"Brokering The Assets "
Traffic World August 11, 2008
by Paul Page

When Werner Enterprises made a deep reduction in its fleet last year, the truckload carrier said its shippers shouldn't worry about capacity, pointing to "the breadth and depth of the 5,000 qualified carriers managed by our experienced brokerage team."

And when Knight Transportation Chairman and CEO Kevin P. Knight looked at the downbeat financial results of the first half of this year, he came away with a clear lesson: "We're not going to be a pure asset-based provider anymore," he said. "We're definitely going to stay committed to the non-asset based side of our business."

In throwing their force behind their freight brokerage operations, two of the nation's largest are lining up with a long-term trend that reflects shifts in the strategies of trucking companies and, perhaps more important, a changing view of the role brokerage plays in managing transportation.

Most major truckload carriers have either created or bulked up brokerage divisions in recent years, starting even before a downturn in demand started pushing trucks off the road last year, and industry experts say the drive isn't slowing down.

"There aren't a lot of carriers looking to add assets," said Scott Arves, president and CEO of Transport America, an Eagan, Minn.-based truckload carrier with a brokerage business of its own. "These carriers want to keep the customer's business but they are not adding the assets to do it.

Con-way, the parent of the LTL carrier Con-way Freight, this month became the latest to add heft to the brokerage business, naming Schneider Logistics veteran Tyler Ellison to run Con-way Multimodal, the freight brokerage business under Menlo Worldwide Logistics. Ellison had headed transportation management at Schneider Logistics.

"A lot of public trucking companies are forming brokerage divisions," said Satish Jindel of Pittsburgh-based SJ Consulting. "For them, it has lower risks than adding assets. If you've got the relationships, you get the capacity from smaller truckers and you leverage that relationship with the shipper.

"Investors tend to give a higher multiple to brokers who do not own the assets," he said. 

But others see it as an increasingly essential part of a trucking operation, one that allows carriers to keep a shipper's business in-house even if the freight moves on other trucks. "For us, we expect to grow the broker operation," said Arves, whose carrier counts about 5 percent of its business from brokerage. "It helps us with customers who want to sole-source a location and helps us smooth variability."

The truckers are pushing into a market that, by some measures, remains very fractured. It is fractured, however, only when you eliminate the market leader, C.H. Robinson, the $7 billion Minneapolis-based behemoth of freight brokerage. 

Armstrong & Associates, the Stoughton, Wis.-based logistics industry consulting firm, estimates the domestic transportation management market at about $35 billion in gross revenue and $6 billion in net revenue. "Of that, C.H. Robinson has 21 percent of the net revenue and 45 percent of the EBIT (earnings before interest and taxes)," said Richard Armstrong, president of Armstrong & Associates.

After a handful of other large players, including Landstar with its $2.4 billion operation focused on what it calls "business capacity owners" and larger third-party logistics operators focused on technology Transplace, the market narrows to many smaller players navigating through a business essential to domestic freight movement.

The carriers are moving into a market that has more shippers looking to the advantages of working through third-parties to handle goods.

Chris Kuehl, chief economist of the Fabricators and Manufacturers Association, said small and mid-sized manufacturers increasingly are turning to third-party logistics providers to help them manage a fast-changing transport world.

With increasingly complicated logistics networks and rising costs, shippers "are getting more sophisticated" about their transportation choices, said Kuehl.

"When supply chains and transportation come up now, we're hearing manufacturers say they realize that logistics costs are a far bigger part of their business than they used to be. Traditionally, many of them relied on a local supplier and whatever carrier hit them that day was the choice," he said. "But as transportation costs have gotten more expensive, some of that decision-making has been taken out of local hands.

"Now, you're looking to control costs as well as to have the provider do a lot more for you," he said.

For the mid-sized third-party logistics operators that perform much of the freight brokerage business in the country, the expansion of trucking companies in their field represents less of a threat than a kind of stamp of approval and a call to greater discipline in the business.

"Whether the marketplace perceives it or not, the people in the business have very much a feeling they have something to prove as far as their professionalism and legitimacy," said Jeffrey Tucker, CEO of Tucker Co. The Cherry Hill, N.J.-based privately held and family owned business is run by the third generation of the Tucker family.

"A lot has changed as far as technology and in terms of the risk and exposure that is a part of our business lives but what it still comes down to in this business is professionalism and good business practices."

In pure operations, however, that will mean managing assets and not owning them. "We have resisted buying trucks or leasing equipment," said Tucker. "We want to maintain our pure third-party status as expert sourcers of services."

In doing that, Tucker, like an array of mid-sized carriers such as Twin Modal, Cargo-Master and Choptank Transport, has spread into an array of services that can run from brokering the transport of loads to managing a dedicated fleet operation and overseeing inbound distribution.

"We find ourselves challenged in ways, good ways, that we didn't even think of five years ago," said Tucker. "The requirement in logistics is that we have to maintain a value proposition for our customers. A shipper expects us, if they're not dealing with the carrier directly, to be more responsive and to have unlimited capacity and, by the way, to have unlimited capacity. You'll hear, 'Why am I using you if you can't get me a truck?'"

But a key piece of what Tucker does, he says, is manage help manage risk for his customers.

The company took a major step in its operations in 2006 when the company took a step back from the wide-open marketplace and began using only selected and qualified carriers. The move was a response to legal decisions that, transport legal experts say, could leave shippers and third-parties exposed to liability in accidents involving truckers they hire (see sidebar, page 22).

"We have lost clients who didn't buy into the idea that you have to have good carrier selection criteria," said Tucker. "We lost a quarter-million dollars in business when we turned that switch on. It was not because of Schramm. It was because we identified the threat that (Schramm v. Foster) posed. We took steps to protect ourselves and our customers. By taking those steps we lost capacity because some carriers didn't qualify under the new guidelines.  We lost capacity overnight in a period when we needed capacity."

"There is now a set of criteria. We are looking at safety criteria. And in this marketplace, that is dealing with one hand tied behind our back because there are competitors, not all of them, that will deal with any carrier coming down the pike."

The move by trucking companies into the brokerage arena gives shippers more choices, but some believe it also calls for new discipline from shippers in managing their transportation.

"Shippers are not managing their brokers very well," said John A. Gentle, the former head of logistics at Owens Corning and now a consultant on shipping and transportation management issues. "They are not vetting them well and they are not making sure they qualify their carriers and have contracts. What I see is they are using them mostly to make sure they are getting the lowest rate."

Gentle is skeptical of the value of the brokerage businesses sprouting at some trucking companies, but certainly not all. "The Schneiders and Werners and companies like that, they understand the business and have very strong brokerage operations," he said. "But with the smaller companies the shipper needs to make sure they are doing the proper vetting and make sure they have in place a contract dealing with the carrier not just as a carrier but as a broker.

"I would bet right now very few have that in place, and I'm very, very concerned about that," said Gentle.

Without specific contracts in place, said Gentle, shippers "are putting their company at risk." Shippers need to ask themselves as they deal with the smaller carriers who are acting as brokers, does that carrier understand the trade, understand the professional management of the risks associated with using the carrier base other than their own trucks? If they don't have a clear understanding of how that business works, the risk to the shipper is enormous," he said.

"If I don't see myself as a risk manager, then I'm not doing my job. If you don't understand managing risk, then you should go to a broker who does understand it and learn from them," said Gentle. 

Arves said brokerage is a tool for an asset-based operator, one Transport America uses as a business to serve its shippers even as the trucker turns to outside brokers to "augment holes in our network."

But as "an asset play," said Arves, his company "ultimately believes the market will come back and place a premium on having assets at our disposal."