Freight Brokerage

VOLUME 25
25 •• NUMBER
NUMBER 11 •• DECEMBER
dEcEMBER 2009
2009
VOLUME
Freight Brokerage –
What The Warehouse Manager Needs To Know
Editor’s Note: The following individuals helped us develop
this topic: Cindy Amos of Transportation Intermediaries Association, attorney Marc Blubaugh of Benesch, Friedlander,
Coplan & Aronoff LLP, James Butts of CH Robinson Worldwide, Richard Hitchcock of BNSF Logistics, Cliff Lynch of C.
F. Lynch & Associates. KBA
A freight broker is a company, or individual, who
serves as a liaison between a buyer of transportation and
one or more carriers. The popular vision of this occupation was vividly described by Cliff Lynch: “All too often,
the term freight broker conjures up visions of Joe Bob
parked in a booth at the Flying Z truckstop with his cell
phone, a pad and pencil, and a generous portion of
chicken-fried steak.” Joe Bob is sitting beside the “posting board” located in every truck stop looking for loads.
Many shippers have this instantly negative reaction to
freight brokerage. Reality is somewhat different. Transportation giants, such as BNSF Logistics, C.H. Robinson
and Schneider National realize a significant portion of
their revenue from freight brokerage operations. Particularly when transportation is in short supply, freight brokers fill a pivotal role. Brokers provide an efficient distribution of transportation services, by matching the needs
of shippers with the capabilities and capacities of carriers.
A broker often can locate transportation when the shipper cannot, assisting a company experiencing a seasonal
surge. It also helps if the company has transportation
equipment that is located in the wrong spot. Changes in
supply chain can come about suddenly, and the broker
provides the agility to handle the unexpected change.
As definitions are considered, it is important to distinguish brokerage from forwarding. The freight forwarder
creates a bill of lading, and frequently gathers and consolidates freight. In effect, the forwarder becomes a shipper,
but the broker typically does not.
Freight brokers are licensed by the Federal Motor Carrier Safety Administration, a process that requires them to
post a $10,000 performance bond. While we usually think
of brokerage in connection with motor freight, the function also exists with other modes of transportation. Air
brokerage is unregulated. The brokerage of marine transportation is known as NVOCC, non-vessel operating
common carrier.
2009
The requirements for entry into brokerage remain unchanged since 1980. Some companies believe that the
rules should be more rigorous since the performance bond
means less now than it did when established. Clearly, a
$10,000 fee does not provide adequate protection for the
normal risks of today’s brokerage relationship, and it
seems likely that the size of the bond will be increased.
Jim Butts observed that a broker should protect the
shippers interest, while recognizing an equal obligation to
protect the carrier’s interest. Dick Hitchcock pointed out
that a responsible asset light carrier never will “give back”
a load. If, a broker has committed to handle a load at a
fixed price and discovers that a higher price must be paid
to secure an available carrier, he absorbs the loss rather
than refuse the load.
Liability Issues
The freight broker is responsible for exercising reasonable care and diligence. Marc Blubaugh explained that
the broker can be held liable for a careless decision in
choosing a carrier. Last spring, a multi-million dollar
judgment against a large broker was reported in the trade
press, due to a fatal accident involving the motor carrier
selected to move a shipment. The broker denied liability
because it did not control the carrier or its driver, or independent contractors. The driver had a suspended license,
and falsified log books. The jury determined that the broker should have conducted a thorough investigation of the
safety records available from FMCSA. In legal terms, this
theory is known as vicarious liability, meaning that the operator is liable for the acts of a third party, as if he were
standing in its shoes.
Protective Steps
Insurance is available through a “contingent cargo liability” policy. Similar in concept to the warehousemen’s
legal liability policy held by many public warehouses, a
key feature of the coverage is the ability to have the insurance carrier handle legal defense.
In addition to insurance coverage, a trade group called
Transportation Intermediaries Association (TIA), is dedicated to maintaining a quality standard for freight brokers
and forwarders.
Also, everyone can gain access to the safety records of
motor carriers by accessing www.safersy.org, a service
maintained by FMCSA. A $20 fee is charged for each carrier inquiry.
