Automating a Truckload

Intro

The logistics industry is critical to our daily lives, but it largely goes unnoticed by the average consumer. It is also massive - estimated to be ~$1trillion annually in the U.S. alone. It also remains one of the most labor-intensive sectors, with a high demand for manual labor for cargo handling, storage, and transportation. In recent years, the adoption of automation in the logistics & supply chain industry has grown rapidly, and we believe the rise of artificial intelligence (AI) could revolutionize the freight industry even further.

Currently, the freight industry is using automation in various areas such as warehouse management, order processing, and route optimization. Automated systems are allowing companies to reduce human errors and improve operational efficiency. For example, Amazon uses robots in their warehouses to move products around, reducing the amount of manual labor required. Additionally, DHL has implemented self-driving trucks in its warehouses to move goods more efficiently.

We’ve observed a rapid trend towards increasing automation within the broader logistics category, but especially within the freight brokerage segment, where we are seeing exciting innovation across the entire load execution cycle. 

Who are the major actors when it comes to freight brokerage, and how do they interact with a typical truckload?

Major Actors in Freight Brokerage

Let’s run through a quick primer on freight brokerage to make sure we’re all on the same page. To start, the basic building blocks of a load are assets (i.e. the cargo) & people (i.e. the humans organizing the load). In addition, there are 500K+ warehouse facilities and 2M+ drivers in the US., all of which are involved in executing a typical truckload. For some perspective, in any given month, literally millions of truckloads are being shipped in the United States alone, though it can vary significantly depending on the time of year and other factors.

The major actors involved in orchestrating these loads are: 

• Shippers: A shipper is an individual or organization that arranges for the transportation of goods from one point to another; unlike a freight broker (discussed below), the shipper is typically the owner of the goods being transported and has direct control over the transportation process. The shipper may contract with a freight broker to help them find a suitable carrier, negotiate rates, and handle the paperwork associated with the shipment.
• Freight Brokers: These companies act as an intermediary between the shipper and the carrier. They work to facilitate the transportation of goods by connecting shippers with carriers, negotiating rates and terms of service, and handling the administrative aspects of the shipment. They do not own any transportation equipment or handle any physical aspect of the shipment themselves, but rather use their expertise and industry connections to find the best carrier for a particular shipment.
• Carriers: This is the company that physically transports the goods from the shipper to the destination. The carrier may be a trucking company, a shipping line, an air cargo carrier, or a rail company, among others. Freight brokers must know the key details of their carriers (i.e. companies that move the loads), such as compliance, DOT numbers, insurance coverage and whether they are bad actors (increasingly important when markets loosen up) - companies such as gohighway.com, saferwatch, & carrier411 are very important in helping identify these bad actors.
• Facilities / Warehouses:  This is where the physical goods are stored. A freight broker must be able to understand where the facilities are, their hours of operation, & key operational details such as whether they operate on First-Come, First-Serve (FCFS), or other procedures.
• 3PL (Third-Party Logistics): Company that offers logistics services to other businesses, typically as an outsourced service. A 3PL provider typically provides a range of services related to transportation, warehousing, and distribution.
  
  For example, a 3PL might provide storage space for goods to help a shipper better manage its inventory levels, or help smaller shippers consolidate their shipments into a single larger shipment to take advantage of lower shipping rates
• 4PL (Fourth-Party Logistics): Offers a more comprehensive level of logistics services than a 3PL. While a 3PL typically offers transportation, warehousing, and distribution services, a 4PL might offer a more strategic level of logistics services that may include managing the entire supply chain on behalf of the customer.

What are the real advantages of digitizing the execution of a truckload?

The most obvious ones are cost reduction & efficiency gains. The two primary drivers of cost for a freight brokerage with respect to executing a load are: 

• The cost of manual effort for the load - a “cradle to grave” account manager can handle 15 loads / day, which roughly equates to $120 -$150 per load in labor costs; and 
• The premium paid for capacity, which is heavily correlated to the lead time - the time between when the loads get posted to the marketplace and the time to pick it up.  

