Comparison between Freight Broker and Managed Transportation Services Freight Operation Models
The freight broker market continues to evolve its value-add proposition for shippers. Technology has put this transformation process into hyperdrive transitioning many freight brokers into logistics service providers (LSP’s).
While the transformation is a tremendous opportunity for shippers to improve their supply chain KPI’s and cost, the pace of change has left some freight & logistics buyers behind.
The freight logistics service with the ability to transform a shipper’s supply chain from a Yugo to a Tesla is managed transportation services. While this service has been available for a number of years, the focus and implementations have been primarily around the largest of shippers. The reason being is only the largest managed transportation service providers had the technology and resources to make the service transformative and the largest LSP’s tend to have a greater focus on the Fortune 500 companies because they had the size and scope to save millions making the ROI calculation an easy sell on the solution.
Fast forward to today and shippers of all sizes can take advantage of managed transportation service solutions because:
The cost of managed TM technology has lessened, particularly within the cloud transportation management systems (TMS) solutions market.
Implementations are easier and less costly because the cost of technology and the strength of the TMS platforms are so advanced.
The benefits of improved cost and service levels are well documented.
The typical shipper can realize an ROI in less than a year.
The days of beating down carriers for lower pricing are in the rearview mirror. Managed transportation services bring costs down through technology, leveraging the buy across multiple shippers and data not easily available but critical in negotiating the best freight rates.
Logistics service providers of all sizes with an eye for the mid-tier shipper market are here to help. As the article entitled What’s New in Managed Transportation says, there has been tremendous growth in companies with less than even a $5.0 million freight spend.
A couple of articles that help in the above discussion to this point include:
With all the above value, there remains market confusion as to why we are comparing managed transportation services to standard freight brokerage. Our goal in the end is to bring transparency to this topic, so you can decide whether it makes sense for your company to explore the options.
Managed Transportation vs Freight Brokerage Model
There are four key differences between managed transportation and freight brokerage:
Ownership of carrier relationships and contracts
In the freight broker model, the shipper calls or sends the freight load information to their broker with the mode, origin and destination address, and all the other freight details required for the broker to dispatch and manage the freight to final delivery, as requested by the shipper. After the shipment delivers, the freight broker will provide the shipper with the POD and eventually the invoice, with its required back-up.
Under a managed transportation services solution, the shipper employs the LSP to manage all the shipper’s freight. The essence of the program is the shipper sends all its shipments to the LSP via an electronic feed, EDI, XML or FTP flat file.
The LSP loads the shipper’s order information into their transportation management system (TMS) to do a high-level plan to optimize the freight to be moved for the day.
In the optimization process, the LSP’s rating engine looks for consolidation, pooling and mode conversion opportunities focused on minimizing the shipper’s freight spend, while still meeting the delivery requirements.
Once the details come through the optimization engine in the TMS, the LSP then tenders the freight to the shipper’s carriers assigned to the various lanes.
The tender process goes through what is called a waterfall tender process, where the least expensive is given the first opportunity to accept the tender, but if they do not, the tender will continue to fall through the tendering process of all the carriers assigned to that particular lane until accepted.
If all the carriers under contract on the lane reject the load, the LSP backs up the lane on its own carriers. This should only occur less than 2.0%.
If you are with an LSP where this is not the case, then there are two possible problems for this:
The routing guide is not deep enough on the contracted carriers required to cover the shipper’s business.
The LSP may not be separating its managed TM and brokerage division and driving business to its margin side also.
We hope shippers do not find themselves in this situation. An interesting Forbes article entitled When Freight Brokers Provide Managed Transportation Services, is there a Conflict of Interest is a good read on the topic that would indicate there is not, but worth checking to makes sure you have not fallen into this situation.
Ownership of Carrier Relationships and Contracts
Under the freight brokerage model, the broker holds the contract with the carriers it uses to move the shipper’s freight. The freight broker makes its money on the spread it charges the shipper versus what they can negotiate on the carrier’s price.
A typical managed transportation services solution has the shipper holding the carrier contracts and relationships. The LSP makes its money in this model through management transaction fees versus the buy-sell spread found in the brokerage model.
If you haven’t done so yet, we highly recommend reading How Much Does Managed Transportation Services Cost? A Comprehensive Pricing Guide where you will find these fees are not something to fear.
What does need to be said under this section is the LSP establishes the shipper’s carriers that will be used in the managed TM solution by running an RFP at the beginning of the relationship. The LSP brings together the shipper’s current relationships, then augments the RFP with carriers it knows will offer competitive rates with high service levels.