It’s All About Financial Responsibility
Lynch observed that brokerage, like any other form of
outsourcing, always carries some risk. Particularly in today’s turbulent economy, the prudent buyer should take
these steps to control financial exposure:
■ Insist on inspecting audited financial statements,
emphasizing the qualifications of the auditor.
■ Verify that bond coverage, if available, is adequate
to cover the actual risk.
■ Determine the net worth of the broker, and consider a minimum net worth threshold.
The prudent buyer will keep financial due diligence at
the top of the list when qualifying potential freight brokers, or in fact any other logistics service provider. Furthermore, because financial stability can change, periodic
reviews should be conducted throughout the relationship.
While most logistics service providers are sound,
well-managed businesses, the occasional failures within
the industry demonstrate the importance of thorough diligence in selecting a supplier.
Advantages In Using A Brokerage Firm
Butts emphasized the following features that may be
available through the use of a freight broker:
■ A broker can optimize freight expenditures, resulting in a reduction of transportation costs.
■ Supplemental services offered such as claims handling, may allow the shipper to improve control
over the transportation function without adding
new employees.
■ Some brokers offer information systems to monitor transportation performance.
■ Because the broker optimizes loads and modes,
those concerned with sustainability will recognize
a greener transportation landscape.
■ Because brokerage is scalable, the prudent shipper
can be lean in an uncertain economy, with the ability to grow quickly as the market recovers.
■ A responsible freight broker has the expertise to
maintain compliance with local rules and regulations in a global environment.
LTL, and truckloads with stopoffs.
Going Global
There are special challenges in the handling of import
and export transportation. Larger firms in the brokerage
business are able to handle global forwarding, as well as
intermodal shipments. Some large brokers have overseas
offices able to handle transportation in the countries in
which they operate.
If you have located a new manufacturing source based
in a small village in the middle of China, how will you
control transportation from factory to destination? A broker can be a key transportation resource in that situation.
Furthermore, as a shrinking dollar creates new opportunities to export, how does a company with no foreign trade
experience find the most economical way to move product from the USA to destinations overseas?
As our economy continues to expand its global footprint, the use of brokerage services for imports and exports is likely to grow.
Would You Like To Jump In The Pool?
Freight brokerage is known for its ease of entry. Many
logistics service providers have recognized that brokerage can be a profitable extension of their services portfolio. Transportation Intermediaries Association (TIA) recognizes the growth of the industry, and publishes a guideline for newcomers. The four-point bulletin distributed by
this association has been included in this article.
A careful review of the document, as well as the two
websites listed within it, reminds us that the devil is in the
details. One might question whether or not the financial
requirements listed are adequate to provide guarantees
that would make your brokerage service truly competitive
with the offerings of large service providers.
While the true cost of entry may be somewhat higher
than the published numbers, entry into this field could be
a profitable decision for many wholesale distributors and
logistics service providers.
T ransportation
Interm ediaries
A ssociation
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Other Available Services
Some freight brokers handle claims. A few even will
guarantee proper settlement of a legitimate claim. If the
carrier will not pay the claim, the broker will do so. The
broker will also protect the carrier from improper claims
from a shipper.
Some brokers promise to assume other credit risks.
While current federal regulations do not require the broker to pay the carrier, a responsible broker will guarantee
payment, regardless of the actions of the shipper. In other
words, the best brokers will protect both the shippers and
the carriers.
Freight brokers may offer to manage inbound transportation, including vendor compliance, and the use of consolidation and truckloads with stopoff features.
Others will analyze load and mode utilization. That includes a comparison of the economics of parcel shipment,
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HOW TO BECOM E A BROKER
Broker Authority – obtain through the Federal Motor Carrier
Safety Administration (FMCSA) http://www.fmcsa.dot.gov/.
Complete Form OP-1. There is a one-time $300 application
fee. Forms are available in TIA’s New Broker Kit.
Surety Bond or Trust Fund – obtained from a bank or
bonding company. The cost varies depending on your
personal credit. You are required to carry a $10,000 bond or
trust. The form filed with this is BMC-84 or BMC-85.
