Is a Freight Brokerage Model Right for You?

Freight Brokerage, Supply Chain, Transportation Management
March 29, 2013

There are many factors you should consider when trying to understand how freight brokers can fit in to your transportation strategy. To ensure safe and secure delivery of your freight, it’s critical to implement a solid plan for qualifying, monitoring and utilizing brokers. It’s also important that you have a strategic partnership developed with one or two solid brokers.

Freight Brokerage 101…

A freight broker acts as an intermediary between a shipper and a transportation service provider.  Unlike an asset-based carrier, the freight broker doesn’t own the truck or employ the driver.  Simply stated, their role is to match available motor carriers with freight that needs to be transported. Freight Brokers have been around since the early 1900’s with the number growing exponentially since deregulation to over 15,000 licensed brokers within the U.S today.

Brokers must be licensed through the Federal Motor Carrier Safety Administration (FMCSA), a division of the Department of Transportation.  To obtain a license, they simply submit an application, pay a $300 fee and show evidence of a $10,000 surety bond.   So it’s relatively easy to enter the freight broker business. Unfortunately, this ease of entry also encourages fraudulent and unethical individuals to take advantage of unwary shippers.

Not doing the due diligence to ensure you are partnering with a trustworthy freight broker can lead to several challenges:

1)      Financial Exposure

One of the inherent risks of working with a broker is the increased financial exposure. It is critical to ensure your freight broker has stringent qualification in place for their partner carriers. They should have measures in place to validate their carrier’s insurance, if they have a satisfactory DOT safety rating, their CSA scores, and that they have financial viability.

You may also be increasing your exposure to losses and additional cost from freight claims.  When working with a freight broker, check if they have any supplemental insurance/coverage to protect you, the shipper, in case of damage or loss.  Additionally, a broker who carries supplemental coverage will often have more stringent procedures for their partner transportation service providers in place to satisfy the requirements of their insurance company/underwriter.  If you are working with a solid freight broker, you should expect them to carry contingent cargo insurance to pay a shipper if a valid freight claim has been refused by the carrier of record. Without contingent cargo insurance, many brokers will wipe their hands of any claims issues and require shippers to track down the underlying asset partner to file and work through any claims or disputes directly with them.

2)      Potential for Non-payment

Before partnering with a freight broker, check their financial stability. If the broker is not in the best state financially, there is a potential risk of nonpayment from the broker to the carrier. It is common for a situation to arise where the carrier pursues the shipper for payment, after a shipper has already paid the freight broker for the transportation. This often occurs when a freight broker has closed their doors or filed for bankruptcy after the time of payment. In essence, the freight broker absconds with the fees without proper payment to the transportation service provider.   

A prime example is the case of Oak Harbor Freight Lines vs. Sears, Roebuck & Co. heard in the Ninth Circuit Court of Appeals in 2008. The final court ruling stated that “a shipper should bear the risk when it chooses to pay for freight charges through a broker, rather than directly to the carrier.” You can read the ruling summary here.   This risk is often referred to as the “double payment liability”. This in turns leads to the risk of a load not being delivered or released until payment has been received, or until the broker’s funds have cleared.

3)      Operational Challenges

Beyond the financial risks are the operational challenges associated with working with freight brokers that do not have the necessary resources or technology in place. For example, many brokers do not have sophisticated technology for tracking performance metrics or showing proof of deliveries. Any questions you may have regarding the freight after the truck as been dispatched will require the broker to reach out to the carrier for that information, thus adding a middle man. So when choosing a broker, it is important to ensure that they have the right systems in place.

4)      Security

You want to make sure that the freight broker you partner with is very careful with your shipment information. If not, it can increase the risk of theft, since many thieves have sophisticated crime networks and can easily steal a carrier’s identity and steal a shipper’s freight.  In February 2012, CargoNet released their annual report on cargo theft showing cargo theft on the rise with a 17% increase from 2010 to 2011.

While there are some risks, there are also definite advantages to utilizing a solid freight broker in support of your transportation needs.  Using a freight broker under the right circumstances can yield big results. Here are some of the benefits to consider:

1)      Flexibility

A freight broker can provide flexibility based on your shipping needs and fluctuation in demand. With access to a database of thousands of qualified carriers, they can provide the right transportation match during critical periods, especially when capacity is tight due to external factors such as seasonality, end of period volumes and weather.

2)      Scalability

By working with a freight broker you can scale down during slow periods and just as easily scale back up during the peak season. They provide an ideal solution to dynamic businesses that need this type of scalability.

3)      Technology

A recent area of advancement for some of the top freight brokers is in the area of technology.  Freight brokers have designed systems and made investments in technology that provide shippers with detailed tracking and performance analytics.

Click here to learn more about freight brokerage.

Stay tuned for our upcoming post on how to evaluate your current broker relationships and what steps you should take to make sure you are working with a strategic broker partner.

Written by Paul Boothe, Group Logistics Manager, Ryder

Paul Boothe is a Group Logistics Manager in the Transportation Service Provider Development Team for Ryder.  He manages the development of the procurement strategy for Ryder’s clients and the carrier setup, carrier on boarding, and carrier management within those client solutions.  His background includes operational management for several of the Ryder Transportation Management customer solutions.

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