February 2009 | Commentary | 3PL Line

Brokering Change

Tags: 3PL

W hen I started in this industry in 1978, transportation companies were known as truck brokers. They primarily moved shipments of agricultural products under rates that were exempt from Interstate Commerce Commission regulation—that is, negotiable according to supply and demand.

In 1980, truck transportation was deregulated. The term "property broker" was defined, and the industry grew. The requirements for becoming a property broker were intentionally minimal ≠ to speed the advantages of deregulation, property brokers were created in part to establish an open market where rates were responsive to market conditions. A property broker's role was to balance the supply of capacity and demand between shippers and carriers.

INDUSTRY IDENTITY CRISIS

Deregulation worked, and is still working to this day. But another problem has arisen: Our industry suffers from an identity crisis. Normally, most of us can be Darwinian enough to not care about such things. This problem, however, affects all industry stakeholders—shippers, carriers, the general public, legislators—and it is too important to ignore.

As the industry has transitioned from transportation to logistics to supply chain management, the realm of property brokers has matured and grown more sophisticated. For example, the vague and ill-defined distinctions involving the ownership and usage of assets leads to a great deal of confusion.

That's the problem. The current requirements for property brokers can leave shippers and carriers exposed to bad debt, non-payment, lack of responsibility for claims, and more. Property brokers have no legal obligation for a carrier's financial performance, nor are they legally required to pay a carrier for its services if the underlying shipper defaults.

Furthermore, the only requirement to ensure a property broker's financial performance—to redress any aggrieved shipper or carrier—is a $10,000 surety bond. The problem is, $10,000 does not provide anyone adequate protection.

The requirements for becoming a property broker need to be updated to reflect new market realities. The broker bond should be raised; it is much too easy to get a license. There are also cases of deliberate fraud, where a carrier or shipper was exploited, and legitimate transportation businesses were put in jeopardy.

Additionally, companies that broker freight to carriers should guarantee freight payment to the carriers they do business with, regardless of whether the shipper pays or not. They should administer any legitimate freight claims for their shipper/customers, and guarantee the financial performance of the carriers they assign for such shipments. It is time for all responsible "brokering parties" to step up and accept this higher level of responsibility.

Property brokerage is a vital part of the transportation and logistics industry. It is how much of our country's freight gets moved. But the industry has matured and developed, and the scant legal requirements and low barriers to entry are no longer effective.

GOING FOR BROKER

Shippers should understand the legal and financial distinctions between the various brokers. Identifying the strengths and weaknesses in business models, operating structure, scope, and scalability, and assessing the specific risks associated with each service provider based upon their finances and available resources, will enable shippers to select the most appropriate provider.