Jett McCandless and Tommy Skinner believe they have gone where no transportation folk have gone before. McCandless is founder and president of a Chicago-based consultancy called CarrierDirect. Skinner is vice president of Shift Freight, based in Santa Fe Springs, Calif. CarrierDirect is the primary sales channel for Shift, which operates a range of less-than-truckload (LTL) services from the West Coast into the Midwest and the Northeast through an outsourced network of carriers.
Shift isn't the lowest-cost provider. Yet in 10 months in business, it has established itself as a reliable player that sticks to its hauling commitments even if it means carrying the load at a loss. What is different about CarrierDirect and Shift is they are believed to have formed the first LTL model built to work only with brokers and third-party logistics providers (3PLs).
So far, Shift's early life has been mostly free of the usual growing pains. It has quadrupled its revenue year-on-year. It recently announced a 30-percent expansion of its coverage area. And it seems to have found a receptive audience. McCandless, who consults with LTL carriers to help them penetrate the broker universe and who sits on Shift's board, calls the company the "future of LTL carriers."
Whether Shift fulfills that lofty expectation remains to be seen. What is evident, though, is that brokers and 3PLs— especially those living in the "transactional" world that matches loads with trucks—are increasingly interested in doing business with LTL carriers. And LTL carriers are returning the eye contact.
BUILDING ON A SOLID FOUNDATION
LTL carriers and intermediaries are no strangers to each other. Many shippers would rather work through their 3PLs than directly
with the carriers, said Bill Crowe, vice president, corporate sales for LTL carrier YRC Worldwide Inc. About 40 percent of all LTL
shipments are today billed through a 3PL, according to data from the American Trucking Associations (ATA) and the Georgia Center
of Innovation for Logistics.
Old Dominion Freight Line Inc., widely considered the country's top LTL carrier, gets about one-quarter of its annual revenue from 3PLs, J. Wes Frye, Old Dominion's CFO, said on a recent conference call with analysts. Virtually all of Old Dominion's business with intermediaries comes from "strategic 3PLs," big firms that offer warehousing and distribution and other services that extend beyond transactional activities, said C. Thomas Barnes, president of Con-way Multimodal, a brokerage operating under the banner of Menlo Worldwide Logistics, a large 3PL that does a lot of work with the carrier.
Today, about three-fourths of all LTL business with intermediaries is considered "strategic," with the rest seen as "transactional," Barnes said. Yet the transactional side is growing faster than the strategic side, an ironic twist given the carriers' general distaste for working with transactional brokers and 3PLs, Barnes said.
If projections for LTL growth are accurate, there might be more opportunities for 3PL-LTL collaborations. LTL revenue will grow by 8.1 percent a year through 2018, and will double to $103 billion a year by 2024 from $51.5 billion in 2012, according to ATA and the Georgia Center data. That would be faster than the projected growth rate for either truckload or private fleet operations. (Several experts interviewed for this story say that the 2012 numbers are overstated and that total LTL revenue today is actually closer to $35 billion a year.)
Crowe, who presented the data at an April conference of the Transportation Intermediaries Association (TIA), said demand for LTL services will continue to grow as improved supply chain technology allows shippers to build smaller-size shipments that move in shorter-haul ground networks. This reduces inventory-carrying costs by shortening the time a shipper's cash is tied up in the goods, he said.
Carriers, for their part, see brokers and 3PLs as a source of new shipper business. A growing number of small to mid-size shippers now work with third parties, and carriers see intermediaries as the best way to tap that shipper market. According to the consulting firm Armstrong & Associates, about 80 percent of the 100 smallest Fortune 500 companies used 3PLs to some extent in 2012, up from 65 percent in 2008. About 81 percent of the companies comprising the Fortune 300 to 400 reported using a 3PL in 2012, up from 71 percent in 2008. Those rates of growth were faster than for companies at the higher end of the Fortune 500 scale, according to Armstrong.
