Commentary: Where’s “my” freight?

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.