Financial market efficiency in the truckload transportation sector
The tools for managing contract freight are digitizing a broken model.
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Editor’s note: As a rule, we don’t run articles from solution providers touting their products. At the same time, there are those occasions when a provider comes to our attention with something that is unique to the market and we invite them to describe what they’re doing because it may be of interest to readers. And, really, they can explain it best. That was the case when I spoke to Anshu Prasad a few months ago, which led to the column from Anshu below. Bob Trebilcock, executive editor, Modern Materials Handling
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Here’s a question: Name the $800 billion domestic industry that is inefficient, volatile and fragmented, and is managed with manual, resource-intensive operations costing more than $90 billion a year? The answer is the U.S. truckload transportation market.
U.S. truckload transportation is a fragmented industry with tens of thousands of shippers and over 300,000 trucking providers. The industry spends an estimated $90 billion in manual, tactical efforts – phone calls, faxes, emails – to operationally secure loaded miles for carriers and guaranteed service for shippers. Even after putting 5 million workers against this problem, up to 25 percent of road miles are driven empty, wasting hours of service and pushing driver turnover to unprecedented levels.
Shippers struggle with feast or famine cycles, where swings in the cost and availability of truckload transportation blows budgets and disrupts operations. Carriers likewise struggle to ride through wildly fluctuating market conditions, while also facing persistent driver shortages and increased regulatory pressure. Truckload rates on the current U.S. market are rising to three-year highs and many shippers are in the situation of not only paying high rates, but often are unable to ship their product.
During my time as a partner at A.T. Kearney, I concluded that today’s tools and approaches for managing contract freight are broken. Tremendous efforts are expended on annual RFPs and multi-round negotiations, only to yield non-binding agreements. There is an opportunity to significantly reduce this waste through commitments carriers and shippers can plan reliably plan around around and build sustainable efficiencies that will lower costs for buyers and shore up margins for providers. While I recognize that there are digital solutions focused on making the trucking market more efficient, in my estimation, they are digitizing a broken business model.
LogisticsExchange (LE) is a company that is working to relieve this pain by introducing financial market efficiency into the truckload transportation market. As a first step, LE has developed a new kind of freight contract, LE Forwards. These are binding agreements which offer the stable and reliable economics of committed capacity while preserving the flexibility to trade with the broader market on the LE platform.
LE’s digital platform allows buyers and sellers to execute binding, enforceable contracts electronically. Automated opportunity analytics allow members to quickly identify the best fits in their portfolio for digital LE Forwards contracts. Proprietary matching and rating algorithms ensure buyers and sellers align on critical service and performance requirements. Smart, standardized contracts and active monitoring through execution ensure contractual obligations are honored. If either counterparty’s needs change, LE’s trading platform provides the liquidity to close out positions.
How does an LE Forwards contract differ? In the status quo, outside of the spot market and dedicated fleets, the majority of truckload spend is managed through non-binding contacts: a shipper and carrier may agree to move 1000 loads annually between Chicago and LA at a rate of $2.00/mile, but if the shipper tenders only 600 of those loads, the carrier is still expected to honor the contracted rate. Likewise, if the carrier accepts only 600 of 1000 tendered loads, or simply refuses to honor the contract rated, the shipper’s only option is to find another carrier, potentially at a much higher price.
If a shipper and carrier enter into a one-year LE Forwards contract to move 4 loads per day on this lane; this contract is a binding commitment. If the shipper tenders only two loads on a given day, they still owe the carrier for the other two loads. If the carrier fails to accept a load, they are responsible for paying the difference between their contract rate and the rate at which the shipper moves the load with another carrier. The committed volume of LE Forwards behave more like dedicated fleet contracts than a traditional RFP award, allowing both carrier and shipper to reduce or eliminate costs. There are some definite benefits to using LE forwards:
- Carrier’s hedge against idle equipment. When planning to serve the LE Forward, the carrier need no longer hedge against the possibility that failure to tender a shipment will render assets idle.
- Unplanned deadhead/empty miles. By having more predictable volume, carriers can plan equipment availability to avoid last-minute scrambles and the associated empty miles die to repositioning.
- Shipper’s spot market exposure if carrier does not accept tender. When carriers fail to accept a tendered load, shippers are often forced to resort to the spot market at much higher process than their “contracted RFP rates.
- Driver attrition/replacement. Committed loads allow carriers to plan and route more effectively, generating more driver friendly freight.
Early results from LE’s work with a select set of large shippers, carriers and 3PLs have been promising. LE has processed over $3 billion in annual shipments from blue-chip companies, identifying over 350,000 contracting opportunities. Since LE’s beta platform launch, the company has offered over 15,000 contracting opportunities to buyers and sellers. Benefits include increased driver utilization and higher margins for carriers, and improved service and cost performance for shippers.
As LE executes additional binding contracts, the company is refining the microservices that power the LE platform and tuning the algorithms for processing large data sets, while also automating the identification and execution of contracting opportunities.
As I noted earlier, many of the other digital solutions that are focused on making the trucking market more efficient are digitizing a broken business model. A financial market for the trading of binding enforceable contracts is a disruptive model that addresses the inefficiencies of the trucking market and provides benefits to shippers, carriers, and 3PLS.
About the Author: Anshu Prasad is CEO of LogisticsExchange, a firm that is bringing financial market efficiency to the transportation sector. He was previously a partner with A.T. Kearney and a contributor to SCMR through the “Operations Advantage” column.
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