Can Asset Based Carriers and Owner Operators Survive 3PL/Broker Pricing?
Current Logistics Model is the Opposite of Sustainable
The unprecedented growth of third party logistics and broker entities began in 2001, shortly after the terrorist attacks in New York and Washington, D.C. Coincidentally, that fateful autumn was precisely when Zip Xpress opened its doors for business.
Bad timing, maybe, but who can predict these tragedies; it had seemed like a good time to launch, with the economy in fairly decent shape, but we all took a hit when the Twin Towers fell. Soon, our economy started to slow and eventually fell into a full blown recession. As the downturn widened, manufacturers were saddled with lower prices in order to remain competitive, and the entire supply chain soon felt the sea change.
Carriers and all the associated support system of service business suffered in the chain reaction of recession. Jobs were cut everywhere in transportation; others were combined and folded into related duties for cost savings. Everyone was trying to make up for rising competition costs and for falling prices on virtually all goods.
Shipping came into the crosshairs
Shipping – an obviously critical area of “commerce infrastructure” – quickly became a victim of the turbulent times.
In a huge miscalculation by many economists and industry outsiders, shipping became a target of relentless cost cutting without regard to repercussions. The buzzword was on everybody’s tongue: Outsource it all, they said.
Far and wide, transportation and logistics were outsourced to third party companies that made promises, promises of less expensive ways to move goods to market.
Very little discussion about “better” ways to move goods … just cheaper.
And seldom in a good sense of the word “cheaper.”
Recovery, then epic recession
By 2005, the economy started rebooting … almost back to pre-2001 levels of business. And then it became clear, a few years later, that a global recession was at our door. It was very close to a depression in 2008-09, with severe, almost weekly austerity cuts in manufacturing in particular.
Once again, in its ripple effect, came the targeting of transportation.
Dramatic levels of logistics outsourcing continued, with lower and lower transportation costs demanded of us from all economic sectors.
Literally countless – as in unaccounted for – brokers and 3PL companies popped up everywhere. Over this whole time period, good times and bad, many made huge windfall profits. Far more brokers and 3PLs opened than new asset based companies; all the third party had to do was promise lower rates at any cost to the industry.
All this time, the carriers and owner-operators were on nobody’s radar, even though they were increasingly working from a dollar that was not really a dollar anymore. In the new supply chain reality, it became a dollar … less the fees for broker/3PL services, which never come from the payer of the transportation bill. It’s always the carrier that eats the broker’s cut.
Dismal returns for the effort
As the president of Zip Xpress, I have watched these trends for the past 15 years; I’m deeply concerned as to where and when these changes will level out. Asset-based carriers need enough profit to grow and maintain their fleet, to attract good people … especially good drivers, and to structure wages that will retain that talent over time. If one were to measure the profit margins of brokers and 3PL firms versus asset based companies or owner operators, I would suspect there is now a vast disparity in favor of the third party people … and they don’t own a single power unit, trailer, or facility to heat and maintain.
The trucking industry’s profits are dismal and getting worse. The resources are lacking for reinvesting into efficiencies, research, development, or facility expansions/upgrades.
Even the largest in the business, such as UPS and FedEx, have shown deteriorating profit margins within their domestic transportation divisions. Meanwhile, the 3PL and broker arena surges on.
North American carriers are under siege
To start a trucking company – of simply one power unit and trailer – it takes a minimum of $150,000 cash, cash flow, or line of credit (LOC). Count on huge numbers to start at the fleet level of operation.
To start a brokerage, it takes just $75,000 of “Surety Bond” cash flow or LOC.
- No fleet insurance going up year after year.
- No worries about fuel prices, fleet maintenance, facility upkeep.
- No relentless searching for good drivers and freight handlers.
- No worries about EPA and federal commerce requirements.
All of which begs the question: Why would anyone choose to put his or her neck on the line being responsible for iron and steel assets, for hiring people at a respectable rate, for benefits and retention and more?
As the owner of an asset based carrier, I am forced to deal with broker rates every day. The frustrations about this new reality have diminished my excitement to remain in this business.
Having talked with many other owners, their sentiments are very similar. Many say they are getting out as soon as they can. The profits versus responsibilities versus risks just aren’t worth it anymore, they’re saying. This is felt from coast to coast, and at some point the new brokering model will become unsustainable.
What is the solution? Despite my career-long involvement in the industry, I’m not sure. It is very hard to take something back after it has been given; after people have adjusted their habits to the new “supply chain of command.”
One thing I am sure about: Our industry cannot survive, let alone flourish, getting only 70 cents to 90 cents of our past dollar, with the rest going to the third-party industry. Especially if outsourcing continues to reward “cheap” at all cost, even if the shippers and receiving customers are poorly served “on the cheap.”
This is the opposite of sustainability.
The number of owner operators and asset-based carriers in North America will continue to shrink without some smart adjustments to this scenario.