THE NEW ECONOMICS OF FREIGHT BROKERAGE...makes sense for shippers because it frees up capacity and lowers its cost. The second way that Transfix’s technology drives efficiencies

THE NEW ECONOMICS OF FREIGHT BROKERAGE

FREIGHTWAVES + TRANSFIX

2

INTRODUCTION

The marketplace for truckload transportation is fragmented and opaque. Relationships

between shippers and carriers are tenuous at best, forged and broken by wild swings

in capacity availability and rates per mile. The unpredictability of freight markets

stems from the complex way that three cycles overlap: freight demand driven by

macroeconomic growth and contraction; how capacity loosens and tightens in response;

and seasonal freight patterns.

Unpredictable market activity and a lack of dedicated relationships force small carriers

to focus on rates per mile, often to their own detriment. In a futile attempt to shore

up prices, trucks refuse to haul cheap freight and idle their trucks or deadhead to

markets where they can secure more favorable rates. Some carriers, on the other hand,

emphasize asset utilization and sometimes accept rates lower than their operating costs

in order to avoid even deeper losses. The constantly changing mixture of strategies—

on the part of shippers, brokers, and carriers — makes rates impossible to forecast

over the long term. This means that shippers have little certainty as to their costs and

carriers have little certainty as to their revenues, and both sides are incentivized to

opportunistically pad their margins while they have the upper hand.


3

Transfix’s digital freight marketplace, by leveraging advanced technology to more

efficiently match loads, creates a new economics of freight brokerage. Transfix collects

and analyzes large amounts of shipper and carrier data to provide reliable capacity

and reliable freight to both sides of the marketplace. For carriers, the network of tight

circuits built by Transfix’s algorithms have the regularity and convenience of a dedicated

contract. For shippers, the reliable capacity Transfix provides feels like a dedicated fleet,

even though in reality it’s a shifting combination of small carriers.

By optimizing for asset utilization, Transfix stabilizes and increases its carriers’ revenue

per tractor per week while lowering the rates per mile paid by the shipper. Transfix’s

industry-leading automated work processes result in more loads per broker per day,

allowing the company to thrive on thinner gross margins and to pass those savings

along to carriers and shippers.

In this white paper, Transfix and FreightWaves define the problems distorting the

marketplace for truckload transportation, discuss how carriers think about their

assets, explain the role of technology in reducing empty miles, and then sketch out

the economic dynamics that come into play when the marketplace is optimized to free

up capacity at the right price.


4

Carriers only generate revenue when they are hauling freight. Miles that trucks run empty

are doubly wasteful. The carriers’ fixed costs of truck payments and insurance continue

to mount, and variable costs like fuel still must be met. From the shippers’ perspective,

empty miles are a waste of potential trucking capacity — the needless reduction of

available capacity introduces artificial scarcity and drives up prices.

According to data in FreightWaves’ SONAR platform, the trucking industry’s empty

mile rate averages between 12% and 13% across equipment types. Dry van trailers, the

most abundant and commoditized type of equipment, average little more than 10%

empty miles while reefer and flatbed trailers deadhead more often. In an industry with

operating margins often below 10%, empty miles are a serious drag on

carrier profitability.

Trucking companies have every incentive in the world to reduce deadhead, but they’ve been unable to move the needle. Why? There are two reasons: freight flows are inherently unbalanced and carriers have limited customer bases.

Freight flows in North America — and globally — are inherently unbalanced. Some

freight markets produce freight in excess of what they consume while other freight

markets consume freight in excess of what they produce. Carriers call productive

markets ‘headhaul’ markets: these markets, which tend to always run short of trucking

capacity, pay higher outbound rates to trucks and are attractive to carriers. Carriers call

consumptive markets ‘backhaul’ markets: these markets, which tend to always run short

of freight, pay lower outbound rates to trucks and are unattractive to carriers.

Los Angeles and Memphis are quintessential headhaul markets, with outbound freight

flows nearly always exceeding inbound flows. The Los Angeles market, of course,

includes two enormous ports that together account for 23% of the continent’s container

traffic, much of it Asian imports. In Memphis, the country’s third-largest rail hub

connecting the eastern and western railroads is located in a fairly poor city that does not

consume much freight.


5


6

Miami and Seattle are quintessential backhaul markets, with inbound freight flows

nearly always exceeding outbound flows. South Florida is populated by upper-

middle class and wealthy retirees who consume goods but do not produce them; the

tourist, financial, and entertainment economies of the region likewise do not produce

significant outbound freight flows. Similarly, Seattle is a wealthy city whose economy

is powered by the technology industry: even the Tacoma port does not bring in

enough freight to flip Seattle into a headhaul market.

So one of the problems contributing to waste in the trucking transportation industry is

rooted in the uneven geographic distribution of freight production and consumption.

The other problem has to do with how carriers sell their capacity, their limited number

of dedicated customers, and the bets they place on the spot market.

