Logistics – the next online inflection point?

Whenever I see a fragmented network of low-tech brokers or intermediaries extracting large profits from a value chain, I suspect there’s enormous potential for a large-scale market dislocation to the web.

We’ve seen several case studies that share some elements of this archetype in ecommerce/retail, digital music, and housing/relocations.  In all these cases, migrating significant slice of the value chain online has connected fragmented buyers and sellers of goods and services together more effectively and at a lower cost.

As I thought of which large industries in the economy will next see a web/mobile inflection point, transportation logistics came to mind.  This is an incredibly low-tech, inefficient space that suffers from a massive market participant coordination challenge.

What are the table stakes in logistics?

Logistics is an enormous sector – more than 10% of US GDP – and comprises many diverse verticals and sets of activities related to the physical movement of goods.  Domestic trucking transportation, in particular, generated $629 billion in revenue last year, and employed roughly one out of every 13 people working in the private sector in the United States in trucking-related jobs, serving manufacturing, retail, public utility, construction, transportation, mining and agricultural sectors (source: American Trucking Association).

Shippers and carriers typically negotiate contracted rates for transporting loads over a specified period of time, either directly with one another or through an intermediary.  This is commonly referred to as the “Contract Market”, and comprises a majority of truck shipments.  The remainder are facilitated through the “Spot Market”, in which loads are offered by shippers and prices are negotiated “on the spot” (at the time of shipment).  Typically, this activity is coordinating through intermediaries such as brokers that specialize in spot market transactions, or through more sophisticated third party logistics providers that can offer a broader outsourced transportation department alternative, spanning from order planning through delivery confirmation and freight payment.  Large shippers will typically maintain a proprietary system that will plan, tender, and monitor load shipments with their own network of large carriers, although they also may rely on large intermediaries like C.H. Robinson to manage shipments on their behalf.  Small shippers with unpredictable load volumes, and small carriers that have a hard time filling capacity, rely heavily on spot markets and intermediaries.

What’s the web/mobile case for change?                                

Despite the increasing sophistication of large intermediaries that have better connected shipping supply and demand, domestic trucking is still a very inefficient market today.  A McKinsey study reported that approximately 1 out of every 5 truck trailers on the road is empty in the US because carriers cannot find loads for the return segments of their delivery routes (a “backhaul”).  According to a study by AT Kearney in 2010, reducing these “deadhead” backhaul miles for commercial and private truckload moves could eliminate 64 billion miles of traffic, and yield almost $60 billion in incremental revenues for the industry.  Much of the inefficiency in coordinating supply and demand for moving loads is a function of market fragmentation: out of the 750,000 registered carriers, roughly 90% of these carriers own less than 6 trucks.  The shipper industry is equally fragmented.  As a result, the coordination challenge of connecting the right load with the right equipment at the right place and right time has remained difficult to solve effectively at scale.

Intermediaries that connect this fragmented supply and demand extract much of the value in the trucking value chain, charging roughly 15% of the cost of shipping (and as much as 30% for critical time-sensitive loads in key lanes, particularly smaller loads), more than covering the high costs of their labor-intensive operations.  Truck fleet operators often see 3-4% after tax net-income margins in aggregate, while non-asset based brokers enjoy 17-18% after tax net-income margins in aggregate.  However, brokers often have trouble aggregating appropriate lane density at a national level, and are typically limited to only serving limited regional markets; of the approximately 20,000 certified freight brokers in the U.S., only 40 earn more than $20M in net revenue (source: 3PLogistics.com)

The full potential of technology has yet to be applied to domestic trucking.  This is probably most apparent in trucking brokers, who rely almost solely on phone calls to get status updates on freight location, and cannot provide accurate real-time load visibility for their shipping clients.  In addition, because sourcing loads is labor-intensive and conducted offline, pricing through intermediaries is very opaque, unlike in comparable industries with real-time pricing such as airline or the stock market.

Who’s making waves?

Emerging in the early 2000s, load boards are “post and browse” directories, similar to Craigslist.  They are an extremely low cost intermediary, costing approximately $150 per month for a subscription (source: DAT.com). Transcore, the leading load board provider, has grown into a several hundred million dollar business.  However, loads boards are also time-intensive to use, requiring many phone calls to reach carriers and execute a load move.  Indeed, according to an Armstrong & Associates report, an estimated 80-90% of the transactions closed through load boards are actually facilitated by small mom-pop brokers who have their own systems to comb through load board data.

