Logistic Service Provider (LSP) vs Freight Broker: A Comprehensive Comparison
The logistics and supply chain market has a long list of terms that often confuse people.
While there are numerous articles on the differences between a motor carrier and freight broker, there are very few on the topic of comparing a freight broker to a logistics services provider.
While the terms freight broker and logistics service providers are often used interchangeably, the two are markedly different. To help clear the, air we are going to walk through the definitions of a logistics service provider and a broker, then move on to a comparison and the reasons why you should care.
As part of the process, we will also cover the definition of a motor carrier and a freight forwarder because of their importance in the understanding of freight brokers and logistics service providers.
The reason for covering these various entities in this way is there is not a one size fits all answer, yet we continue to see articles indicating there is. Our purpose is to stick with definitions, terms and services models so that shippers will have the tools to determine which is the best fit for their particular requirements.
The main distinctions companies need to know about motor carriers, freight brokers, logistics service providers and freight forwarders is:
Asset or non-asset services
Primary insurance coverage
The Federal Motor Carrier Safety Administration (FMCSA) is the ultimate resource on this topic and is one of the resources companies need to use to ensure they are operating as a legitimate freight service provider.
Often,a freight broker will hold itself out as owning assets, but by checking their authority on the previous link you will know for sure what type of freight entity you are working with for your company.
In some cases, you will find that they are not even operating as a legal non-asset service provider.
Now, with all the semantics behind us, let’s jump into the topic of freight brokers and logistics services.
Definition of a Freight Broker
A freight broker is a person or an entity which arranges for the transportation of property by a motor carrier for compensation. A broker does not transport the property and does not assume responsibility for the property, meaning they do not own the freight equipment that is moving the load.
The above definition seems simple enough, but there is quite a bit to unpack to get to the full meaning, so let’s look through it in more detail:
Freight brokers do not own assets themselves, so they purchase transportation from mode-specific carriers, such as a less-than-truckload or truckload provider.
They make a profit by marking up the rate, essentially functioning as transactional agents.
Brokers are not first in line when it comes to cargo liability coverage. This is held by the asset carrier used in moving the freight load.
Brokers do hold contingent cargo coverage, which comes into play if the carrier’s coverage does not hold. Not all broker’s carry similar contingent cargo and other policies that they should.
or more in-depth coverage, we highly recommend you read the Do’s and Don’ts of Freight Broker Insurance Coverage and Intermodal Claim & Insurance Information Outlined.
Under freight brokerage laws, if the freight broker does not pay the carrier for the shipment they moved for your company, whether they go out of business or they just refuse to pay the bill, then the company will have to pay the carrier, even if the company already paid the carrier for that freight load.
This point is often missed by even the most seasoned freight professional and we recommend you get familiar with this topic through some of the best transportation and logistics law firms.
For more on freight brokers, we suggest reading 10 Tips on How to Select the Best Freight Broker for Your Company. This blog will not only provide tips on how to ensure you are working with a high-quality broker.
Definition of a Motor Carrier
A motor carrier is an asset-based entity that transports property for compensation.
A motor carrier owns the assets and is primary on the insurance for the freight they move.
Definition of a Logistics Service Provider (LSP)
A logistics service provider moving freight for companies will look the exact same as a freight broker on the FMCSA site, as their operating authority is that of a freight broker.
The main difference is that an LSP has a much wider array of tools, technology and services a freight broker does not have at its disposal.
Before jumping into the comparison of freight brokers and LSP, I wanted to also share the industry does muddy the water a bit more on the topic of LSP’s by often calling them third party logistics companies (3PL’s) or fourth party logistics companies (4PL’s), which can be a non-asset logistics service provider from either the freight, warehousing or both sides of the logistics and supply chain industry.
Definition of a Freight Forwarder
A person or entity which holds itself out to the general public to provide transportation of property for compensation and in the ordinary course of its business:
Assembles and consolidates, or provides for assembling and consolidating, shipments and performs break-bulk and distribution operations of the shipments
Assumes responsibility for the transportation from the place of receipt to the place of destination
Uses for any part of the transportation a rail, motor or water carrier subject to the jurisdiction of either FMCSA or the Surface Transportation Board
What one should know of a freight forwarder is they often own some assets, but the majority of the business model is non-asset oriented. Freight forwarders’ primary focus is moving international freight under their house bill of lading or house airway bill, which makes them first in line for liability.
Comparison of Freight Forwarder and Logistics Service Provider (LSP)
With the definitions out of the way, let’s get into the comparison of a freight forwarder and LSP.
As mentioned earlier, there is a place for all four entities in a company’s supply chain strategy: motor carrier, freight broker, logistics service provider and freight forwarder, although none of them could not exist without a motor carrier.