When trucking capacity is tight, carriers make more money by taking ad hoc freight on

the spot market, sacrificing the coherence of their networks for lucrative rates per mile.

When trucking capacity is loose, carriers make more money by servicing dedicated

customers with predictable volumes and lanes. In other words, carriers manage their

capacity according to changing market conditions — and they normally lag market

conditions, over-exposing themselves to downside risk without fully capturing

the upside.

Without being able to fully commit to a strategy — dedicated or spot — carriers face

structural obstacles to optimizing their networks. Dedicated customers may use

their capacity to ship freight from Chicago to Atlanta, but not in the other direction.

Furthermore, sales teams siloed from operations and chasing commissions based on

revenue, not profitability, sell capacity to customers who don’t fit into the carrier’s

existing network, creating further inefficiencies.

The combination of inherently unbalanced freight flows and specific, limited customer bases create inefficiencies in carrier networks that reduce profitability and drive up costs for shippers.


7


8

Surging spot rates don’t make up for sloppy asset utilization, and large enterprise

trucking carriers know it. That’s why publicly-traded trucking carriers often report the

proportion of loaded miles to empty miles run by their tractors.

Take Knight-Swift (NASDAQ: KNX), the country’s largest truckload carrier, as an

example. Knight-Swift recently reported its financial results for the first quarter of

2019, and some of the operating metrics included in the release highlight the importance

of asset utilization. KNX’s gross revenues dropped 5.2 percent compared to the first

quarter of 2018, even though revenue per loaded mile (or rate per mile) increased

9.4 percent. Why?

Digging a little deeper into the numbers revealed that Knight-Swift’s miles per tractor

were down 8.7 percent and the carrier’s percentage of empty miles increased to 12.9

percent. Despite significantly higher rates, Knight-Swift brought in less money than it

did a year ago because its trucks ran fewer overall miles and ran more empty miles.

Meanwhile, small and regional carriers without extensive networks of facilities, market

data, load-planning software, or diverse customer bases are forced to fixate on rates per

mile. Owner-operators and drivers for small fleets congregate in Facebook groups like

“Rate per mile masters” and “Trucking: Rates and Lanes” to compare notes and share

market information in manual, error-prone communications processes.

It doesn’t help that the equipment types commanding the highest rates per mile have

the highest percentage of empty miles. Reefers tend to run more empty miles because

food production is highly concentrated while food consumption is highly distributed.

Flatbeds tend to run more empty miles for a variety of reasons: they handle one-off

projects like specialized equipment moves, active construction sites are always in new

places, and rarely do commodities like building materials have balanced two-way

freight flows.


9


10

Again, the waste of trucking capacity drives up costs for shippers and makes it difficult for carriers to calculate the true profitability of any single load.

Furthermore, the electronic logging device mandate has narrowed the time span in

which small carriers and owner-operators — who had lower rates of ELD adoption than

enterprise carriers before the mandate — can run miles and generate revenue. The waste

of trucking capacity, then, occurs on both a distance (empty miles) and time (non-

driving hours) basis.

Transfix’s platform optimizes for asset utilization based on both of those factors, deadhead miles and hours of service, in order to increase its carriers’ revenue per tractor per week by about 20%.


11

How can Transfix help small carriers achieve asset utilization rates far beyond even the

largest enterprise carriers?

Creating a ‘dedicated’ experience for both shipper and carrier requires dynamically

managing capacity and freight volumes across an array of regional players. Transfix’s

platform builds dense circuits and adds or subtracts loads and trucks on an on-demand

basis, integrating upstream supplier information with carrier data sets like preferred

destinations and HOS availability.

“Freight platforms need two things in order to achieve asset utilization: critical mass and data. Transfix has these two things and that is what enables us to help both shippers and carriers optimize their operations. We enable shippers to achieve dynamic capacity, while enabling carriers and truck drivers to run their preferred lanes and make money,” said Jonathan Salama, CTO and co-founder of Transfix.

Transfix effectively serves as integration layer between many shippers and many

carriers to automate the process of matching the right load with the right truck at

the right price. There are two primary ways that Transfix’s technology is making

truckload transportation more efficient, driving shippers’ costs down while increasing

carrier revenues.


12


13

The first is by optimizing its algorithms to maximize asset utilization. Automated freight

matching can solve for different problems. A platform designed for shippers may be

geared toward finding the cheapest available truck, while a carrier-centric platform

might be built to send trucks to markets with high spot rates or to find loads that will

reposition the truck closer to a driver’s home. A 3PL handling critical freight may want

its algorithms to find the nearest available truck regardless of cost. In short, in order for

a load-matching algorithm to decide which truck is the right truck for a load (and vice

versa), it has to be trying to solve a specific problem—it has to define what ‘right’ means.

