Noël Perry - The Times They Are A-Changin': Digitization and the Brokerage Business

The Transport Navigator's Perspective

It All Started with the Core of the Process

3PLs started using digital tools in the late 1990s right in the core of their business, freight matching. Before that, 3PLs found loads and trucks manually by building up a cadre of relationships, people who either phoned in requests or responded to a 3PL’s requests. Scott Moscrip of Truckstop.com and his competitors at DAT changed that by setting up online services where shippers and carriers could post their needs. We call them ‘load boards’ now. Suddenly the actors have instant, efficient access to that information. Moreover, both boards collected information neutrally across the entire market, allowing shippers and carriers to advertise their needs well beyond the reach of a single 3PL.

Yes, It Was Competition for the Broker's Traditional Approach
3PLs initially resisted this change because it reduced the value of their coveted book of shippers and carriers. However, the astute brokers quickly realized the value of this exponential increase in vital information. They used the load boards to reduce their costs and dramatically expand their reach. Before long, their reluctant competitors were forced to use the load boards as well, making them part of all brokerage operations today.

They Built a Hybrid Model
Importantly, the brokers continued to rely on mainly analog processes in-house, delegating the building of complex digital tools to the load boards. Accordingly, Truckstop.com and DAT steadily added information to their tools, the essential bits of information that allow a broker to ensure the reliability of either shipper or carrier. The transmittal of such information remains primarily the task of the 3PL, but the collection and documentation reside in the cloud with the digital experts at the load boards.

It's Now Becoming Digital Freight Matching
After 20 years of technical progress, digital entrepreneurs are now aggressively pushing the envelope of their services. The most obvious offering comes under the heading of “digital freight matching” (DFM), a process where the digital tools manage the communication process between shipper and carrier. In its simplest form, a 3PL uses the load board information to select a good match. The 3PL then sends the relevant parties a link to the DFM app where the decision makers can consider the offer, accept, reject or counter it, all on-line with the effort of a few clicks. The idea is to eliminate the expensive human-powered communication process that persists today.

As Amazon.com has taught us, simple digital tools can make shopping much easier. Of course, as with the original load boards, these tools will eliminate much of the 3PL’s costs, and some of their value. Will the astute 3PLs once again join the revolution and co-opt the process as they did with the load boards?

The Answer Will Come in Three Parts, with the Shares of the Parts Still to be Determined
Part one is loudly advertised by a growing collection of digitally based new entrants, in essence, digital 3PLs, with the emphasis on the “digital.” Their strategy is, in part (more about other aspects below), based on their belief that their expertise in managing technology will defeat the traditional 3PLs’ market experience and relationships. Those 3PLs that choose to conservatively barricade themselves behind those historical analog defenses will join trolley cars and canal boats as relicts of a previous era.

In part two, some 3PLs will either have the digital expertise or the scale to create their own DFM tools; C.H. Robinson comes to mind, of course. And, I have a good broker friend whose husband has been keeping her small operations at the forefront of digital innovation for years. Such whole-hearted adopters will survive, combining the new tools with their well-established knowledge of the market.

Finally, in part three, we have the hybrid model now extended to digital communication. Traditional 3PLs will be able to partner with a collection of digital experts, like Truckstop.com, to offer the low cost and convenience of digital tools to their clients, either shippers or carriers. Those digital suppliers, like Truckstop.com and DAT who already possess critical mass in data, will have a large advantage in this competition.

The next phase is digital data integration and presentation
The battle for market position gets deeper and more complex when one considers the geometrically expanding availability of digitally collected and presented information. As a start, the new tools will present the suitability of carrier and shippers, moving the presentation and documentation of such information from the analog 3PL to the new tools. Also the new tools are aggressively adding other data, aimed at making that platform a one-stop shop for shipper or carrier.

Need an ETA once the deal is agreed to? The tool will provide it. Worried about whether Murphy is sharing the interstate with your load? The tool will compute you a risk of late delivery based on traffic and weather.

If Scott Moscrip’s original load board was the first practical application of big data to trucking, these tools would move big data into the mainstream of every 3PL’s business. Importantly, big data ups the scale minimums of the new tools. Looks like my small broker friend will need a hybrid approach. In the same way, the barriers of entry for the digitally based startups keep rising.

The End Game Is Digital Freight Optimization (DFO) – Artificial Intelligence
As we progressively automate the 3PL functions, what is left for the 3PL to do? If you believe the claims of some of the digital startups, not much. Give me access to thousands of loads and thousands of trucks, and I’ll make the match in seconds. I don’t need some expensive 3PL to do that; my algorithm does it better and way cheaper.

We see this today in the digitization of the New York Stock Exchange and the various commodity markets like the Chicago Board of Trade. Sure, there still are hyper-active people waving and pointing at each other on a crowded floor, but electrons do most of the work. This analogy is a good one because trucking is thought to be a commodity market, like pork bellies, but is really more like a stock market. Every load is different, every trucker is different; which ones do I choose for the match? In stock markets, then, we have a legion of very well-paid advisors who tell us which stocks to buy or sell, based on their knowledge of market trends and our particular needs. Even in commodity markets such experts exist. Indeed, we know that librarians are becoming much more necessary as digital tools give even the smallest library access to millions of books. “Ms. Librarian, where do I look?”

So, the end game question is: is its human intelligence, in the form of the 3PL, or artificial intelligence in the form of the digital entrepreneurs?

Maybe the Los Angeles Dodgers Give Us the Answer
It used to be major league baseball was managed by grizzled wise men, the scouts, like the character Clint Eastwood played in the movie, “Trouble with The Curve.” They were the brokers of traditional baseball. But if you have watched that other baseball movie, “Money Ball,” you know that the beginnings of big data were shifting power to a new kind of broker who used statistical analysis as well as the time-honored ability to observe high-class athletes. In the last 10 years, all the teams have adopted digital tools to figure out what kind of players they want and whom to match against whom in the ninth inning with two outs and the bases loaded. This calls for a new kind of broker, someone more like the Yale grad running the Chicago Cubs, Theo Epstein, than the Clint Eastwood character.

Now, Sports Illustrated tells us the Dodgers, as just one advanced example, are applying digital technology to the detailed analysis of throwing and hitting the baseball. What are the pitcher’s fingers doing in the micro-second when he releases the ball? Here’s the point: My Phillies still need a skilled broker, but he, or she, had better be able to interpret the complex technology that is revealing more and more secrets of the great American game.

The irony is, the more technology reveals, the more it uses artificial intelligence to tells us things, the more we need the great manager, the great broker to interpret it.

I guess You Have Figured that I Like the Hybrid Model
I suppose that someday a computer will replace the manager (and the 3PL) with full artificial intelligence. A printout will tell the pitcher how to throw the ball and make up the lineup card too. I’ll do something else in the summer rather than follow baseball. Some of the digital startups in trucking think that day has arrived for us. I suggest not. There is still way too much variability in the U.S. spot trucking market and its close adjacencies to assign the final match decision to an algorithm. But the same economics will reward the 3PL who is fully fluent in the new technology. Will he or she need to develop that technology? I think not. Will he or she need that technology? Unless the owner of the 3PL wants to spend his or her days watching old Clint Eastwood movies, YES!

Noël Perry is Principal with Transport Futures, located in Lebanon, PA. He can be reached at nperry@transportfutures.net. Visit his website at transportfutures.net.