The LSP will also run min-RFP’s when volumes shift, are added to or they recognize a market ship. The end result is the LSP wants top tier carriers on the shipper’s freight, so it will only need to tap into the brokerage market less than 2.0% of the time because of capacity needs.
LSP’s bring unmatch TMS technology to shippers through their managed TM service solutions.
Under the freight brokerage model, the shipper has their transportation software and the broker has theirs and never the twain shall meet. Each system has data the other does not want to share in the customer-vendor relationship.
In the managed TM model, the LSP provides the system for both the shipper and LSP to operates. In other words, one platform … one team … one focus. The shipper will see exactly what the LSP executing its business will see. All reporting and analytics will come directly from this platform. The shipper integrates its order management system (OMS) into the LSP’s TMS. The LSP will create the reports, portals and any other mechanism for the shipper to allow its internal and external customers to have access to the data the shipper wants to share.
Logistics services providers are in the freight market every day with multiple shippers having very different and similar requirements. This gives LSP’s an incredible amount of freight market intelligence, which they also combine with market analytic data that they purchase.
The LSP turns its data into knowledge, which is infused into their managed TM service solution to consult with the shipper to drive optimal results. The days of the shipper competing against itself for the best rates are done. What do we mean by this you ask? Well, how often has your finance group told you to reduce next year’s budget by “X” amount. My guess is plenty of times.
The point here is how is “X” reduction chosen. From what we have seen, it is often the solve-to number required to make the bottom line budget work, but instead of “X” maybe the reduction should have been “Y” or “A.”
By employing a managed transportation solution with an LSP, the game-changing element is the LSP knows what is competitive and can optimize the results off the “real” spend captured by moving the freight through its system every year. We have found the savings to be tremendous with results typically above 10 percent and at times mid-20s.
With the key distinctions now discuss, we will add some additional points to the various topics within a managed transportation services solution. To help in the process, please see all the activities LSP’s provide through a managed TM program.
Additional Points to Help Clarify Differences in Freight Brokerage and Managed Transportation Services
Procurement of Carriers
As was mentioned earlier, the LSP negotiates carrier rates on the shipper’s behalf using the market intelligence they have within their network. The move in the holder of the carrier contracts has changed how companies present themselves in total size. So, instead of calling out “our company is x.x million, billion or trillion in revenue” you will hear “our company has x.x million, billion or trillion in freight under management.”
Execution of Shipments
The only point to be added in this section is to take a close read all the way through the above chart to see everything going on within a managed transportation solution.
Under managed transportation services, the shipper can expect to only have to oversee and review the logistics activity being executed on its behalf through its LSP relationship. Everyone is on the same team within this service solution.
Settlement of Shipments
Let’s face it, the back end process of auditing and paying freight bills is one of the least glamorous. An additional service brought to shippers through a managed TM solution is freight audit and pay. The LSP makes this look easy because they have the contracted rates within the system, which they then have the carriers send their invoices to the LSP’s optical character recognition (OCR) audit program to scrape the required invoice information that goes through a three-way match on rates and approved accessorials.
After the invoices go through the pass and are approved through the audit function, the LSP assembles a single invoice for the shipper to then fund to the LSP. The invoice can be a single account or the shipper can tell the LSP how it wants the freight spend classified into its account codes for accounting purposes.
The LSP will pay the carriers via check, ACH or wire once funded by the shipper.
At month end, the LSP will provide the accounting whatever they would need for accruals and reporting.
In some cases, the money saved in finding rate discrepancies and accounting staff pays for the program by itself.
Visibility, Reporting and Business Intelligence
Often times data can be seen as more important than the shipment itself by various groups within the shipper’s corporate structure.
There is tremendous value in the data that is captured in the program that brings what-if analysis on daily, weekly, monthly, quarterly and yearly reviews to drive a shipper’s supply chain to be a value-add competitive advantage versus just a cost center.
The analysis is “real-life” work versus averages-of-averages that many shippers do today because the amount of data cannot effectively worked in an Excel spreadsheet. All we can say is the data brought to the service is a game changer and on that note we will close out this article.
We hope after reading this article we have opened your eyes to the value a managed transportation services solution can bring to your business and hope we can participate in your journey to find a LSP that will be the best fit for your company.
For more on freight management service solutions we recommend the following comprehensive articles:
- The Complete Guide to Managed Transportation Service Solutions
- The Complete Guide to Freight Management Service Solutions
Also, don’t forget to review both your company’s outbound and inbound freight requirements. Bringing the two together can bring additional value and visibility to your entire supply chain.