Let’s look at the different steps in the execution of the load and where we believe cost reduction through digitization is most likely to happen (Note: logos below indicate companies who are addressing each of the steps in the load execution cycle, usually by providing SaaS-based solutions or online marketplaces; Operator Stack has invested in several of them):

Carrier compliance and Scorecarding:  Every carrier doing interstate commerce should have a US DOT number and, depending on what they are hauling (e.g. regulated commodities), might also be required to have an MC number. These validations need to be done ideally every time (or day) before you tender a load to the carrier. Given the enormity of liability in not doing this, this has become table stakes for every broker out there. There are a few tech solutions that can help with this - carrier411, saferwatch and gohighway to name a few. In addition to this, the quality of service (usually measured by on-time Pick up and drop off) is important to ensure a smooth transaction. While each brokerage may maintain their own scorecards, a universal one is needed, which is what companies like Iso are trying to build.

• Theft and fraud is also becoming a larger issue. These crimes are increasingly sophisticated & perpetrated in a way where MC and DOT numbers get traded between carriers. So just using a paper record as filters for bad actors no longer works. There are no large scale specific solutions for this in the industry yet.

Rating & Quoting: Most brokers bid on load (request-for-proposal & spot) based on tribal knowledge or by using aggregate information, such as Dat 7 and Dat 30, without taking into account their network and the estimated cost of “covering” that load (logistics speak for finding capacity). Pricing each load should at a minimum be based on market conditions and the strength of the broker’s network, i.e. index based quotes will and should be replaced by solutions like Greenscreens.ai.

Order Entry and Connectivity: Most large shippers use a TMS / Managed Transportation service but when dealing with Mid-Market or smaller shippers (say Freight Under Management < $30M) they tend to not have a TMS. Loads get both tendered and quoted via email, phone or text. This is incredibly manual because all of the load detail needs to be transferred to a broker TMS such as Mcleod, so that the execution of the load can be tracked. This is often error-prone and time consuming. This is why Vooma.ai is an interesting bet.

Scheduling: Currently a laborious process, but the basic way it works is:

1. Each load has at least 2 stops that need to be scheduled (excluding drop loads)
2. When loads are tendered to brokers or carriers, it's typically their responsibility to contact facilities and book appointments.
3. Facilities can use a variety of scheduling mechanisms such as First-Come, First-Serve or specific dock<>time appointments.
4. Scheduling is an intensely manual step today, with brokers often having to log in to a portal hosted by the facility's TMS or WMS, or scheduling via email or phone.
5. Manual scheduling tasks on a portal are partially solved using RPAs, but email and phone scheduling remain manual.
6. Call centers in Mexico/India are commonly used to help with manual scheduling tasks.
7. In the long term, APIs are the best way to solve this problem. The large dock scheduling providers are building APIs with many slated to release a public API over the next year
8. Hundreds of millions of appointments are booked every year at $10-12/load, making this a valuable problem to solve.

Capacity Procurement (“Covering Freight”): This is the biggest promise delivered by digital brokerages so far. In a traditional brokerage, there are carrier sales reps whose main role is to maintain relationships with carriers; and they do this by calling the carrier and negotiating prices for each load. Incentives are usually aligned since the reps are paid a salary that depends on the margin generated on each load. Each carrier rep usually has a network of 40-50 carriers and each of their days involves identifying loads that can maximize the margin within their network of 40-50 carriers - but, of course, suboptimal decisions get made all the time. Automation here has three value props:

1. Reducing labor cost to find capacity: It is estimated to cost $30-35/ load to acquire capacity for a load in just labor cost. Automating this has a material impact on the brokerage margin. 
2. Ability to buy capacity at lower than market rates: Having a bigger network than just 30-40 carriers/ rep allows for finding capacity at better prices. If capacity is procured through an app or a product, things like upfront pricing with timely increases and bidding allows for better pricing differentiation. 
3. Better visibility and operational efficiency: Tracking loads through apps and allowing carriers to upload proof of delivery and docs through the app allows for better visibility, as well as better scorecarding of carriers and higher efficiency.

This is where digital brokerages like Uber Freight excel because they can globally optimize, better differentiate price between carriers and scale up without the need for more carrier reps. Some digital brokerages have proven that this can be completely automated - which is not only more efficient but, because your supply liquidity is higher, it also leads to lower than market rates.

