Bob Walters, President, Freight Management Inc.
While Inbound Logistics Magazine would have us believe that outsourcing started with 3 Party Logistics (3PLs) in 1985, as public and private warehouses became abundant throughout the nation to store and ship their clients’ goods, 3PL’s history actually goes backs to the 1960s – although in a different form and in a much more limited supply.
Since 1969, licensed brokers like Freight Management, Inc. were already operating as (or with) our clients’ traffic departments, managing full time staff onsite. We managed their claims, their audits and were in charge of overseeing their day to day operations.
To really understand the history of 3PLs though, you have to understand the changes that have taken place in our industry and how changes today continue to impact our operations and services.
Freight Management, Inc. was founded in 1969 as a way of providing solutions to carriers and shippers. Since 1932 and up until the late 1960s, the world of trucking and freight had seen rigid regulation with limited entry of new carriers and 3PLs. There were just few carriers available and those that did exist worked just a small slice of the market. Contract carriers were limited to five – seven contracts, if and only if, they overcame objections by other carriers serving the same market. Only twelve Interstate Commerce Commission (ICC) freight brokers existed, but if you wanted to buy one, you had to wait until someone died, then purchase the broker’s license from their estate.
One major difference in that era was that a trucker’s value was based upon their authority not the cost of the trucks or gear. Audit companies and major shippers had to employ scores of staff just to file the daily flood of new rates and rules that carriers issued for audits. By today’s rates, it cost shippers about 50% more then to move products. There was no single carrier serving the nation: UPS did not yet have service in all areas, especially the intrastate market, and FedEx did not exist. So a large shipper might have use 40 – 50 carriers to serve all the states.
Given those limitations, we set out to help both shippers and carriers. Common carriers needed shippers that could support them for authority and get more freight in the lanes. Shippers, on the other hand, operated on the assumption that all rates were the same; that you simply chose a carrier by the salesman you liked best.
While rates were rigidly regulated and authorities were limited, there were always alternatives available to shippers for lower rates. They could: master bill with the common carriers, do pool distribution, set up string drops on load carriers; marry two pig trailers on the railroad, or they could also use freight forwarders who offered different rates and could provide volume discounts of up to 15%. These were some of the options available from 1969 – 1978.
When we got started, one of the first things we did was develop back hauls for private fleets – like the large food chains, and then helped them get their authority. We also negotiated freight allowances with the major vendors of Smart & Final, Vons and others, thus reducing landed shipping costs for inbound product.
We also pioneered the concept of palletization in the field, identifying and introducing it as the standard. Prior to this time, all freight was hand – loaded and unloaded.
In addition, we helped shippers by checking the accuracy of their freight bills, which was difficult for them to do unless they owned a huge tariff library.
By coming up with these solutions, we were able to grow our company in a challenging environment.
After 1978, a major change came about when limited deregulation hit the market place, first affecting air freight forwarders, then freight brokers. In 1980, the carriers were permitted more rate flexibility as well as easier entry for other motor carriers like Schneider, JB Hunt, and Covenant Trucking. Rail agents could now post rates for single trailer loads. New carriers spring up like mushrooms in the field.
To respond to the overwhelming new competition in brokerage, we had to change our business plan again and take steps to control some of the changes. As one of the founders of the Transportation Brokers Conference of America (now known as Transportation Intermediates of America), we began to offer training and certification for the thousands about to enter this field. Having a licensed broker billing the shippers was a totally new concept; previously, the carriers did all the billing paying a commission to the broker.
The new entrants who flooded the market had different levels of experience: They were truckload operations: exempt brokers, moving van companies, and others who were doing the shipper billing in their field. This rendered a $10,000 broker bond totally ‘inadequate.’ The bond was never meant to cover bankrupt brokers who failed to pay the carriers after receiving payment from the shippers. Rather, it was designed to protect the shippers against losses they might suffer from a broker failing to do what they promised (i.e. leaving the shipper with a specific loss).
In the first year of deregulation, rates dropped 30 – 40% as options increased exponentially. And yet, the increase made it more difficult for shippers to choose the best option. Additionally, since most shippers drastically reduced their traffic departments in the rush to cut middle management, those making these decisions had less experience.
Along with more flexible rates, carriers were also permitted to expand nationwide, even though many did not have the sales staff to sell their programs in all the states they served. We helped fill that gap.
In the chaos this created in transportation, we recognized our new role was to provide order and to refine the choices while also providing cost reductions to shippers. To survive in this business, we had to shift our program 180 degrees to fit this market and serve its new needs.
In 1995, the industry opened further when rate deregulation took hold nationwide accelerating the use of and demand for 3PLs. While warehousing, freight forwarders, brokers, auditors, and management services had been in existence since the 30’s, though not as numerous as now, all had to change to serve the market’s changes.
Even today, our role in logistics or freight management services continues to evolve as a major part of our work requires the use of computerized reports. These include reports from the audit process, EDI transmissions, ASN dispatch and track/trace for inbound or outbound freight. Not all carriers are able to provide this level of service – and yet, it is required if they want to remain competitive. Today only 5% of the common carriers that existed in 1970 still exist and most of those are in some degree of merger.
Who knows what the future can hold for any of us? Software is now so easy to obtain and operate that it could jeopardize our clients’ need to outsource the audits, the brokerage and management of freight programs.
In 1975, we were the only company providing logistics management services. In 1995, there were 20 of us, and now, there are 500. How many remain depends upon what they are willing to do to accommodate the latest change. Most will be gone with the latest tide, I suspect.
In transportation, you must find your role in relationship to what the trends are in the world or face extinction. Just as certain as death and taxes, change will always exist; in fact, it will probably accelerate in the coming years. You either ride it to your success or die in the failure to respond.