How David lives with Goliath

Transportation intermediaries feel the heat when it comes to competition with large carriers and third-party logistics providers. Yet their small size is one of the intermediaries' greatest advantages.

By Jim Thomas -- Logistics Management, 12/1/1998

When it comes to transportation outsourcing, big is not the one size that fits all shippers. Although the big revenue opportunities typically are seized by the larger third-party logistics providers (3PLs), which regularly ink multiyear, multimillion dollar contracts, smaller transportation intermediaries continue to thrive. How so, when shippers seeking to pare down their vendor bases typically look to the larger logistics companies? It appears that these smaller providers match up well in scale and service with small and mid-sized companies that make up a large part of the U.S. economy.

"The name of the game for big vendors is consolidation," says William Tucker, president of the Tucker Co., a transportation intermediary based in Cherry Hill, N.J. "It is the only way they can continually grow their business year after year. So big vendors will gobble up private fleets, often from mid-sized companies. Because there is a lot of demand the large provider can't fill, it abandons the mid-sized company in favor of its larger customers. So cracks open up in service. The more they consolidate, the more cracks open."

And the more the cracks open, the greater the opportunity for intermediaries to build business relationships with mid-sized shippers. Some intermediaries prefer this business because the large shippers are the most demanding. "It is a phenomenal feat to satisfy just one big shipper because [these shippers] require so many of your resources," says Tucker. Additionally, say a number of intermediaries, the real growth opportunities lie with smaller shippers, not the Procter & Gambles and Wal-Marts of the world.

"Most brokers aren't going after the Fortune 1000 companies," says Ronald Williamson, president of RJW Logistics Inc. of Addison, Ill. "We generally look for customers with average annual sales in the range of $40 million to $50 million."

Williamson says it's not that intermediaries ignore larger prospects, but that large shippers present intermediaries with a business challenge. "If you compete against the large truckload or less-than-truckload carriers, you may win a $400,000-a-year account," he says. "That will make up a large percentage of your business, which makes it tough to walk away from the account if things don't work out."

The Challenges

Still, the big providers have always challenged the smaller competitors on any number of playing fields, including the political arena, say intermediaries. The Transportation Intermediaries Association (TIA), the leading education and policy organization for North American transportation intermediaries, opposed provisions in the Ocean Shipping Reform Act of 1998 that barred non-vessel operating common carriers (NVOCCs) from entering into confidential contracts with customers. The law allows ocean carriers and individual shippers to participate in confidential contracts, but NVOCCs, which are intermediaries, will have to follow published tariffs. "The big shippers, carriers, and organized labor colluded to throw the NVOCCs to the wolves," charges Tucker.

"We are living with ocean shipping reform, although we believe it discriminates against small businesses and NVOCCs," adds Robert Voltmann, executive director and chief executive officer of the TIA. "The TIA hopes that a broad interpretation of the law will allow NVOCCs to participate in confidential contracts. We will challenge the law if it is not implemented favorably."

Recently implemented volume requirements by major railroads also add to intermediaries' woes. The TIA has expressed concern over what Voltmann calls the "continuing degeneration of rail service." He says, "The Burlington Northern Santa Fe wants intermodal marketing companies to guarantee them $5 million in business annually before they can qualify for preferred contracted rates. CSX has taken that a step further and stipulated that the $5 million must be in new business. There is a recent pattern of the railroads increasing their profitability by doing less."

What's in a Name

Another source of friction between the Davids and Goliaths is marketplace perception and image. Larger transportation providers sometimes seek to differentiate themselves from intermediaries, most of which are known as brokers. In his recent book, Transportation and Logistics Basics, R. Neil Southern writes that "Some larger companies [that] provide a brokerage function do not like the term 'broker'. They prefer to be called freight forwarders or transportation or logistics companies."

Voltmann responds: "In this era of intermodal intergalactic supply chain facilitators, there is a perception that brokers are a throwback to another time. However, if you book freight for a carrier, then you are either a broker or a freight forwarder under the law."

Regardless of perception, Southern says that intermediaries fill a void in the transportation marketplace: "If truckload carriers had adequate sales representation to find their own loads and shippers had adequate carriers to haul their freight, there would be no need for transportation brokers." Intermediaries' success clearly indicates that the need does exist.

"A lot of what we do is just fundamental economics played out," says Gregory Stachura, president of GSA International Ltd., an intermediary based in Novi, Mich. "If we don't deliver our services competitively with good, timely information, then we don't make it."

Stachura says that the marketplace has defined a clear role for intermediaries. "We've seen the mega-players land the large accounts," he says. "What will settle is the need for specialization; the small niche player that can offer a holistic solution that goes beyond transportation to include the entire supply chain."

The development of complex logistics information systems creates another challenge--and perhaps an opportunity--for intermediaries. Says Stachura, "With technology, all of us want to push a button and have everything run on its own. That can be done, but would it be cost efficient? There are tradeoffs with technology, and intermediaries need to be able to put a pencil to them. What will be a customer's return on the cost of capital? What is the payback schedule? Can it be reduced?"

Other intermediaries see less demand from their customers for information systems. "[S]mall to mid-sized customers haven't demanded it, and we aren't volunteering it," says Williamson. "Our customers want reliable logistics services at competitive rates, so that's our focus."

If there is one need that all intermediaries agree on, it is the need to diversify. "It's the way to battle the competition," says Williamson. "We recently added air freight and expedited services, and we are doing more and more local cartage. The challenge is to find new rivers of cash. If one dries up, you'd better have another one running."