on the ground, in the ditch, or in the news. It cost a lot to satisfy demands but the investment paid off — except for the dreaded soft squeeze at RFP time — we were not commoditized and had contracts with teeth. How the hell can you run a trucking company — stewards of someone else’s stuff — and not know the shipper?
David Roush
Eric …
Appreciate your insight.
Safety First. Safety Always!
Jonathon Richardson
That one guy hit it right these little shit ass company running cheap 64 cpm junk going to Bronx Harlem jersey city all that junk is what is messing up.tbings and the shit ass Indian and habeeb company’s that popped up in IL with there junk volvos those types need to go and watch how fast frieght rates turn around
Jon
Only when carriers, brokers and shippers finally embrace proven operational technology like TMS software such as AscendTMS , McLeod, Blue Jay, TMW (or ANY good TMS) to point them in the right direction and to help them manage their businesses better then things will change for the better. The “big guys” win because they leverage the best available technology and are thus much more efficient. So, the smaller guys must also leverage TMS technology if they even hope to survive – never mind prosper. Our own data shows this week in and week out.
David Roush
Jon …
Thanks for the comment.
Knowledge is indeed king and fact based discussions with the shippers are critical to any trucking company’s success. Without facts, the discussions are just anecdotal noise.
Steve
The result is unsafe equipment, improperly trained drivers, speeding, and reckless driving to get more miles in, resulting in deaths. These rates are below the average necessary to run safe. I see companies, “patching” things up instead of properly repairing. Talk to any shop, you’ll find that when rates are this cheap, companies start cutting good maintenance programs. The result are crashes like the one in CO. Unfortunately when it’s so easy to get ones authority, people without the business aqumin think if they are losing money, they just need to run more miles. Many of them are just trying to cover their payments, hoping that the rates improve before they go bankrupt. As if any major repair comes along, they are unable to repair it as they haven’t been making enough to fund their maintenance account. These rates create unsafe work environment. There should be some sort of business test required to get ones authority. At least be able to demonstrate your cost per mile, and present a maintenance plan.
neil balfour
I agree with you on most of the points you make! I don’t think that getting and maintaining your own authority is all that easy. I believe the big companies that lease owner/operators who simply sign on the dotted line are the problem. Anyone with a cdl can walk into a mega carrier and sign a lease purchase agreement and think they own a trucking company when in reality they just own most of the responsibility and will probably make less than a company driver before they go broke and the company that they leased to takes the truck back and hires another guy who thinks he owns his own truck/business to drive the same truck and round and round it goes.
Francis
Big boys got the controller??? wait when Uber and Amazon got the full blast the got money to clean up??? you member what goes up must come down???? ??????? ???
Martin
How can we survive as an industry when,in LTL, we leave 30 minutes free at the shippers and 30 minutes free to the consignee and charge less than our cost at both place to move the freights.
In full load, we all have the technologie aboard to bill from minute 1 till full or empty . if we begin to charge
from minutes 1 our time at the dock. what took 2 hours today and more are going to be lot less if every minutes count.
translate via Google.
ziff
It would be great if it happened but the sad reality is detention is still mostly at the shipper or receivers discretion regardless of what the carrier thinks your billing for an add on. Most brokers have started adding unfair detention terms to rate confirmations and often not agreeing to those terms means no load. seen terms as egregious as 4 hours free at each stop and $ 25 an hour after with max $200 detention for trip on a 4 stop load. Rate sucked on top of that sadly ended up doing it being a Company Driver with no choice still told dispatch they where morons for taking it.
David Roush
Martin and Ziff …
Thanks for your comments. My suggestion is that you join the FreightWaves War on Detention: https://www.freightwaves.com/war-on-detention
Atul Gupta
Thanks for the well written and informative article.
You are suggesting this change becoming more of an industry rule. Is there any stats/data to support this industry shift pointing to a fundamental shift? Or is it just symptoms of a market shift from a sellers market to buyers market.
To support the argument, I do see there are lot more companies offering spot market and marketplace solutions than before.
Dhoodaan
Indians need to stop hauling cheap freights. You guys are driving market crazy!
Steve Webster
It is not just the Indian s that haul cheaper freight. Many companies that committed to providing so many loads in May of 2018 are now one year going to the spot market or a lower cost carrier.
David Roush
Atul…
Thanks for the comment. This is a market shift as you point out. That being said this cycle has repeated itself since 1980.