TIA Surety, the Broker Trust run by Brokers – to learn more
go to http://www.tianet.org/surety.
Processing Agent – All broker applicants must designate a
process agent in each State in which offices are located and in
which contracts will be written. Process agents who will
accept legal filings on applicant’s behalf are designated on
FMCSA Form BOC-3. Form BOC-3 must be filed within 90
days after the date notice of the application is published in the
FMCSA Register. http://www.fmcsa.dot.gov/registrationlicensing/licensing/agents.htm Contact Jack Rizer with
American Moving and Storage Association at 703-706-4975
and let him know you were referred by TIA.
Cash or credit. As a part of your initial start up costs, a broker
must have cash or available credit to pay carriers. Shippers
may not pay for services from 60 – 90 days.
Roosevelt functioned as a cheerleader during the dark
days of 1933 by communicating positively. In a series of
radio broadcasts known as fireside chats, Roosevelt maintained public morale. Never since the 1930s have so many
people been fearful about the future.
Maintaining
Morale
While journalists and Wall Street continue to report
that the country is recovering from the “great recession,”
it is important to remember that this recovery has not been
accompanied by rising employment. One out of 10 Americans are unemployed, and it is safe to assume that the majority of workers are as fearful as ever about the future.
This is both a problem and an opportunity for warehousing leaders. Traditionally, warehousing has been a
lagging indicator, which means that 2010 might be a difficult year. Even the best logistics service providers cannot
control the actions of their customers in reducing inventories and/or eliminating distribution locations.
At the same time, warehousing is a service that cannot
be exported. Although the manufacturer may move the
production line to China, the distribution centers must be
close to the market. While there is no guarantee that logistics service providers will not face financial failure, the
survival rate of the industry during the Great Depression
of the last century was better than that of the business
community as a whole.
Communication is the best way to control fear. When
did you last discuss economic conditions with the people
working in your warehouse? Do they have an accurate understanding of your company’s condition and its future
prospects? In our March issue, we described how Franklin
A New Way To Find
Warehousing Services
Two trade associations, IARW and IWLA, have made
it easy to find warehouse service sources in various geographical areas, by disseminating information about their
members. In addition, well-established sales service organizations, such as Associated and Affiliated Warehouse
Companies, provide marketing information and consultation to shippers. These sales groups have member companies in all major cities.
A new approach, “TKO,” is a product of Armstrong &
Associates. The acronym stands for Turn Key Logistics
Outsourcing Service. Armstrong has a database of several
hundred logistics service providers located worldwide,
that are described in its annual “Who’s Who in Logistics”
report. Included in the individual company reports is a
depth of detail not published elsewhere. It includes gross
and net revenues, the names of key executives, major customers, and details regarding size and scope of transporta-
While you may not have Roosevelt’s eloquence, a series of “fireside chats” with the people who work in your
organization could have tangible value today. What have
you done, and what will you do, to combat fear?
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Join ALAN!
American Logistics Aid Network, known by the acronym ALAN, was formed in the aftermath of Hurricane
Katrina. One of the lessons learned was that private companies were more effective than government in delivering
relief. ALAN is a consortium of more than a dozen professional and trade associations representing various logistics service and manufacturing companies..
Because ALAN has no budget for advertising or public
relations, some people are not aware of its existence. Still,
we are inspired by those individuals who have donated
significant energy and time to the development of the organization. Unfortunately, there have been opportunities
since Katrina for ALAN to be engaged in providing relief
after severe weather incidents.
We have been involved in training programs for personnel employed by The Federal Emergency Management Association. It is gratifying to know that FEMA administrators recognize the need for their employees to be
educated in the business of supply chain management. We
were surprised to discover that most of the FEMA staff
had no knowledge of the activities of ALAN. You can
learn more about this important activity by visiting the
website at: www.alanaid.org.
tion, information technology and warehousing operations. By delivering this information to a prospective
buyer of logistics services, Armstrong is able to offer advice unavailable from other sources.
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Options In Piece Picking
The most expensive and the slowest element of most
warehouse operations is the picking of individual pieces.