Visibility: Knowing where a carrier is at any given time during the load execution is critical for a shipper as they want to ensure timely delivery. Shippers typically evaluate brokers and carriers using metrics called PU (pickup) and DO (drop off) where they evaluate what % of the loads moved by a specific broker fall below their performance threshold. Late pick-ups and drop-offs are not only expensive for a shipper (imagine an assembly line shutting down as they wait for their shipment), but can also result in customer churn because of potentially bad experiences. Most shippers care about this and track these metrics vigorously. This has been solved mostly due to the ELD mandate and by aggregators such as Fourkites and P44. However, there is more work to be done in: 

1. Consolidating visibility views especially for international ocean and air with over-the-road, i.e. OTR (large enterprise companies want to see where their loads are in one single place), and:
2. Helping with visibility and management of drop trailers (candidly, it's a mess right now)

Invoicing and Payments: Most brokers pay their carriers NET 30 and receive payments from the shipper NET 60. There can be up to 30 different line items in the invoice such as fuel surcharge, lumper payments, detention etc. Each shipper stipulates the condition for each one of those charges to be approved and these are usually in the contracts signed by the broker. 

1. There are issues everywhere in this space  - the broker may pay a carrier for a line item, but may not be able to recoup that charge from the shipper because some condition isn't met. The key to solving this problem is to capture the requirements of the shipper for each line item and ensure that the carrier gets paid only when those conditions are met. It is a lot harder than it sounds. In addition, shippers are incentivized to reject payments to brokers for a certain line item.
2. For instance, It is currently expected that brokers are 2-3% shortchanged on the money they are paid - because they didn’t meet the constraints set by the shipper or because they are unable to catch short pays and attribute them to the correct line item or because they don’t have systems in place to invoice shippers on time. SOX compliance is also a huge issue here.
3. The systems used today to track these payments make it extremely hard to identify which of the line items was rejected by the shipper, especially if multiple loads are being paid at once by the shipper. This is what Loop is trying to solve.

Factoring: Carriers need a lot of working capital and given that most shippers pay NET 50 / 60, they need another source of capital for things like wages, loan servicing, fuel, and repairs. This led to banks and other organizations giving carriers and brokers advanced pay using the invoice as collateral. Invoices are assets that get traded, at a high premium - typical factoring costs are between 2%-3.5% of the loan value for 30 days. Most factoring companies also pass along the risk of non-payment back to carriers. It is estimated that ~30-45% of carriers use factoring companies.

1. There are many areas here where automation and digitization is needed. For example, there are on average 6 calls that get made from factoring companies to brokers to verify, authenticate the invoice, and to get paid - that needs to go to 0.
2. Billions of dollars are being traded over phone calls, remind you of old penny stock days? 
3. While Factoring management systems are used there is still work to be done to automatically digitize and structure the data of the invoice, proof of delivery (along with the times stamped for detention, etc). Once received, these invoices are digitized using OCR and then organized to ensure that the proof of documentation meets the shipper’s requirements.
4. We believe that a marketplace will eventually be created where a carrier can upload their invoice, proof of delivery, and all relevant material and acquiring banks can offer different rates based on their confidence in the proof being met and the risk of non-payment it could absorb. We believe the carrier industry will go from having a factoring relationship (carrier uses one factoring company and sends all their invoices) to more of a quick pay (adhoc early pay for a rate). You already see this behavior with carriers who primarily use digital brokerages. 

Conclusion: The potential for completely touchless loads is growing, i.e. each step of the load execution process is sufficiently automated, such that the loads - once tendered to a broker - get put on a marketplace entirely without human intervention. We don't believe it is possible to reach 100% automation in every step (i.e. the human will still need to be “in the loop”), but we would be disappointed if 5+ years from now, at least 50% of the loads going through large brokerages are not touchless. There are some key areas that matter more than others, like Pricing and Quoting, Appointment Scheduling, & Capacity Procurement and Visibility that are harder to solve and probably have higher immediate value props, but we are well on our way to achieving this in the future.

Thanks for reading, and please reach out if you’re building something transformative in any of these areas.

GPs @ Operator Stack

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