There is a lot of discussion today about digital freight, whether it’s a threat or opportunity for the logistics industry. There is also a lot of hype and confusion. Understanding what digital freight is — and what it isn’t — is important for all stakeholders to succeed in the industry.
Last week, as part of its ongoing Logistics Webinar Series, I participated in a webinar organized by BlueGrace Logistics titled “Digital Freight: Threat or Opportunity?” where I discussed the following questions:
- Why is digital freight getting so much attention today?
- What is new and different about it?
- How should brokers, as well as shippers and carriers, respond to this trend?
- Is digital freight a threat or an opportunity?
I also talked about what digital freight isn’t, which I summed up in these three points:
Digital Freight isn’t bringing additional new capacity to the market.
Early on, many in the press referred to the new, tech-savvy startups as “Uber for Freight” companies. The storyline was that these startups were going to disrupt the freight industry just like Uber had disrupted the taxi industry. Then, of course, Uber itself entered the market with Uber Freight. What disrupted the taxi industry, however, is that Uber, Lyft, and others added a large amount of new capacity to the market — namely, you, me, and everybody else with a car willing to drive for them. That is not the case in the freight market. These startups aren’t adding trucks and drivers to the market; they’re tapping into the same existing pool of carriers and drivers that the traditional freight brokers are working with too. While these tech-savvy startups are arguably leveraging existing capacity more efficiently than traditional providers — that is, they’re reducing the amount of wasted capacity in the industry (such as empty backhauls) and matching freight with capacity more quickly — at the end of the day, they’re still competing for business with the same network of carriers and drivers as everybody else.
Digital Freight isn’t drastically changing the contract vs. spot mix for shippers.
Back in the dotcom days, numerous startups launched transportation marketplaces in a bid to revolutionize the way shippers and carriers worked together. Virtually all of them failed. These marketplaces (aka “exchanges”) didn’t work for many reasons, but the prime one was that these startups didn’t really understand the transportation market. They assumed that transportation was a commodity, no different than buying paperclips, and so their primary focus was on facilitating reverse auctions, where carriers would bid against each other for shipments to drive down costs for shippers.
But transportation is not a commodity. It is a relationship-based business where trusted relationships matter — because it impacts customer service and satisfaction, and by extension, the shipper’s brand and reputation — which is why the vast majority of freight is moved via contracted carriers, not the spot market.
At least at the moment, digital freight is not causing shippers to flip the model and move the majority of their freight via the spot market. In a recent survey we conducted with our Indago members, one of the respondents (a VP of Supply Chain at a Consumer Goods company) summarized it this way:
At the end of the day, [these digital freight startups] are still a brokerage-based business. They are just deploying technology differently. Great if you utilize spot for your freight, not so good if you want to make sure that your freight is covered for a budgeted rate.
Digital Freight isn’t fundamentally changing the formula for success in the industry.
It doesn’t matter if you’re a startup or an established provider, the formula for success in the freight industry remains the same and it depends on three things: (1) you have to build a critical mass of shippers and carriers and drivers; (2) you have to remember that transportation is not a commodity and that relationships matter (and take this reality into consideration in your operating model); and (3) you have to measure and control the quality of the end-customer delivery experience.
So what is new and different about digital freight? Is it a threat or opportunity? I encourage you to watch the full webinar for my perspective on those questions and more. Then post a comment and share your perspective!