In other words, value your relationship with motor carriers and show them the respect on the road they deserve because without them the logistics industry would not be what it is today and how we get our food, clothing and all the other goods to our home would be impossible.
Non-Asset Transportation Service Provider
Both the LSP and freight broker are non-asset transportation providers that operate under a brokerage authority.
The value both a freight broker and a logistics service provider brings is capacity and service, so a company does not have to have relationships with 100's of motor carriers.
The only add to this point is intermodal service providers, or as those in the industry call intermodal marketing companies (IMC’s), operate under a brokerage license. This means they have a much different relationship with the class I railroads in how they deliver the service.
Under a true IMC, the provider has a direct relationship with the railroads, where a broker is buying intermodal service through an IMC, which more in-depth analysis can be found in reading Intermodal: Asset and Non-Asset Providers Explained and Defining Asset & Non-Asset Intermodal Providers - Advantages of Both.
A freight broker tends to be transactional oriented fulfilling a company’s specific need on a day-to-day basis where they go out to the spot market to obtain capacity for the shipper.
An LSP, on the other hand, tends to be more big picture and strategic focused. LSP’s have contracts with their shippers on specific lane requirements. An LSP can also obtain capacity in the spot, but this is not its primary way it goes about obtaining capacity for its customers. LSP’s go out for blanket contracts that roll up the volumes across their entire book of business for the best service and value.
Volume of Shipments
Companies that are smaller in size tend to get everything they need from a freight broker. Also, smaller companies often do not have the volumes necessary to have a contract rate for a full calendar year, so they have no other choice but to move their freight under spot rate contracts.
Medium to larger companies have the volumes necessary to drive year round contractual rates for their business, which plays much better than utilizing spot rates for the business.
Now, some companies will argue that they save by utilizing spot rates for all their business, which may be true in the short term, but certainly not in the long term. The reason is spot rates are supply and demand curve oriented, meaning the tighter the capacity, the higher the price and vice-a-versa.
As we like to put it for those that believe the spot market gives them the best rate and service is to consider when to buy a new refrigerator for your home. Do you buy when the appliance when it is on sale or do you buy when it breaks? Nine times out of ten the refrigerator you were eyeing is not on sale at the time it breaks, but you hear from the sale person it was on sale last month. In other words, you are in a better position to buy when you want it, not when you need it. This is the same for buying rates on the spot market.
The topic of technology, as it relates to brokers and LSP’s is really about communication, reporting and analysis.
Logistics service providers have the best cloud-based transportation management systems in the industry that handle the communication to all internal and external stakeholders, along with capturing all the details on a freight move to report and analyze for both tactical and strategic initiatives.
On the communication side, LSP’s can handle phone, email, fax, FTP flat files, EDI and XML, whereas a broker tends to operate more via phone, email, fax and flat files to managed and communicated from the initial freight tender to final delivery and settlement of the invoice through freight audit and pay..
The LSP’s technology also has built in a freight optimization engine that allows them to optimize the freight for best price and service, whether that is modal conversion or pooling and consolidating LTL freight.
An LSP is second to none on the data collection of shipment data for reporting and analysis for a strong business intelligence (BI) solution on a company’s logistics and supply chain performance. The insight brought to a company on the TMS is a game changer for companies on service and cost. The result is working with one of the better LSP’s provides a company a strategic advantage over its competitors through an LSP’s managed transportation service solutions at a very low cost that typically has less than a year return on investment.
As the technology section indicated a logistics service provider operates on a higher, more complex service solution model. As mentioned earlier, an LSP can provide capacity for any mode, which is what a freight broker brings to the market, but the value add is being able to offer so much more than just a truck and a rate.
Where the complexity comes in is a logistics service provider brings its talent, market knowledge and technology together to offer service solutions that include managed transportation, inbound freight management, freight audit & pay, consulting services, etc.
Network of Resources
Not only does the LSP have a network of resources internally, but they also have the ability to tap into market data that through their knowledge and their systems can pull together a complete supply chain solution, whereas the broker is transactionally oriented in any given day, week or month.
The network of resources is an LSP has a greater database of active and approved carriers that allow them to leverage on price and also a quick turn on obtaining capacity. Brokers tend to have a niche and key carriers they leverage for their customers in regions of the country.
Keep in mind freight brokers and logistics service providers are service providers. They do not own transportation assets, so their assets are people, technology, industry knowledge and ability to pull it all together to get the job done for you and your team.
Align yourself with the most reputable and service-oriented team you can find for your company and understand there will be service failures at times. Pay close attention on how your provider recovers from the service failures and how they correct themselves moving forward so they do not become the standard.
Hopefully the walk through comparison of a freight broker and logistics service provider helps in your decision as to which makes the most sense for you. We’d love to be a part of the conversation as you go through your buying journey.