Transportation management systems (TMS) are more sophisticated and can help optimize shipments through consolidation of loads, shifting of modes of transportation, and real-time track and trace, and can create connect routes across loads to create continuous moves.  However, TMS are also primarily proprietary, the domain of large shippers like WalMart.  The remainder of the market is comprised of 3rd party TMS – primarily on-site installed software.  This segment of the market is highly fragmented, and suffers from compatibility issues across TMS, and as a result, multi-homing costs between competing systems.

High-tech brokers are also beginning to employ their own online systems to serve this market.  Coyote Logistics has developed its own online freight matching algorithm, although it continues to source empty trailers with a large pool of phone operator/brokers.

Perhaps most interesting are web-based freight exchanges such as Freightquote and Open Mile, that, unlike brokers, are fully automated and not labor-intensive (and can thus scale easier), but unlike load boards, can more efficiently facilitate transactions with broker-type service features such as electronic load offering, accepting, tracking, and payment.  Many possible transaction permutations can be facilitated.  These exchanges can support reverse auctions, in which carriers bid on posted loads during a bid period similar to eBay.  In another permutation, shippers could post a load and a set a requested price that a carrier can accept to automatically “win” that load, similar to Priceline.   Finally, shippers can also review published sample quotes and compare across carriers for rates, transit times, and reviews, and then submit a booking request for a load, similar to Expedia.  I like the eBay model and charging carriers a service fee, because it would a) allow shippers to see savings from carrier competition, and b) monetize small carriers at a point when their alternative would be running an empty trailer on a backhaul.

Facilitating trust among market participants is critical in shipping, given the high value of loads and time sensitive nature of delivery.  Authentication and review of carriers must be high priority, as well as cargo insurance and payment fraud protections.

I suspect executing the right set of platform ingredients will unlock tremendous value creation in the tired business of moving goods from point A to point B.


4 Comments

  1. Nikhil Sachdev

    Wayne, your post highlights a really interesting space that I agree is ripe for disruption.
    I can see a real need and value creation opportunity on both sides of the platform. For shippers, there are probably huge cost savings that come from using a platform like openmile, including 1) reduced hassle and time spent on coordinating shipping logistics, 2) increased transparency on rates and competitive bidding that leads to overall better spot rates, and 3) reduced commissions if you can properly dislocate the intermediary. For the carrier, it seems like he also will capture some value in the form of reduced commissions, and hopefully can also better utilize his currently underutilized fixed assets (if 20% of capacity is lost on backhaul that’s a huge revenue and margin opportunity!).
    I have some questions though about how one of these businesses, like openmile, can effectively mobilize both ends of the user base. It doesn’t seem like the platform on its own provides standalone value, so how can one of these players build a big enough two sided network? It seems like working with existing intermediaries could be a first step to aggregate a set of truck listings. I’m not sure if there is a high tech way to “scrape” this information, but if possible then the platform could at least build a passive, but large list of carriers. Perhaps then focusing on acquiring shipping customers and sending specific shipping job leads to carriers, with the Priceline pricing conception you presented, would then spur them into greater participation, and eventually incent them to pay for the service. Payment could take on a variety of forms including a monthly subscription, or charges for premium placement.

  2. Wayne Hu

    I think your questions hit on an interesting dillemma in this space – what matters is critical density of engaged shippers and carriers along the same high-volume lanes, but because the industry is SO incredibly fragmented, it becomes very tricky to scale, despite the enormous value creation potential. I totally agree standalone value is a tough proposition here. There are many ways to build features like easy online payments that make transactions easier, but I can't think of anything that doesn't require connecting a shipper and a carrier first.

    One way to potentially address this issue is to focus on just shipper and carrier niches that have no alternative – e.g. cannot afford working with a broker, and are yet busy enough to not frequent load boards on their own. For this unserved market, It may become a "no regrets" move to sign up.

  3. Wayne Hu

    There are some downsides to this strategy however: a) if you're filling the last truck for these smaller independent carriers that can't afford a broker, you might have to worry about quality of service – what incentive do they have to deliver the goods on time and in shape if this is just a one-off load to fill capacity? and b) it might be more difficult than is usually the case to convert the newly signed up shippers and carriers to actively engaged users if they're joining with a "why not" value prop…it's one thing to sign up, it's another to go through the many steps required to source, coordinate and execute a load movement.
    I think these are clearly concerns that a review system, and market and interface design clearly needs to keep in mind. I like your Priceline point a lot – maybe if carriers could enter their route information in some basic transportation/route management program online (something small carrier probably have to do with a pen and paper today), then the system could auto-generate leads for the empty routes. Maybe a way to solve the standalone value prop problem and the active engagement problem with one stone…

  4. leeway12

    Thank you for sharing interesting insights on the challenges that are being faced by the logistics companies in the US. However, I would like to know the major reasons why domestic logistics companies have still not adapted to the use of GPS tracking systems in their business process?

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