Trust in Logistics – a broken system on the verge of revolution
Trucking in the US is a very large sector of the logistics industry. It rests on the shoulders of 3.5 million truckers. 1.1 million registered trucking companies. Over 13,000 freight brokers. Hundreds of software companies. Millions of shippers of all sizes. The industry is very fast paced, nuanced and unpredictable. It is relatively easy to get into trucking, as the barriers to entry are very low. Hundreds of new trucking companies enter the space daily to chase the American dream. When I first got into this business in 2002 I was pleasantly surprised how easy it was to get going, generate revenue and even turn profit. However, as the time wore on, all the issues plaguing American trucking started to reveal themselves. Apparently, again, to my surprise, there was no shortage of them. These issues multiplied and compiled over time.
Government safety regulations, IFTA ( International Fuel Tax Agreement ) reporting, driver turnover and shortages, low freight rates offered by brokers, lack of direct customers or an over dependence on one, equipment maintenance, abuse and misuse, slow invoice settlements, fraud, load theft — just to name the few. However, in my opinion, the heaviest issue that I see is the the issue of trust, or the lack of it. You see, in this highly fluid and largely opaque industry players simply don’t trust each other.
The industry is highly centralized around large trucking companies and large freight brokers. Shippers outsource their logistics operations to a few of them in order to avoid having to trust and deal with too many vendors. Large players bring the technology and man resources to the table to handle the job. Sounds reasonable, right? But here is the issue — this set up largely alienates most small trucking companies from participating in this economy directly. Note, 90% of all US trucking companies run 6 truck or less. Yes, these small trucking companies are the ones who actually carry most of that freight, but it comes to them at a heavy discounted rates. In slow times rates can become so low that it forces many of them to close doors and loose the equipment to the bank. The entire industry is held hostage by the large companies who want to preserve this set up. Their job is to keep their shipper customers fed and happy by alleviating the headaches associated from having to manage the trust and relationships with hundreds, if not thousands of small carriers. These hefty trust intermediaries are not cheap. 15 to 30% commissions are common in this game. However, again, here is the problem, trucking is a low margin business. 5% profit margin is normal for a small trucking companies. So, to me, most of that commission should end up in the pockets of a small carrier and consequently, the driver. You see, truck drivers are the ones who end up holding that bag. Low wages and driver abuse is the byproduct of this good-ole system. As a result, we now experience a serious driver shortage. Being a truck driver is simply not that attractive. If this problem persists, you, the consumer will be paying a lot more for the products you buy, because the freight rates are skyrocketing. Remember, freight rate is a big portion of product’s price. How would you like to pay $7 for a gallon of milk, cause, you know, it may come to that.
Well, now, that I got you all depressed and angry, what are we gonna do about it?
The most logical thing to say would be — Lets get rid of all the rich oppressors who build barriers between customers and small hardworking folks like us and WHOALA! Well, that would be a utopia dream. You see, these “oppressors” solve real problems for shippers. A plastics manufacturer doesn’t want to deal with it, they want to concentrate on their own business of making plastic. Thats why it makes sense for them to outsource the logistics function. Out of sight, out of mind. The less you know the better you sleep.
So in order for us to solve the problem for the little guys we first have to solve the trust and headache issues for the customer first. After all, they are the one who pay the bill, right?
So, how do we do that? How do we eliminate headache and trust issues for the customer?
Unfortunately, this is not a conversation for one article. However, I have an idea.
We have to develop a system with a brand new mind set. Most technology companies enter the space with this slogan. “ Automate everything, get rid of brokers”, but what they actually are doing is becoming brokers themselves. That doesn’t fix the problem. Granted, automation may lower the overhead and consequently, the commissions, but will the savings get passed to the carrier and the driver? Unlikely.
A new, neutral system has to be designed that does the complete opposite. Don’t alienate — include, enable collaboration, encourage transparency. Don’t oppress or abuse the little guy — help them succeed, consider the drivers, be fair. Don’t centralize — make it open to the public, while preserving privacy and confidentiality. Find a way to incentivize good behavior by all players involved, help companies improve by providing unbiased actionable insights, show them how. And, yes, do all of that, without creating headache for the dear customer.
Its a large undertaking, but it can be done. Any thoughts?