Transfix’s platform is optimized to solve for asset utilization, meaning that it tries to keep

its carriers’ trucks full and minimize empty miles. Solving for asset utilization makes

sense for carriers because a lower rate per mile, say, $1.80 per mile versus $2 per mile,

is far more desirable than deadheading at $0 per mile. Solving for asset utilization also

makes sense for shippers because it frees up capacity and lowers its cost.

The second way that Transfix’s technology drives efficiencies in truckload transportation

is by building virtual ‘dedicated’ customers and virtual ‘dedicated’ fleets out of

multiple shippers and multiple carriers. Doing so requires Transfix to look deep inside

its customers’ supply chains to gather and analyze upstream data, so that it can help

position assets where they are needed even before loads are tendered. Shipper

facilities are also analyzed so that Transfix’s customers learn how detention times at

specific nodes in their networks are correlated with transportation costs. Improving

scheduling at docks, so that the notification of an early or late shipment actually causes

on-the-fly adjustments to be made, maintaining constant throughput, is another priority

for Transfix.


14

The new economics of freight brokerage are already in play on Transfix’s platform.

Shippers are paying less; carriers are making more. Because both sides benefit, the

platform is scaling rapidly. Why does scale matter?

Digital freight marketplaces are sets of math problems governed by Metcalfe’s law.

Metcalfe’s law states that a network effect is proportional to the square of the number of

connected users of the system. In other words, the power of the Transfix platform

has an exponential relationship to its number of loads and trucks, not merely a

linear relationship.

Let’s put this in simple terms. Imagine two freight marketplaces: the first has a combined 100 trucks and loads; the second has a combined 200 trucks and loads. Metcalfe’s law states that it is actually four times easier for the second marketplace to match freight than the first marketplace, not just twice as easy.

As Transfix scales, its marketplace becomes more liquid, with less friction slowing down

transactions. As shippers ramp up their cadence of tendered loads per week, their costs

go down and become more predictable, converging to a rational market rate.

In the chart on the next page, carriers are represented by green dots. The fewer

shipments per week hauled by a carrier, the more unpredictable the shipper’s cost

will be -- the wide distribution of costs is evident on the left side of the chart. The

more frequently and regularly a carrier participates in Transfix’s marketplace, the less

expensive capacity becomes. Hauling just ten loads a week allows carriers to streamline

their operations and accept lower rates. What’s most striking is that effect holds true

for carriers who haul twenty or thirty loads per week -- costs become lower and more

predictable, a win-win for both sides of the marketplace.


15


16


17

Hauling just ten loads a week allows shippers to mitigate most of the upside risk to

trucking rates, but what’s most striking is sending twenty or thirty loads per week still

yields meaningful step changes in cost.

Because Transfix’s new economics provide incentives to both sides of the marketplace,

both carriers and shippers have reasons to join the platform and add scale. With every

new user — shipper and carrier alike — Transfix matches loads faster, increasing its

internal efficiency and its load per broker per day count. The more productive Transfix’s

brokers are, the narrower its gross margins and the more it can drive down costs

for shippers.

Shippers care a lot about cost. FreightWaves conducted a survey in July 2019 of about

150 shippers to learn more about their priorities, pain points, and future initiatives.

The respondents were fairly evenly split in size: 37.84% moved more than 1,000 full

truckload shipments per month; 30% moved 100 to 1,000 truckloads per month; and

31.76% moved fewer than 100 truckloads per month.

The survey showed that the three things that shippers care most about are on-time

performance, cost effectiveness, and visibility. Price benchmarking was the second-

most popular response, chosen by 43.75% of shippers, to a question about which future

initiatives the shippers were most interested in implementing in their businesses.

A separate question asked shippers to rank the most important factors they considered

when adding a new carrier or broker to their networks on a scale from 1 to 8, with 1

being the least significant and 8 being the most significant. On-time performance

scored a 7.51, the highest, but price / cost-effectiveness was the next highest at 7.29.

The survey results suggest that an efficient digital freight brokerage platform like

Transfix that optimizes for asset utilization can address shippers’ concerns. Predictable,

dedicated-like routes enable carriers to improve service at a lower cost, and, all loads

moved inside Transfix’s platform are tracked precisely.


18

Of far more importance than Transfix’s own efficiency, of course, is what scale does

for the shippers and carriers on the Transfix platform. As Transfix builds density in its

regional networks, shippers cover loads faster and carriers drive fewer empty miles. In

other words, as Transfix builds scale, the platform works better and better. It’s intuitive:

the more loads available in the system, the more likely it is that a carrier will be matched

with a load that is both nearby and taking the truck where the driver wants to go.

“The flywheel is spinning faster and faster,” said

Drew McElroy, co-founder and chief executive officer

at Transfix.

To learn how your organization can benefit from the new economics of freight brokerage

in Transfix’s platform, contact [email protected].


19

Documents

THE NEW ECONOMICS OF FREIGHT BROKERAGE...makes sense for shippers because it frees up capacity and lowers its cost. The second way that Transfix’s technology drives efficiencies