Managed Trans vs Brokerage Model in Declining Rate Environment
Wynneford Advisors
Supply Chain Consultants with a Quantitative, Implementation Focused Approach
Multiple freight indices from Cass to DAT point to double digit drops in dry van truckload spot market rates through August 2022. For freight brokers, this is the most profitable time of the freight cycle. For shippers, this is the time where vigilance and a careful assessment of the appropriate outside transportation model are needed.
A publicly traded broker highlights this point best. Emphasis is mine:
“Our second quarter of 2022 surface transportation results benefited from the softening market conditions, as periods where the cost of purchased transportation [i.e., carrier rates] begins to decline often result in improved adjusted gross profits per transaction in our portfolio.”
In short, when rates begin to fall, broker margins increase because they have a fixed rate with their shipper but can negotiate lower rates with their carriers. In this company’s case, their carrier rates fell 5% while they actually increased their customer pricing by 1.5%. That’s a 6.5% difference between what a shipper would pay under a typical broker arrangement and what they would pay under a transparent managed transportation arrangement.
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To be fair, these companies also faced compressed margins when purchased transportation rates increased faster than they could raise rates during 2021. However, brokers still raised rates over time.
In conclusion, shippers should consider managed transportation providers that offer transparency, especially during downturns in freight rates. Wynneford can assist clients in conducting a competitive 3PL RFP that focuses on costs as well as customer service, visibility and data management.
During 2Q22, a Wynneford client realized 14% lower freight costs through a managed transportation provider, which equates to over $1mm in annualized rate savings. During the RFP process, other managed transportation providers offered contracted rates that were HIGHER than the previously negotiated rates. The eventual winner offered a transparent model that aligned their compensation with minimizing the client’s shipping costs. The resulting savings speak for themselves. ?