Right Price: Modern Freight Brokerage in the U.S. September, 2015 Phone: +1-800-525-3915 Website: www.3PLogistics.com Email: [email protected] ABOUT ARMSTRONG & ASSOCIATES, INC. Armstrong & Associates, Inc. is a supply chain management market research and consulting firm specializing in 3PL strategic planning, logistics outsourcing, competitive benchmarking, mergers and acquisitions, 3PL service/cost benchmarking, and supply chain systems evaluation and selection. Armstrong & Associates’ Who’s Who in Logistics Online Guide to Global Supply Chain Management provides Internet access to its continually updated 3PL database. Recent research papers include “Big Deal – 2014 Results and 2015 Estimates”, “Global and Regional Infrastructure, Logistics Costs, and Third-Party Logistics Market Trends,” “Trends in 3PL/Customer Relationships,” “3PL Brand Recognition, RFP Activity and Expected Profit Margins for 3PLs – 2013,” and “Mexico: Trucking, Railroads and Third-Party Logistics Market Report.” All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopied, recorded or otherwise, without the prior permission of the publisher, Armstrong & Associates, Inc. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Armstrong & Associates delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such, Armstrong & Associates can accept no liability whatsoever for actions taken based on any information that may subsequently prove to be incorrect. © Copyright 2015 Armstrong & Associates, Inc. 2 | Page Modern Freight Brokerage/Domestic Transportation Management The modern freight brokerage/Domestic Transportation Management (DTM) segment of the U.S. Third-Party Logistics (3PL) Market looks very different from the original "one man with a desk and phone" model. The evolution of freight brokerage to DTM and its core offering--modern, IT based freight brokerage with a host of value-added services-- stems from the federal deregulation of brokerage licenses. Governmental control of freight brokerage licenses eased dramatically in 1980 as part of motor carrier deregulation. There were 14 freight brokerage licenses before deregulation. After deregulation, the only major constraint to obtaining a license was the requirement for a $10,000 surety bond. The number of licenses issued grew dramatically and reached a peak in the late 1990s with more than twice the current total of ≈15,500. The surety bond minimum was raised to $75,000 at the start of 2013. The number of license holders dropped to the current level after years of slow change as freight brokerage consolidated and major companies developed into third-party logistics DTMs (domestic transportation managers). Of the remaining licensed freight brokers, there are about 50 who have net revenue (gross revenue or turnover minus purchased transportation) exceeding $20 million. Armstrong & Associates, Inc. (A&A) estimates that there are another 250 freight brokers having gross revenue of over $20 million. The top 40 account for over two-thirds of freight brokerage/DTM gross revenue and more than 70% of net revenue. Figure 1. North American DTM/Freight Brokerage Market Reality There are approximately 1,500 freight brokers with fairly sophisticated skills, but with revenues of less than $20 million. Modern, large freight brokers have evolved quickly, developing sophisticated DTM skills based on human capital, IT support, and process management capabilities. Freight © Copyright 2015 Armstrong & Associates, Inc. 3 | Page brokers handle thousands of truckload (TL) and less-than-truckload (LTL) shipments daily relying primarily on electronic communications with shippers and carriers. Most of the top freight brokers/DTMs have tight, quality-controlled operations split between carrier procurement and account management. Before carriers are utilized by a freight broker, they are qualified by providing insurance, operating authorities and other basic company information. Rates for desired traffic lanes are often furnished. Freight brokers/DTMs maintain individual carrier files, shipment lane histories, and large electronic rate libraries. Most orders are received electronically from shippers (via electronic data interchange (EDI), systems integrations, email, web portals, etc.). Shipments are then electronically tendered to carriers who are given a short time window to accept them. Once accepted, all parties are notified. Shipments are then picked up and delivered. Exceptions are dealt with electronically and, as a last resort, by phone. Large customers of DTMs—“enterprise accounts”--are often treated separately from smaller more