Exchanges: Friend or foe?
Web-based transportation exchanges have become both rivals and business partners for truck brokers and 3PLs in their fight for the shipper
By James A. Cooke Executive Editor -- Logistics Management, 4/1/2003
Not long ago, Land O'Lakes dropped its third-party logistics company and transportation broker in favor of an online transportation exchange. The dairy and deli-products manufacturer, based in Arden Hills, Minn., now uses a private online network to find carriers, book loads, and manage its transportation needs. Logistics manager Pat Johnson is pleased with the results. "We took over most of our freight and knocked freight costs down between 10 and 15 percent," he says.
The approach taken by Land O'Lakes is the exception rather than the rule. Although pundits predicted just a few years ago that Web-based exchanges would eliminate transportation middlemen, so far that hasn't come to pass. Many middlemen, in fact, are taking advantage of online exchanges to better serve their existing customers and gain new clients. Even so, it's still unclear who will have a brighter future—the virtual broker or the flesh-and-blood version.
From Public to Private
The first transportation exchanges began appearing in cyberspace nearly a decade ago. Most of them were designed to act as matching services, linking up shippers that needed to move merchandise with carriers that had available capacity. The potential for success of these virtual transportation spot markets called into question the viability of traditional middlemen such as transportation brokers, freight forwarders, and third-party logistics companies (3PLs). "Three years ago, intermediaries looked doomed," says James Kenny, a professor of marketing at Western Illinois University in Macomb, Ill.
Now the tables have turned and a number of transportation exchanges have bitten the dust. Rich Parker, an executive with Nistevo, a private-network developer in Eden Prairie, Minn., says that the online auction model failed because it didn't meet shippers' needs. The fact that it focused entirely on price also made it unpopular with carriers. "From the carrier's point of view, every company was equal and all you were doing was driving the price down," he observes.
Many of the surviving exchanges have transformed themselves from public networks open to all comers to private networks with exclusive memberships. In a private network, a shipper can perform the work of a broker, finding a carrier to handle a last-minute shipment among a pool of prequalified network participants.
That's exactly what Land O' Lakes is now doing with its private network. "We're taking the middlemen out," Johnson says. "We have a central planner here that handles the freight from the biggest plant and people on-site at the DCs handling their own freight."
The Personal Touch
Despite the emergence of private portals and the challenge of finding business in a sluggish economy, traditional transportation brokers say they're doing just fine. According to the Transportation Intermediaries Association (TIA), a trade group based in Alexandria, Va., brokers handled $50 billion worth of truck transportation on behalf of shippers in 2001. When third-party logistics companies, freight forwarders, and other middlemen are added in, says Robert A. Voltmann, TIA's executive director and CEO, the amount of transportation expenditures directed by intermediaries rises to $80.6 billion. (See Figure 1.)
Brokers also say they haven't lost much business to exchanges, thanks in large part to the personalized service intermediaries bring to the table. Unlike online exchanges, 3PLs and brokers take responsibility for the actions of the carriers they choose to handle a customer's freight, says Barry Butzow, a senior vice president at C.H. Robinson Worldwide Inc., a large broker and third-party logistics company in Eden Prairie, Minn. There's no substitute, moreover, for human decision making, he believes. "Somebody has to be there to fill in the gaps, even if you institute the technology. You still have to have bodies," he says.
Chip Smith, president of Twin Modal Inc., a brokerage firm and intermodal marketing company in Minneapolis, agrees. "Carriers don't want to do negotiations online," he says. "It's too easy to mask someone behind a Web page. Carriers like to go online, but they want to talk to whoever has the load before they sign off on the deal."
While brokers insist that exchanges have not taken their business, some industry observers aren't so sure. "It does erode that business for the broker," says Joe Wagner, vice president of transportation solutions at Atlanta-based Manhattan Associates, which recently acquired Logistics.com, a transportation exchange provider. Wagner cites the example of one client that now tenders the 500 truckloads a year rejected by its primary carrier to its other approved carriers online. "Any brokers who would have been doing that are no longer involved," he says.
Competitor or Customer?
Ironically, even as they threaten the brokers' livelihoods, brokers and other intermediaries have become some of the exchanges' best customers. Indeed, many brokers view exchanges as partners rather than rivals, using them to find carriers and equipment for their clients' shipments. "We consider [exchanges] to be a partner like a carrier," says Mike R. Solomon, president of M.R.S. Co. in Godfrey, Ill., which engages in freight forwarding, brokerage, and dedicated contract carriage.
Exchange operators like to point out that their service actually helps intermediaries get more business. Freightquote.com, for example, runs a public exchange and also constructs private exchanges for 3PLs, freight forwarders, and brokers as well as for shippers. Executive Tim Barton acknowledges that about 20 percent of the truckload freight overseen by his exchange may represent business taken away from brokers, but says his company's custom-built networks actually help intermediaries gain shippers' business.
Another exchange that's popular with intermediaries is TransCore Commercial Services of Beaverton, Ore. TransCore has its roots in a 25-year-old matching service that brought truckers together with brokers. TransCore began its business by placing green-screen computer monitors listing available shipments at truck stops. Today it operates a Web-based exchange that allows shippers, brokers, and carriers to do online deals and track shipments.
Scott Philips, vice president of new solutions, says his company "opens up opportunities for brokers rather than eliminating" them. It does so by giving shippers access to third parties when their regular providers can't do the job, he says. "Shippers have a carrier base. If they can't cover the load, they put the shipment out to a trading community made up of other brokers and carriers," he explains.
Survival Strategy
The fact that some brokers and third parties are finding ways to use transportation exchanges to their advantage bodes well for their future, TIA's Voltmann believes. By using public and private portals in concert with their own technology, they are able to reduce costs and improve their performance while continuing to offer personal service, he points out.
Still, the online services clearly represent a competitive threat. To compete with them, intermediaries will have to work harder to prove their worth to shippers, says one analyst. "The challenge (for brokers) is to present a greater value proposition than just serving as a middleman," says Adrian Gonzalez of the market research firm ARC Advisory Group in Dedham, Mass.
Another survival strategy for transportation brokers will be to focus on matching the shipments of small and medium-sized shippers with equipment and capacity offered by small and medium-sized truckers. "Disintermediation won't occur at the lower end because of the value brought by the 3PL to the small shipper to build networks," Kenny contends.
In short, exchanges offer a credible threat to transportation intermediaries, but there's no reason to write them off for the foreseeable future. "We see brokerage growing," says Voltmann. "We don't see that technology will replace the intermediary. We see technology as allowing everyone involved to continue to make money, even though prices are not increasing."
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