DC Velocity - December 2013

transport analyst at Baird, said in an October research note that carriers are “managing from the trough,” analyst lingo for adopting a minimalist approach to their operations.

As their traditional haulage business stumbles along, carriers looking to generate new revenue streams have been expanding into nonasset-based services, Hartford says. The resultant convergence of asset- and nonasset-based coverage is causing problems for the nonasset-based players, especially those without sufficient buying power or a unique product niche, Hartford says. Shippers worried about reliable access to truck capacity are now more willing to utilize asset-and nonasset-based providers, the analyst added. This reflects a change in mentality from previous cycles, when shippers tilted toward nonasset-based firms that were more “carrier neutral,” Hartford says.

IS “RANDOM-ROUTE” PASSÉ?

Jonathan Starks, director of transportation analysis for consultancy FTR Associates, says shippers seeking capacity stability are reducing the amount of “random-route” freight they tender in favor of a dedicated contract carriage strategy, where a carrier dedicates capacity for a multiyear period in return for a volume commitment. Because the random-route traffic is a broker’s bread and butter, this migration is bound to slow broker growth, Starks reckons. The continued tightening in supply will accelerate the shift, which has been under way, albeit gradually, for about a decade, he adds.

Ryder System Inc., the Miami-based trucking and logistics giant, is one of those straddling both sides of the fence. Ryder has fused its brokerage services with its “dedicated” trucking unit. The program operates under one contract with a uniform set of terms and conditions, and a single point of contact at Ryder, according to Steve Martin, the company’s vice president of dedicated.

Martin says Ryder’s model gives customers both flexibility and capacity assurance, depending on their situation. It will also have the effect of siphoning off supply that would normally be available to nonasset-based providers through the noncontractual, or “spot,” market. As a result, “running a business on the basis of spot market activity will become more challenging,” Martin says.

Not surprisingly, those on the other side of the debate— notably the nonasset-based providers—haven’t gotten the memo about the sun setting on their business. They note that the widespread capacity shortages that many have been warning about for five years or so have yet to materialize. “We’re not seeing the needle move very much” on supply constraints, says Chris Pickett, chief strategy officer at Coyote Logistics, a nonasset-based 3PL in Chicago.

Pickett says nonasset-based providers with the carrier
contacts and network scale have the agility to quickly pro-
cure capacity during seasonal spikes such as in produce sea-
son, or in markets like retail and so-called fast-moving con-
sumer goods (think toothpaste and toilet paper) that are
staple items but where velocity of end demand can shift on
a dime. “These are unpredictable and volatile markets, and
it’s tough for a shipper to leverage asset-based carriers that
operate on static schedules,” he says.

John G. Larkin, lead transport analyst at Stifel, an investment firm, says asset-light 3PLs will continue to play a vital role in optimizing fragmented networks on both sides of the transaction. Larkin added that shippers aren’t as concerned about the prospect of supply constraints as the conventional wisdom might hold.

“When capacity really does tighten to the point where shipments are left on the dock, then the asset-based carriers with brokerages might be more comforting to shippers,” says Larkin. “But we have been anticipating the ‘mother of all capacity shortages’ for a half-decade already, and the 3PLs still are shooting the lights out with growth way above the rate of freight growth overall.”

EVEN GREATER VALUE

A nonasset-based provider’s load-matching skills could stand it in even greater stead during a prolonged period of tight supply, according to Valerie Bonebrake, who has worked for asset-based and nonasset-based providers, and now heads the 3PL unit at Tompkins. Perhaps for that reason, many shippers would rather work through 3PLs than go direct with the carriers even if they had the resources to avoid an intermediary, according to Bonebrake. “The nonasset-based 3PLs’ value proposition will not change as capacity tightens up,” she says.

Bradley S. Jacobs, founder and CEO of XPO Logistics
Inc., a Greenwich, Conn.-based broker and 3PL, says the
nonasset-based category has become bifurcated, with
stronger players gaining share at the expense of weaker
rivals. “There’s a massive market share movement from the
smaller brokers to the larger ones. This isn’t surprising since
the bigger ones have greater capabilities to offer,” Jacobs
says. “When I ask customers what they value most, it’s
always some version of lots of capacity, on-time pickup and
delivery, and cutting-edge technology.”
Evan Armstrong, Armstrong’s president, says the leading
3PLs of the next 20 years will possess the broadest and most
integrated logistics capabilities, expand their penetration into
once-alien markets like less-than-truckload and intermodal,
demonstrate network scale (he estimates that $300 million a
year in purchased transportation is today’s price of entry to
play with the big boys), and have the widest geographic scope.

Most important in what may become a long-lasting period of capacity shortages, successful middlemen will “ contract with tactical asset-based providers as [capacity] is needed,” Armstrong says. The nonasset-based providers “may have assets where they are necessary to support customers, but it will be a more ‘asset-right’ versus an asset-based model,” he adds. ;