ARC is kicking off a study on managed transportation services (MTS). One of the key questions we have is how is the value proposition of the logistics service provider (LSP) affected by their business model? For example, some LSPs are freight brokers. Would LSPs that provide both MTS and brokerage provide a better or worse ROI than other types of LSPs? I asked these questions of three managed transportation services providers.
First, a bit of background might be helpful. Freight brokers get paid by shippers for arranging their transportation of cargo but the freight broker owns no trucks, ships, etc. The difference between brokering a load and providing managed transportation services is that brokerage is focused on execution – a planner at the shipper tells the broker the mode, the lane, and details about the shipment, and then the broker executes that shipment. In a managed services arrangement, the shipper’s planners are employed by the LSP. The LSP get downloads of shipments from a shipper’s enterprise systems, does high level planning – load consolidation, multi-stop optimization opportunities, etc. – and then executes the loads.
One of the largest freight brokers in the world is C.H. Robinson. Their managed services division is TMC. I talked to Jordan Kass, Vice President of Management Services at TMC. Despite the fact that parent company C.H. Robinson is a broker, Jordan forcefully made the point that TMC operates independently and that their business model is based upon garnering revenues only from the planning services they provide for their clients; there are no brokerage revenues associated with TMC’s business. The reason that TMC operates as a separate division of C.H. Robinson is that this is, and has been, a customer requirement.
Avoiding any appearance of a conflict of interest is accomplished by leaving their clients in charge of the carrier relationship – their clients make the final selections on which carriers will be used on which lanes. Further, TMC’s load execution is fully auditable – in short, clients can see which carrier was tendered first on a lane, when the second tender went out after the first was turned down, and ultimately insure the route guide was properly executed. This insures TMC is not profiting by improperly throwing business to carriers in C.H. Robinson’s brokerage network.
In short, TMC’s differentiators – common technology platform, robust global TMS, control towers around the world, and paying their planners in part based upon the success of their clients – have almost nothing to do with brokerage. TMC’s shipper clients tend to be substantially bigger than the other two LSPs I talked to.
Doug Waggoner, the CEO of Echo Global Logistics, makes the point that providing both MTS and brokerage can be of particular benefit to smaller shippers. Echo Global Logistics is a public company with about 1,300 U.S. based employees. Doug said that small companies have not invested in a TMS. Small companies tend to have small staffs and thus limited expertise in particular modes of transportation. “How can a one man transportation office stay on top of the strengths and weaknesses of various less-than-truckload carriers? How can he know the different carriers speed of delivery, reliability, and regional coverage? How can he know all the in’s and out’s in parcel contracts?”
Echo provides brokerage and managed transportation services based on a proprietary, internally developed TMS known as Evolved Transportation Management (ETM). ETM can access their network carrier capacity data to help optimize carrier selection and procurement. The 24,000 carriers in their network, and their understanding into those carrier’s equipment and preferred lanes, means they can help discover backhauls for their carriers. All this, Doug argues, allows Echo to help otipmize a client’s network and procure capacity at a rate their small shipper clients would find very difficult to match.
Chris Pickett, the Chief Strategy Officer at Coyote Logistics, agrees that carrier density matters. Coyote is another broker that provides managed transportation services across Canada, the U.S., and Mexico. The whole key to their business model is scale and network density. “The more dots on the map, with each dot representing a carrier equipment location, the better. More dots means a better chance of identifying a truck in proximity to a Heineken (one of their MTS clients) pick up location, a better chance at getting shorter dead heads and better service – a truck an hour away is more likely to arrive for a pickup on time than one much further away. As a result you also get more competitive rates from the carrier. Scale equals better price and better service.” At the close of a recent acquisition, Coyote will have 40,000 contracted carriers in their network.
And Doug Waggoner of Echo says the personal relationships with carriers should not be denigrated. Echo has hundreds of employees talking to carriers on a daily basis. If Sally from Echo is talking to Bob the carrier several times a week, her relationship can allow her to say, “I helped you out yesterday, can you assist me today!”
There are ways to build risk mitigation into a MTS/broker relationship. At Echo, onboarding a new shipper customer involves reviewing a customer’s business processes and developing a preliminary freight plan that targets a percentage cost savings achievable over the life of the contract. Quarterly business reviews, their proprietary technology, and their spend leverage are used to actualize that promise.
Chris at Coyote says that “the key to brokerage model is transparency.” If a shipper has a route guide, Coyote gives that customer the ability to audit their shipments in the same manner that TMC does.
So who is right? Is it better to build a Chinese Wall between brokerage and MTS and prevent conflicts of interest? Or can the brokerage MTS business model provide a better ROI, particularly for smaller shippers?
If you use LSPs for managed services you can help answer that question. ARC is conducting a survey benchmarking the ROI and best practices associated with managed transportation services. All valid shipper participants will get the full report once the results are ready. If you want to participate, please click HERE.
(TMC is an ARC client).