ANAHEIM, CA -- 03/20/08 --
Bob Walters, president, Freight Management, Inc.
Some in the industry would have us believe that outsourcing started with 3
Party Logistics (3PLs) in 1985, as public and private warehouses became
abundant throughout the nation to store and ship their clients' goods,
3PL's history actually goes backs to the 1960s -- although in a different
form and in a much more limited supply.
In fact since 1969, licensed brokers were already operating as (or with)
traffic departments, managing full time staff onsite. They managed their
claims, their audits and were in charge of overseeing their day to day
operations.
To really understand the history of 3PLs though, you have to understand the
changes that have taken place in our industry and how changes today
continue to impact our operations and services.
Since 1932 and up until the late 1960s, the world of trucking and freight
had seen rigid regulation with limited entry of new carriers and 3PLs.
There were just a few carriers available and those that did exist worked
just a small slice of the market. Contract carriers were limited to five -
seven contracts, if and only if, they overcame objections by other carriers
serving the same market. Only twelve Interstate Commerce Commission (ICC)
freight brokers existed, but if you wanted to buy one, you had to wait
until someone died, then purchase the broker's license from their estate.
One major difference in that era was that a trucker's value was based upon
their authority not the cost of the trucks or gear. Audit companies and
major shippers had to employ scores of staff just to file the daily flood
of new rates and rules that carriers issued for audits. By today's rates,
it cost shippers about 50% more than to move products. There was no single
carrier serving the nation: UPS did not yet have service in all areas,
especially the intrastate market, and FedEx did not exist. So a large
shipper might have used 40 - 50 carriers to serve all the states.
Given those limitations, Logistics Management companies and brokers set out
to help both shippers and carriers. Common carriers needed shippers that
could support them for authority and get more freight in the lanes.
Shippers, on the other hand, operated on the assumption that all rates were
the same; that you simply chose a carrier by the salesman you liked best.
While rates were rigidly regulated and authorities were limited, there were
always alternatives available to shippers for lower rates. They could:
master bill with the common carriers, do pool distribution, set up string
drops on load carriers; marry two pig trailers on the railroad, or they
could also use freight forwarders who offered different rates and could
provide volume discounts of up to 15%. These were some of the options
available from 1969 - 1978.
Private fleets needed back hauls -- like the large food chains, and then
helped them get their authority. They also received freight allowances with
the major vendors of Smart & Final, Vons and major fleet operators, thus
reducing landed shipping costs for inbound product. Brokers could support
them as a 'shipper' and help that process.
Brokers also pioneered the concept of palletization in the field,
identifying and introducing it as the standard. Prior to this time, all
freight was hand loaded and unloaded.
In addition, audit companies helped shippers by checking the accuracy of
their freight bills, which was difficult for them to do unless they owned a
huge tariff library.
By coming up with these solutions, brokers and early 3PLs were able to grow
their companies in a challenging environment.
After 1978, a major change came about when limited deregulation hit the
market place, first affecting air freight forwarders, then freight brokers.
In 1980, the carriers were permitted more rate flexibility as well as
easier entry for other motor carriers like Schneider, JB Hunt, and Covenant
Trucking. Rail agents could now post rates for single trailer loads. New
carriers spring up like mushrooms in the field.
To respond to the overwhelming new competition in brokerage, many had to
change their business plan again and take steps to control some of the
changes. Transportation Brokers Conference of America (now known as
Transportation Intermediates of America), was formed and began to offer
training and certification for the thousands about to enter this field.
Having a licensed broker billing the shippers was a totally new concept;
previously, the carriers did all the billing paying a commission to the
broker.
The new entrants who flooded the market had different levels of experience:
they were truckload operations, exempt brokers, moving van companies, and
others who were doing the shipper billing in their field. This rendered a
$10,000 broker bond totally 'inadequate.' The bond was never meant to
cover bankrupt brokers who failed to pay the carriers after receiving
payment from the shippers. Rather, it was designed to protect the shippers
against losses they might suffer from a broker failing to do what they
promised (i.e. leaving the shipper with a specific loss).
In the first year of deregulation, rates dropped 30 - 40% as options
increased exponentially. And yet, the increase made it more difficult for
shippers to choose the best option. Additionally, since most shippers
drastically reduced their traffic departments in the rush to cut middle
management, those making these decisions had less experience.
Along with more flexible rates, carriers were also permitted to expand
nationwide, even though many did not have the sales staff to sell their
programs in all the states they served. Brokers helped fill that gap.
In the chaos this created in transportation, many logistics management
companies and brokers recognized their new role was to provide order and
refine the choices while also providing cost reductions to shippers. To
survive in this business, they had to shift their program 180 degrees to
fit this market and serve its new needs.
In 1995, the industry opened further when rate deregulation took hold
nationwide accelerating the use of and demand for 3PLs. While warehousing,
freight forwarders, brokers, auditors, and management services had been in
existence since the 30s, though not as numerous as now, all had to change
to serve the market's changes.
Even today, the role logistics or freight management services provide
continues to evolve as a major part of our work requires the use of
computerized reports. These include reports from the audit process, EDI
transmissions, ASN dispatch and track/trace for inbound or outbound
freight. Not all carriers are able to provide this level of service -- and
yet, it is required if they want to remain competitive. Today only 5% of
the common carriers that existed in 1970 still exist and most of those are
in some degree of merger.
Who knows what the future can hold for any of them? Software is now so easy
to obtain and operate that it could jeopardize their clients' need to
outsource the audits, the brokerage and management of freight programs.
In 1975, there was only one company providing logistics management services
and 12 licensed brokers. In 1995, there were 20, and now, there are 500
plus 10,000 brokers in the traditional role. How many remain depends upon
what they are willing to do to accommodate the latest change. Most will be
gone with the latest tide, I suspect.
In transportation, you must find your role in relationship to what the
trends are in the world or face extinction. Just as certain as death and
taxes, change will always exist; in fact, it will probably accelerate in
the coming years. You either ride it to your success or die in the failure
to respond.
Contact:
Robert Walters
Tel: 714-632-1440 Ext. 112
Email: Email Contact