transactional customers. Enterprise accounts tender large volumes of orders daily to the DTMs to manage transportation for multiple locations in their networks. Generally, DTMs optimize the daily order tenders from major shippers using a TMS (transportation management system) consolidating LTL shipments into truckloads and performing end-to-end truckload matches to develop best cost/service routes. These network transportation management shipment transactions often follow repetitive contractual patterns. Pure spot market transactions without either pre- negotiated carrier or customer rates are a small part of the total. Figure 2. DTM/TMS Optimization Process Flow ORDER/SHIPMENT INPUT STRIPOUT/FILTER SHIPMENTS Rail box cars, UPS, expedited loads, etc. RUN CONSOLIDATION ROUTINE Package to LTL, LTL to TL Using real rates (mode shifting optimization) RUN MATHEMATICAL RUN MIXED NETWORK FLOW INTEGER PROGRAM To isolate TL carriers by available capacity To find end-to-end “best routes” EXPORT RESULTS For logistics engineer review According to research done by William Greene's team at Morgan Stanley, 48% of large shippers use two to five freight brokers, and 38% of large shippers use six or more © Copyright 2015 Armstrong & Associates, Inc. 4 | Page freight brokers. Freight brokers now handle an estimated 15% of all LTL and TL shipments in North America. Large shippers look to them more often to increase their options, especially during periods of tight trucking capacity. Trucking demand exceeds supply on a periodic basis in the U.S., especially during peaks in late summer and fall. During these times, shippers are increasingly choosing reliable freight brokerage DTMs to cover transportation needs. Many shippers have added brokers to their core carrier list to ensure ongoing capacity. In the U.S. there are approximately 50,000 companies utilizing DTM/Freight Broker services. Of those, an estimated 520 of the largest shippers have total transportation spends of more than $100 million, the next 675 have spends of $30 - $100 million, the smaller 15,000 shippers have spends of $15 - $29.9 million, and the remaining 33,000+ shippers have total transportation spends less than $15 million. Figure 3. Transportation Spends of Domestic Shippers The American Trucking Associations (ATA) estimates that there is a shortage of 35- 40,000 truck drivers in the U.S., which in turn creates a tractor capacity shortage. Despite pay increases and better scheduling, this capacity limitation continues from year to year. Shippers see the need for DTM relationships that will protect them during tight trucking capacity times. As a result, closer relationships are formed. Modern freight brokerage/DTM, with its greater transparency based on IT capabilities and improved operational performance, provides customers with better service and differentiates major DTMs from smaller freight brokers with less efficient business models and limited carrier capacity. Freight brokers/DTMs are careful to provide capacity for their large clients first. Coyote Logistics differentiates itself further with a guaranteed on-time service at the contracted service price, even if it has to take a loss on the shipment because of increased carrier charges due to strong demand. © Copyright 2015 Armstrong & Associates, Inc. 5 | Page With a strengthening U.S. economy, tight carrier capacity, and the expansion of modern transportation management skills, U.S. 3PL DTM segment gross revenue reached $56.8 billion in 2014 and net revenue grew 20.5% from 2013 to $8.5 billion in 2014. DTM segment growth rates should exceed 10% per year for the foreseeable future. Figure 4. Trends in Trucking vs. DTM Gross Revenues (US$ Billions) $1,000 $100 $800 $80 Hire Revenue - $600 $60 $400 $40 $200 $20 U.S. 3PL Revenue DTM Gross Segment Transportation, Trucking, and For Transportation, Trucking, $0 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transportation Trucking For- Hire DTM The current DTM/Freight brokerage market is dominated by truckload dry van shipments. Truckload accounts for 85% of revenue. Less-than-truckload and intermodal have grown to 9% and 6% respectively. Figure 5. 2014 DTM/Freight Brokerage Revenue by Mode 6% 9% Truckload Less-than-truckload Intermodal 85% Sources: Armstrong & Associates, Inc., ATA, Morgan Stanley Research Dry van traffic accounts for 72% of truckload revenue. Refrigerated is 22%. Flatbed and bulk are smaller segments covered by specialized operations. © Copyright 2015 Armstrong & Associates, Inc. 6 | Page Figure 6. 2014 DTM/Freight Brokerage Truckload Revenue by Equipment Type 4% 2% 22%