Reduction in force: Shippers rationalize their universe of 3PL providers
In an effort to avoid high spot market prices, some shippers are bypassing their 3PLs and negotiating directly with truck owners for capacity. Will that come back to haunt them?
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
Like everyone else, truck shippers are sweltering through the dog days of summer. Yet as they formulate their 2016 transportation budgets, their strategies may be influenced by what occurred 20 months ago and in the dead of winter.
During a four-month stretch between December 2013 and early March 2014, heavy snow and ice storms paralyzed highways and kept large volumes of truck capacity off the roads. Desperate shippers turned in droves to freight brokers and third-party logistics service providers (3PLs) to find space pretty much at any cost. That meant a disproportionate reliance on the non-contract or "spot" market, where rates are substantially higher than contracted pricing. Several estimates suggested that 40 percent of all truck activity in the quarter went through the spot market; normally, about 15 to 20 percent of truck movements are handled there.
Intermediaries able to fully flex their carrier networks helped shippers get their goods to market. But it came at a high price: Spot rates for dry van trailer services, the most common type of trailer used, hit an all-time high of $2.08 a mile in March 2014, according to DAT Solutions, a research consultancy. Spot van rates stayed in that elevated range into the summer.
For many logistics and procurement executives, 2014 turned into a year of budget busting, with some shippers spending about twice as much on brokerage services as they would normally do. In most cases, top brass tolerated the cost overruns due to the extraordinary wintertime circumstances. Yet CEOs would not be happy with any repeat performances, and they have put their logistics staffs on notice that steps need to be taken to secure appropriate shipping capacity at reasonable rates.
One step has been for shippers to negotiate for capacity directly with the asset owners, thus bypassing the 3PLs and by definition, reducing their sphere of influence. Thomas S. Albrecht, managing director, transportation equity research at investment firm BB&T Capital Markets, said in a recent interview that of about 100 large shippers he spoke with in the past several months, between one-half and three-fourths have scaled back their broker networks or are looking to do so, and are directly engaging motor carriers to handle more of their freight. Shippers are taking that route because they want to reduce their exposure to volatile spot markets and increase service consistency, which they believe comes with having direct access to asset-based truckers who can provide assured capacity, Albrecht said.
Whether it is due to changes in shippers' strategy or better weather in the first quarter of 2015 that allowed contract capacity to keep rolling, spot market demand has been under pressure virtually all year. Spot loads in June were down 21 percent from June 2014 levels, though they were up 5.7 percent sequentially, according to DAT. June's load-to-truck ratios, which measure the number of loads posted on DAT's load boards for every truck posting, were down year over year by 44 percent for van, 51 percent for refrigerated, and 49 percent for flatbed transport, the consultancy said. Spot rates were down 10 percent for van, and in the high single-digits for the other two equipment types, DAT added.
DRACONIAN CUTS
At some shipper companies, the broker cutbacks are resulting in reductions of just a few providers. Other cuts, however, are more draconian. For example, on March 1, a large beverage shipper completed a revamp of its 3PL/broker network that reduced its provider universe to 25 from 130, according to Albrecht, who declined to identify the company. In addition, a big food shipper that had used as many as 90 brokers has a mandate to shrink the count to 36, according to an executive at the company, who spoke on condition of anonymity and asked that the organization not be identified.
Because their products have seasonal spikes, food and beverage shippers typically use more brokers than shippers in other industries so they can accommodate the potential freight overflows during the busy cycles.
The food shipper has so far narrowed its 3PL/broker count to 40, according to the executive. It allocates about 20 percent of its volume and spending to brokers, down from around 29 percent for the past five to 10 years, the executive said. Meanwhile, the shipper is spending more time working directly with carriers, the executive said.
The decision to narrow its broker universe has been in the works for some time, according to the executive. The company has long sought to reduce, if not eliminate, the practice of supporting carrier and broker markups on the same transaction ("margin on a margin," the executive called it). It had also become dissatisfied with geographic overlaps, inconsistent service, and incidents of price gouging that came with having so many brokers. These shortcomings became especially evident during the 2013-14 winter cycle, the executive said.
The executive emphasized that the rationalization of brokers is a long-term strategy that would unlikely be altered even if truck capacity tightens further due to a shortage of equipment and drivers. The company mostly uses regional carriers and therefore, largely relies on brokers with regional capabilities bookended by three or four core nationwide brokers.
Several brokers that were asked to comment for this story either declined to do so or did not respond to requests.
Not everyone is seeing broker rationalization taking place, possibly because many shippers don't work with many providers to start with. "I haven't come across a situation where I've seen a shipper with, say, eight brokers," said Michael P. Regan, founder and chief of relationship development at TranzAct Technologies Inc., a consultancy involved in the 3PL sector. "What I've seen are shippers with one, two, or three brokers." Richard Armstrong, founder and chairman of Armstrong & Associates Inc., a consultancy that closely follows the 3PL segment, said nearly half of large shippers use two to five brokers, while 38 percent use six or more.
Armstrong said shippers aren't consolidating their universe of brokers as much as they are becoming shrewder about whom they use. Big shippers will continue to migrate to a core group of brokers, commonly known today as "domestic transportation managers," that can reliably handle—and optimize—significant volumes, he said. Most of these transactions are handled under contract; spot market transactions are a small part of the total, Armstrong said. These sophisticated providers, which account for a fraction of the 15,500 licensed brokers in the U.S., should see net revenue—gross revenue minus the cost of purchased transportation—increase by 10 percent a year for the foreseeable future, the consultancy said in an industry report published in June.
In addition, not every carrier is experiencing an influx of shipper business that had formerly been handled by brokers. A spokeswoman for Schneider National Inc., a leading truckload carrier and logistics service provider, said Schneider is seeing no evidence of diverted volumes being sent its way.
Albrecht of BB&T said that a shift away from brokers to asset-based carriers might serve shippers well for the balance of 2015 and through next year. However, he expects the pendulum to swing back to the brokers by 2017 as the driver shortage worsens and new government regulations, such as those mandating the use of electronic logging devices in each vehicle, drive up fleet costs, push smaller carriers—which still account for most of the nation's truck operators—out of business, and tighten capacity to unprecedented levels.
At that point, brokers' capacity-procurement capabilities will become more valuable than ever, Albrecht said. Unless carriers can resolve the driver shortage issue, "freight brokers are likely to have another day in the sun" perhaps as early as next year, he said in a mid-June research note.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.