The disruption of 2020 took everyone by surprise, and although it sent the industry scrambling to adapt, a few key challenges remained the same.
Take away the uniqueness of the last year — from soaring consumer goods demand to plummeting durable goods consumption — shippers needed carrier capacity, and most organizations had to lean on a routing guide created during their last RFP to make it happen.
But what happened when the routing guides created before the pandemic didn’t account for the drastic changes in freight demand? Digital load boards and brokerage stepped in to meet that need in a big way.
What Brokerage is Designed to Do…and What it Isn’t.
The spot market and brokerage solutions are designed to help shippers find capacity in a pinch. They create a reliable means for shippers to service highly volatile freight needs. When a carrier cannot fulfill their contracted freight duties, or when a shipper has unexpected influxes in their network, the spot market keeps goods moving. The last-minute capacity may come at a premium, but the spot market helps fill the gaps of an imperfect routing guide when the market is volatile.
Despite their intended design, the spot market and brokerage have not been functioning as they should. Shippers who rely on an annual RFP process to set their plan for the year see their routing guide degrade quickly. Without a dynamic and intuitive mechanism to responsively correct their network they turn to the spot market over and over waiting for their next sourcing event.
This was particularly painful throughout the pandemic, but it’s a phenomenon that impacts shippers every year — and it almost always ends up in the spot market. Overreliance on the spot market and brokerage quickly becomes costly, service levels suffer, and shippers lose direct connection to their underlying carrier data.
Magnifying Common Challenges Under the Pandemic Microscope
Under normal conditions, a national shipper tends to strategically use brokerage to cover 5%-10% of its freight. In recent years, our network data has suggested this trend is higher, hovering around 15%.
When the disruption of the pandemic impacted the U.S. in March and April of 2020, that number jumped to about 30%. This normalized briefly in May and June before creeping up well into 2021.
Short-term spikes in brokerage use are expected when major disruption hits the freight market. But as elevated volumes begin to stabilize, best practice would be to secure contracted capacity to cover those loads.
But rather than re-contracting freight needs that shifted or emerged, data shows that shippers went back to the well repeatedly over time, opting for brokers and spot market coverage long past what their networks dictated. This longer-term exposure crept up to 51% at its peak across shippers in April of 2021.
To put it bluntly, the radical shifts in transportation needs sent everyone’s pre-pandemic transportation plans out the window, and brokers provided one of the best ways to move freight quickly and efficiently.
This rising brokerage use is not problematic on its own, but it did coincide with a near-50% price premium at its peak in 2021– and the average price premium can range from 5%-35%. That difference easily translates into millions of unplanned dollars spent across the industry.
Reliance on long-term brokerage and spot market use is expensive and unsustainable, and there are viable and immediate solutions available.
How to Address the Everyday Challenge of Creeping Brokerage Use
Transportation is a more than $700B industry, aligning with hundreds of thousands of carriers across the U.S. with some of the world’s more notable brands. Although a small number of national carriers move a large portion of North American freight, there are an abundance of niche carriers operating in any given geography. Figuring out which one is the best fit, who they are, and where they are moving is a major challenge.
Brokers make this playing field even more muddy. They act as a middleman, matching shippers to carriers, clouding underlying performance data that could benefit both sides. Over time, a shipper could be using the same partner over and over, while also paying a premium for the broker’s service, and never know it.
Eliminating overexposure to brokers and the spot market is quite simple: pursue direct, contracted relationships with a diverse portfolio of large national carriers, mid-sized regional players, and even much smaller trucking companies. Reevaluate these contracts as often as your network dictates and renegotiate using open and transparent ecosystem data.
This approach allows the shipper and carrier relationship to function more optimally, while leaving brokers and spot solutions to optimally achieve what they are designed to do. Shippers maintain flexibility in their networks, carriers engage in optimal relationships, and brokers cover the freight left in between.
The pandemic put what we already knew under the microscope: trustworthy brokers thrive when servicing last-minute and volatile freight. Overuse exposes shippers to unnecessary cost premiums. Direct relationships lead to the best outcomes for all parties.
Heather Mueller is Chief Operating Officer at Breakthrough. She creates data-driven value for Breakthrough clients through their transportation supply chain solution, Network Intelligence. In addition, Heather oversees Breakthrough’s Applied Knowledge team, bringing market information to clients that drives a more strategic approach into their transportation energy and supply chain management strategies.