At the price-quotation stage – good. At the truck-sourcing stage – bad, very bad.
“if you believe in the free market economy, then you will believe in copper run’s pricing.”
Those are our own words, elsewhere on this website. We also speak often, and positively, about competition.
As a purchaser of highway freight transportation services, you can benefit significantly from competition. After all, significant competition was what industry deregulation was all about in the 1980’s and 1990’s.
But, as a purchaser of highway freight transportation services who wisely invites competition, be careful to manage that competition wisely and to your advantage. And certainly don’t let it manage you.
At the quoting stage
If you invite competitive quoting between brokers, either regularly, or from time-to-time, it is reasonable to expect that the prices you receive will fall in to a range that includes some fair prices, as well as some low-balls and some that are unrealistically high. It is also reasonable to expect that the prices will be lower than they might otherwise be in the absence of competition. This is especially true in the case of shipment-specific spot quotes.
This type of open competitive process will act to your net benefit – the brokers are competing against each other in a process that you control.
At the truck-sourcing stage
However, if you invite competitive truck sourcing between brokers (i.e., you give the same shipment to more than one broker at or nearly at the same time), then your price will increase and the number of your suppliers will decrease. This would be the exact opposite of what you were aiming for. Why would this happen?
When you give a shipment to a freight broker, the freight broker tries to source a truck – that is what he is supposed to do. When you give a shipment to multiple brokers, they will all try to source a truck – that is what they are all supposed to do. But in reality, all the brokers end up calling the same relatively small group of potential carriers, and posting your shipment on the same internet-based real-time load boards. But they cannot see each others’ postings: the carriers have information that the brokers do not have, putting the carriers in control of this shipment’s market.
Within literally minutes, the group of 6 or 8 or 10 carriers who might truly be interested in your shipment all know about it, and they all know that multiple brokers are working it. How? Because when you monitor a computerized load board for 8 hours every day, all the time with a hair-trigger finger on your telephone keypad, you learn how to read that load board. And you learn that if several brokers are competing for the same truck or small group of trucks, there is money to be made.
How so?
In the language of economics, this is what happens in the multiple-broker scenario: while the underlying freight transportation demand is actually only one shipment, and the required supply is only one truck, the simultaneous participation of several competing brokers, each posting a demand, creates the appearance in the marketplace that there is a demand for several trucks for several shipments.
The expected result? Apparent demand has risen, actual supply has remained unchanged, and suppliers (carriers) are able to bid up the price.
But this apparent demand is not true demand, and every supplier carrier knows from experience that there is really only one shipment. And every carrier also knows that the underlying customer has not actually assigned the shipment to any broker, so that any deal made with any broker is at best a low-probability tentative deal.
So most carriers leave the auction, and move on to other more realistic shipments. Those carriers that do retain interest are wary. This multiple-broker market is a shooting star, and it soon flames out.
The carriers that do stay quickly take over the competition. Instead of bidding the price down to be sure they are the successful carrier, they will bid the price up, because they know that at least some of the brokers will be willing to sacrifice margin in order to make the sale. Remember, the carriers can see every broker on the load board, so they know what each broker is doing, whereas the brokers can see only the carriers, and not each other.
What started as a competition controlled by the customer to find a low-bidding broker, has quickly morphed into a competition controlled by one or more carriers to find a high-paying broker. The customer is on the sidelines.
The brokers are still competing against each other, but the process is being controlled by the carriers. You, the customer, not only has lost control, the carriers are bidding your price up and you are not even involved.
But not for long. Carriers still in the game will get a rate from one broker, and will then call another broker to see if a higher rate is on offer. Often, it is. At the end of this very fast, very confused process, somewhere in this mess there will be probably more than one broker / carrier combination that has struck a tentative deal.
At that point, you, the real customer, gets a call from a broker to report that he has a truck, followed by a call from another broker, and perhaps another, all with the same news. It is not even unusual for more than one broker to report that they have the same truck! And the customer hasn’t even actually yet given the shipment to anyone!
But in the short-lived frenzy, the rate has been bid up for everyone. Which means that a broker who wants to move your shipment will have to choose between doing so at a relative loss, or asking you for more money. The carriers have forced the brokers to switch from reducing their prices to the customer, as they were when they offered competitive quotes, to now asking for more money than they originally quoted!
Some brokers, knowing that there will be one or more tentative deals with 15 minutes of the process starting, will decide to pass on the deal, and will fall silent. Eventually, a single deal survives the turmoil: the successful carrier will be the one who was most effective at pushing a broker into paying an above-market rate.
The net result is that:
- the customer pays more than planned or necessary; or
- the broker loses money on the transaction, and seeks to recoup his losses on future prices; or
- the broker bows out of that competition, and perhaps from future dealings with that customer.
In each of these 3 cases, the customer pays more, either immediately, or in the future, or both.
The take-away is to use prudent business practices, including multi-broker competition, to obtain price and service quotations, and to choose a single service provider. Make this single-provider choice before assigning the shipment, so that your chosen broker can control the carrier sourcing process, on your behalf.
Having done so, stay with that provider for that shipment, even if that provider is having difficulties. You can always switch to a different provider next time. Know that the marketplace is very well inter-connected and very well experienced, and it will eat your lunch if you lose control of your own competition.
When Copper Run finds itself in a multiple-broker situation at the truck-sourcing stage, we always bow out. Nothing good can come to a broker, or to the broker’s customer, from one of these messy free-for-all scrums.
A further note of caution regarding the process:
If you ask a broker to quote a price for a shipment that will move on some undefined future date, the broker will usually prepare a quote based on his experience. But if you ask for that same quote for a shipment that will be released within hours, many brokers will go to the marketplace acting as though the shipment has already been assigned to them, as a strategy to obtain the most finely tuned price, a price that will, by definition, be tied to one specific truck.
Brokers who do this are effectively skipping the quoting step and proceeding directly to the sourcing step of the process.
When this happens, the result is that the marketplace again sees several brokers with the same shipment, and the same price-increasing chaos as described above ensues. To avoid this, when a customer goes out for spot pricing, it is in the customer’s interest to put as much time as possible, preferably a least several days, between the quoting step and the sourcing step.