Four technology options exist. The low-tech alternative is
paper picking, or the use of a pick list to guide the selector
in finding the product for each order. The next step up is
bar code scanning, which involves the use of a scanner
gun to verify that the correct product has been selected.
While accuracy is improved, the pick rate often is the
same as paper picking. Pick to light is a system that allows
the selector to read LED screens that verify the item and
the quantity on the appropriate gravity flow rack lane.
While such systems are costly, they enable the operator to
train order pickers quickly, and to achieve a high pick rate
together with high accuracy. Voice picking has a lower
pick rate than pick to light, but the capital investment is
less, and the accuracy is comparable.
The Art Of Supply Change Management
Pick This!
By J.C. Andraski, S.E. Fawcett, A.M. Fawcett, & G.M.
Magnan, Supply Chain Management Review, November 2009, pg. 16.
By OPSdesign Consulting, published by WERC
(Warehousing Education and Research Council),
©2009, 89 pages.
The authors explored the typical language used in
resisting change; including these statements:
P We’ve never done it that way.
P We are different.
P Let me tell you why that won’t work here.
Learning loops are activities that drive learning to
facilitate change. They include these four common elements:
P Leaders communicate that continuous learning is expected.
P They provide training in basic learning skills.
P They allow people to use the skills successfully.
P They measure and reward results.
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The Innovator’s DNA
By J. Dyer, H. Gregersen, C. Christensen, Harvard
Business Review, December 2009, pg. 60.
The authors seek answers to these questions: How
do I find innovative people? How can I become more
innovative myself? They also identified five skills
necessary for innovative thinking:
P Associating, or the process of
connecting things
P Questioning
P Observing
P Experimenting
P Networking
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What Would Peter Say?
By Rosabeth Moss Kanter, Harvard Business Review,
November 2009, pg. 65.
In her tribute to Peter Drucker, Dr. Kanter described three themes that are “essential Drucker.”
P Management should be a profession.
P A manager’s primary job is to look out for the
long-term health of the organization.
P Knowledge workers cannot be controlled.
They must be motivated.
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What Ever Happened to DRP?
By Deep Parekh, American Shipper, Aug. 09, pg. 24.
Distribution requirements planning was a highly
regarded logistics strategy a couple of decades ago.
The author pointed out that the principles of DRP are
as valid today as they were when it was first developed. Like many developments that enjoy great popularity, DRP fell into disuse for no good reason. The
author makes the case for unearthing the remains and
trying again.
The subtitle of this excellent reference work is, “A
compendium of piece-picking process alternatives.”
All order selection procedures have the option of
picking full units, cases or pieces. The piece pick also
is known as broken case or each pick. All of the alternatives were explored in this article, itemizing the advantages and disadvantages of each.
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Power Down
By Peter Bradley, DC Velocity, Sept. 2009, pg. 36.
Green retrofits are one way of controlling energy
costs in the distribution center. Installation of efficient lighting often is the quickest way to achieve significant reductions in energy costs. Any lighting
system more than five years old probably is obsolete.
The newest lighting and ballast systems offer significantly longer life, as well as a lower consumption of
electricity. Ceiling fans offer a much lower cost alternative to air-conditioning, and also reduce heating
costs by moving warm air from the ceiling down to
the floor.
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Nightmare Before Christmas
By Andrea Harris, Focus, October 2009 page 38.
The author suggested that sudden increases in volume associated with seasonal sales drives can reduce
profitability. Volume surges create a need for overtime, temporary labor, off-site storage, and premium
delivery rates. Careful forecasting and planning reduce the impact of seasonal surges. Distinguish between your best customers and those you might be
happy to lose. Then offer expedited service only to
the best. Buffer stocks and a carefully negotiated
outsourced contract can reduce the impact of seasonal
surges.
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A Smarter Way To Spend Your Money
By A. Dixit, CSCMP Supply Chain Quarterly, 3Q 2009,
pg. 50.
The author proposed development of a spend management strategy, and the implementation of a system
to review and control expenditures. Included in the
process are visibility, analysis, study of alternate
sources, and negotiation. It starts with determining
what is being spent, with whom, and for what. While
the article seems to be focused on large companies,
some of the ideas are applicable to an enterprise of almost any size.