In a market punctuated by increasing demand, increasing production, and decreasing carrier availability, shippers are in a race to find carriers to ship their freight. Problems often arise when contracting out carriers due to 1) the shipper’s lack of a carrier network and 2) limited market information.
This is where freight brokers come in.
What is a freight broker?
Freight brokers come in all shapes and sizes but their functions are generally the same. They serve as an intermediary between shippers and carriers. They quote the shipment and schedule the pickup. They track the entire shipment process from the creation of the bill of lading to signing off of the shipment by the consignee to auditing the carrier invoice.
Every type of freight requires a different kind of transportation service, be that LTL, TL, Flatbed, etc., and freight brokers are skilled in finding the right carrier to meet load specifications.
Benefits of using a freight broker?
Why worry about sending hundreds of emails, making hundreds of calls, and paying hundreds of invoices for your hundreds of shipments when a freight broker will do it all on your behalf? Freight brokers ease the burden of managing carrier relations and scheduling, so you can focus on your product and your employees.
In addition to their services, by partnering with a freight broker you gain a wealth of information collected from industry reporting and client data. Data informs smart decisions and those smart decisions translate into savings.
Another benefit of utilizing a freight broker is access to their network of carriers. Access to more carriers increases the likelihood your freight will pick up and deliver when you need it.
Cons of using a Freight Broker?
Brokers have the control to cancel or delay a load they have already accepted, if they can make more money by accepting a different load. However, it is not in their best interest to cancel a load because it reflects badly on their company.
In the case that a load is not canceled due to lack of economic options, you, the shipper, will end up paying more for the shipment than you would if you shipped it yourself. The primary strengths of a freight broker is the carrier connections and time reduction for your company. You will, most likely pay more than if you did the scheduling and auditing yourself. However, the time saved and the connections created can offset the extra expense.
How do Freight Brokers turn a Profit?
As with any business, freight brokers must turn a profit in order to stay in business. As such, their profit comes from charging the shipper an additional amount on top of the amount they pay the carrier.
1) Freight brokers go to carriers and negotiate rates for themselves under the auspices of buying a bulk amount of miles. Then they resell those miles to shippers for higher than they paid, but lower than the shipper would pay if they went directly to the carrier. A simplified example looks like this:
A national carrier charges $2/mile from Chicago to California. A Freight Broker says they will pay the carrier $1.25/mile but buy 1,000,000 miles upfront. Now that freight broker goes to companies shipping from chicago and asks if they would like to ship to the west coast for $1.75/mile instead of the $2/mile they currently pay.
Now the shipper is saving 12.5% and the broker is making 50 cents per mile. The shipper was too small to negotiate a better rate with the carrier. So the freight broker has to find enough shippers to use up the million miles they purchased and everyone wins.
2) Freight brokers can turn a profti through offering services over discounted rates by working load boards and a network of carriers. DAT releases the load pricing on any given lane at any given time by analyzing what prices people are paying. You may hear terms like DAT +3 or DAT +5. This means a broker is saying they can find you a carrier to take your shipment at the current DAT rate + 3% or 5%. an example of how the broker prfits off services may look like this:
A shipper contracts the broker saying they have a shipment going from here to there and it weighs this much and needs to be there by this time. The broker will do all of the work - find the carrier, execute the paperwork, schedule the pickup, and make sure it delivers on time. Wherher they just charge a percentage over the shipment cost or have blaket fees for various services, the broker makes money based on the services they provide.
Above are just two common ways freight brokers make money by working as intermediaries between shippers and carriers. Often, freight brokers are doing both of the above scenarios, upselling services, offering additional services such as warehouse management and so on.
Freight brokers can bring capital and time savings to your transportation program. However, remember they aren’t working for free, so make sure you understand exactly how they are charging you and audit all expenses paid to a freight broker frequently to make sure you are getting everything you pay for
The difference between 3PLs and Freight Brokers
The principle difference between a 3PL and a freight brokerage is the longevity of the relationship. A 3PL operates on long-term working relationship with your company in developing and managing your supply chain whereas freight brokers operate on an as-needed basis.
Both 3PLs and freight brokers aim to get you the best rates possible for shipping; however, freight brokers come in the most helpful when you have an unusual or not regularly scheduled shipment to fulfill and do not have the assets to execute the shipment yourself.
As stated above, a freight brokerage may operate as a subsidiary of a 3PL for increased customer service and added value for the customer.
When looking for a 3PL or a freight broker, more often than not you will receive the best rates and the best service if you go with a company that offers both logistics management and freight brokerage services.
For a more in depth look at the benefits of hiring a 3PL click here
Choosing a Freight Broker
When partnering with a freight broker to manage your shipping needs, selecting the right freight broker is imperative to the success of your logistics department. Not all freight brokers are created equal. Below are eight areas to consider when choosing a freight broker.
- Are they licensed by the Federal Motor Carrier Safety Administration (FMCSA)?
By law, any freight broker must have a federal property broker license in order to perform the services they provide.
- Do they specialize in your type of freight?
Every business has different freight needs. Ensure that your freight broker is familiar with and equipped to work with your freight needs.
- Do they offer insurance options and claims assistance?
In the case of an accident or claim, a good freight broker will offer help as needed and provide assistance in solving the issue.
- How does there vetting process work?
It is important to understand each freight brokers vetting process for freight that you have. They should be working with the most reputable carriers, verifying the safety rating, and the operator’s authority.
- Is the broker a Transportation Intermediaries Association (TIA) member?
The TIA holds its members to a high ethical standard and provides continual training to its members.
- Have members of the staff completed the Certified Transportation Broker (CTB) program?
Administered through the TIA, the CTB program puts brokers in the top tier of the industry.
- What are their tracking options like?
Know how the broker manages freight visibility. You need assurance that any issue that your freight encounters will be handled in an appropriate manner with your knowledge.
- How long has the broker been in business?
If a broker has been in business for an extended period of time they likely have a proven track record and an increasingly large pool of contacts and resources.
Freight brokerage Industry Trends
Contract rates continue to rise
In 2018, contract rates have risen 15% and will continue to follow the growth of the spot market rate. Additionally, driver recruitment and retention continues to pose a difficulty to carriers which then results in additional rate hikes.
Cost increases affect shipping
Freight brokers are not immune to the increased costs that are permeating the growing economy. Driver shortages in the US cause carrier costs to increase.
New technologies continue to revolutionize the industry
Technological advancements continue to send ripples through every industry, including freight brokerage. New systems and pieces of software allow freight brokers to operate with increased efficiency, total freight visibility, and improved carrier communication.
Do You Need a Freight Broker?
You may be saying to yourself, “a freight brokerage just isn’t for my company.” And that is totally fine. The services of a freight broker aren’t for everyone and no two companies have the same freight needs. Some companies operate just as well without outsourcing to a freight brokerage as they would with a freight brokerage.
However, if you’re a company that makes a lot of last minute shipments, or your product is very specialized and requires specific care when being transported, or you simply ship out a lot of freight and need to find the cheapest carriers, a freight brokerage is definitely an area that deserves your consideration.
In a highly volatile market, partnering with information and relationship-based companies for supply chain organization can be a huge asset to your company because if your company falls behind in shipping, the next dominoes to fall are sales and inventory control.