DIFFERENCES AND DISTINCTIONS
Not all freight is alike, however, and experts caution that brokers and 3PLs accustomed to working with truckload carriers will
need a separate playbook if they take to the LTL field.
Brokering a truckload shipment is relatively simple: Freight moves in a linear fashion from point A to point B. A typical LTL shipment, by contrast, involves multiple stops and numerous human touches, and carrier tariffs can be tricky to navigate. In addition, LTL freight must be classified under specific, and sometimes obtuse, commodity codes that are based on various product characteristics. In short, LTL is everything that truckload isn't.
Experts on a TIA panel said brokers can successfully handle LTL if they understand that LTL's complexity makes it nearly impossible for brokers and 3PLs to manage each shipment without draining their margins. "LTL is a fantastic niche opportunity. It is not a [good] niche opportunity if you have to touch every load," Andy Berke, vice president, strategic development for Riverview, Fla.-based 3PL BlueGrace Logistics, told brokers. Following that path—that is, manually managing each individual LTL shipment—would result in a broker only making about $30 to $50 a load, Berke said.
The good news, Berke said, is that brokers can "automate the heck out of LTL." Although tools like rate and routing engines can be expensive to develop and implement, they can yield enormous benefits if done right, he said. "If you can crack the code where the customer is tendering [the freight] and selecting your provider through you, you are making money in your sleep," Berke told the group.
Brokers also must know the details of a shipper's products because, unlike truckload, LTL shipments are governed by a phalanx of classification codes. Carriers reweigh every shipment they receive, and any misclassification identified during that process means the broker or 3PL must go back to the shipper for more money. Matt Williams, president of Pro Star Logistics, a Salt Lake City-based 3PL, said the goal is to make it easy for the carrier to execute a shipment and to avoid classification problems. "You have to understand your shipper's commodity better than when you're shipping via truckload," he said.
YRC, for example, relies heavily on its 3PL partners to ensure the freight they receive is properly classified, Crowe said. "Intermediaries know exactly what we know about the classification" of freight upon tender, he said. It is the third-party's responsibility to educate the customer in how to properly classify a shipment, he added.
A CHANGED CLIMATE
Brokers and 3PLs looking to expand into LTL must also recognize that the marketplace has changed dramatically. Four years ago,
with the U.S. economy digging out from the Great Recession and with LTL carriers undercutting each other to grab market share,
space was relatively plentiful and was priced cheaply. The carriers then embarked on a multiyear program of network and equipment
rationalization. Today, truck capacity has tightened, predatory pricing is history, and rates have increased and could go higher
still. Carriers now have little tolerance for potential partners whose commitment doesn't extend beyond searching for the lowest
rate du jour.
"The true kind of price reseller is in trouble," Jack Holmes, president of UPS Freight, the LTL unit of Atlanta-based UPS Inc., told attendees of the National Strategic Shippers Transportation Council (NASSTRAC) annual conference in mid-April. Brokers and 3PLs that "don't have relationships [with LTL carriers] will suffer," especially as tightening capacity allows carriers to be more selective about who they work with, Holmes said.
Even Skinner of Shift recognizes the inherent risks in getting deeply involved with the transactional broker crowd. "You can't let them beat you up," he said in an interview at the NASSTRAC conference.
At this point, brokers and 3PLs need LTL carriers more than the other way around. The big truckload carriers are building substantial brokerage operations, a strategy that impacts all brokers but especially those who earn their living through transactional activity. Even the traditional parcel carriers have gotten into the act. UPS Freight is expanding its truckload and intermodal brokerage operations as well as an asset-based, dedicated contract carriage service that uses a hybrid of owned and outsourced equipment.
As big companies muscle in on brokerage in a bid to capture more of a shipper's total spend, many brokers, especially those who do little more than provide domestic dry van services, may be in trouble if they can't expand their value proposition. Opening up the LTL channel could be a way for intermediaries to do just that.
Gartner, Inc.
