Is Mandating Transparency in Shipper-Broker Contracts a Priority to the Trucking Industry?
Calls for transparency into proprietary contracts and transactions between brokers and shippers are increasing at a time when the industry is plagued with several larger challenges.
A hearty welcome to the 77th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Something of regulatory importance to the trucking industry transpired in late March, which surprisingly went by without much debate. The Federal Motor Carrier Safety Administration (FMCSA) denied a rulemaking petition from the Transportation Intermediaries Association (TIA) seeking to remove the requirement for brokers to disclose their shipper transaction records to the respective carriers hauling the load.
Understandably, the TIA is not happy with their petition's overruling. But to understand their perspective, we need some historical context into how brokers have evolved over the ages. Before the trucking industry's deregulation via the Motor Carrier Act of 1980, the standard practice was for carriers to pay brokers a commission — like a finder's fee — to find shippers.
This all changed after deregulation, which gave brokers a more prominent place in the system. The transactions were no longer directly between carriers and shippers, but two-pronged. Brokers now became intermediaries between carriers and shippers, transacting individually with both carriers and shippers. Deregulation meant brokers were longer mere 'catalysts' for freight moves — they were the industry's linchpins, ensuring capacity consistently met demand in a highly cyclical market.
Deregulation meant brokers were longer mere 'catalysts' for freight moves — they were the industry's linchpins, ensuring capacity consistently met demand in a highly cyclical market.
The trucking industry is extremely fragmented, with over 90% of the market stakeholders being small trucking firms running six or fewer trucks. This scenario makes it improbable for most carriers to stay visible to shippers, pushing them to bank on brokers to secure freight. Similarly, shippers find it easier to work with brokers, as brokerages can meet capacity demand better, and offer a more satisfactory customer experience.
Nonetheless, a segment of the carrier community has held some resentment with brokers profiting from their services, hoping to keep a larger share of the margins to themselves. The OOIDA and SBTC championed their cause, petitioning the FMCSA to mandate brokerages to share their shipper transaction details with the carrier hauling the freight. The argument was that this would ensure fairness and transparency in the brokerage segment.
"The first protests to push for increased regulation of brokers happened in May '20 — two months after the onset of the pandemic that led to a shutdown of all freight. However, there was a freight boom immediately after, lasting two and a half years where carriers had all the leverage," said Anne Reinke, president and CEO of the TIA. "With capacity being so tight, carriers had more flexibility in setting prices, and brokers sometimes accepted those rates even if it had impacted their own profits."
However, as the tide changed in the freight markets, Reinke contended brokers were again in the limelight, for reasons that were more historical and based on distrust than reality. "Brokers are not enriching themselves on the back of owner-operators. The petition would enable carriers to see broker transactions and their proprietary contracts, which they can use to negotiate lower rates," said Reinke.
Such a mandate ultimately risks creating an asymmetric market where carriers become the defacto gatekeepers of broker profits, reducing their degrees of freedom and hindering the overall brokerage business. Introducing regulations with a sweeping impact on a highly fragmented freight market can likely disrupt the delicate balance established between the carriers and brokers in the value chain.
Such a mandate ultimately risks creating an asymmetric market where carriers become the defacto gatekeepers of broker profits, reducing their degrees of freedom and hindering the overall brokerage business.
Reinke pointed out that the FMCSA has had its priorities wrong, focusing on a commercial issue over larger challenges in the industry — like driver safety, increased frequency of truck accidents, and the recent uptick in fraud. Digital transactions have also facilitated an increase in the latter, as scammers can now deceive customers without direct communication or phone calls. Double brokering is also a huge issue (we spoke about such industry challenges in a recent edition).
"The FMCSA's decision to mandate transparency in broker-carrier contracts is baffling considering there are other challenges they must prioritize responding to," said Reinke. "As brokers, the numbers aren't in our favor either, considering many more carriers are out there. But we look to continue making our case and putting up a vigorous defense."
For the industry at large, it makes sense for the FMCSA to encourage collaboration between brokers and carriers, than push for regulations that pit them against each other. It starts with creating an environment that enables trust between different stakeholders. Reinke mentioned that a TIA member came up with an idea to address fraud and double brokering by introducing a TWIC-like card for both carriers and brokers — adding an extra layer of protection, which inevitably builds trust. (Transportation Worker Identification Card or TWIC is a security credential issued by the Transportation Security Administration (TSA) to logistics workers accessing secure transport facilities)
"While owner-operators, TIA, and ATA may not agree on every aspect of safety, we can agree on developing a set standard for FMCSA to determine a carrier's safety rating. This will benefit everyone involved — shippers, carriers, and the public. In particular, it will help small carriers who currently don't receive ratings. Developing a safety rating system will also help legitimate carriers with excellent safety records stand out. This is a conversation worth having, even though the details need to be worked out. It's about finding common ground and improving the status quo."
All that being said, the FMCSA's decision to add transparency to broker operations will do little to disrupt the industry in the long run, especially for brokerages running ethical practices and maintaining good relationships with their carrier partners. "To thrive, brokers must hold themselves accountable and not be complicit to any fraudulent activity. The goal must be to ensure this piece of the supply chain is safe, secure, honorable, and ethical," said Reinke.
To thrive in a competitive and heavily regulated market, brokerages need to focus on developing a business model that generates a stable cash flow and does not rely solely on occasional high-margin spot rates for survival. For a sustainable competitive advantage, brokerages should build a moat around their business through aggressive networking and adopting innovative technologies that provide a consistently good customer experience.
For a sustainable competitive advantage, brokerages should build a moat around their business through aggressive networking and adopting innovative technologies that provide a consistently good customer experience.
"As a broker, the key is to have a group of shippers who can count on your service and carriers who know they'll be treated well," concluded Reinke. "In a freight slump like today, it's essential to hone your skills, get educated, and stay relevant enough to thrive during such challenges."
The Weekly Roundup
Labor tensions continue to flare up across the US West Coast ports as employers and dockworkers are nearing the one-year anniversary of them working together without a contract. With the peak back-to-school freight inbound, retailers might look to steer clear of the West Coast ports to stay out of potential disruptions that can hit the coast without notice.
Retailers are struggling with bloated inventories, which is not just tying up capital, but also costing companies a lot in keeping them. In a CNBC survey, two-thirds of the respondents observed that excess inventories will remain an issue throughout this year, forecasting normalcy only by 2024.
Warehousing capacity is set to increase in the vicinity of the Port of New York and New Jersey in the next few months -- an interesting timing, considering a plateauing retail market. However, despite increasing vacancies in the warehousing segment, the long-term commercial real estate indicators are still positive.
Consumers are now more willing to wait for their packages, and aren’t pushing for same-day deliveries -- a relief for retailers balking at an ever-increasing cost of fulfillment. This change in consumer sentiment is a result of retailers pushing a part of the fulfillment costs downstream, making consumers more receptive to waiting than spending extra for quicker delivery.
…said who?
“Flatbed rates this year look very similar to what they looked like in 2018. That was the last boom prior to the pandemic, and toward the end of that year, things began to cool and stayed that way until March 2020.”
- Dean Croke, principal analyst at DAT, commenting on flatbed rates returning to pre-pandemic normalcy as single-family home construction activity continues to stay low
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