How Freight Disrupted Itself
In the last year, a new dynamic has begun to reshape the freight industry. Unlike some industries that are virtually attacked by external actors, like Uber disrupting the taxi industry, the catalysts of this transformation are coming from within.
Coming from within the industry, Dr. Phil Blumenthal has a front-row seat to it’s evolution. Phil knows his (freight) stuff. In his PhD thesis he developed a product to secure ocean freight rates with financial derivatives. And until recently, he was an archtypical “insider”, an executive at one of the world’s largest and most respected forwarders, DB Schenker, where he was responsible for the New York market. Prior to that, Phil held a variety of other logistics roles in both Germany and the United States.
Then, in November 2015, Phil joined Freightos.
Two Trends Are Threats To The Industry
Phil identifies two threats, which are acting as fundamental drivers of change within the industry. We asked Phil to elaborate on these catalysts, and more importantly, their impact.
Declining Freight Rates
For forwarders, just as the 2009 financial crisis ended, another crisis began. There has been a massive increase in the capacity of the global container fleet. There are several reasons for this, other than projected demand. Simple pricing theory dictates that if you increase supply more than demand, prices will fall. And they have. And continue to fall.
Sure, costs to carriers are also falling, but forwarders typically charge a margin, not a set rate. Works well when rates are moving upwards. But when rates are falling, revenue is hit harder than costs. Maybe this wouldn’t be so bad if expenses fell too. But most other expenses, like labor costs, are not linked to carrier costs. And, as expenses have a habit of doing, they have kept rising.
Phil adds that something else has contributed to declining freight rates. Nowadays, shippers are better informed of market trends, rates and competitive offerings. Knowledge is power, and this knowledge is keeping freight rates at low levels. Suddenly the freight industry is not so opaque. But no matter the cause, carrier rates plummeting or internet-savvy shippers, declining freight rates spells gloom for forwarders.
It’s not just freight rates. Shippers are getting better visibility into freight forwarding right across the value chain of Quoting > Booking > Transporting > Delivery > Billing.
Shippers have their own pressures. Global supply chains are increasingly complex. Supply chain volatility, increased procurement vendors, agile manufacturing and an on-demand economy. They are demanding support, more transparency, from forwarders. And getting it.
And that creates a vicious circle for Forwarders. They must continuously match the value add quality services that competitors offer to stay in the game. Take for example, freight tracking technology. Accurate event information and exception notification started relatively recently as an expensive value-add that few forwarders could offer and few shippers could afford. Today even small shippers won’t ship unless they can check the status of their shipment.
The Threats As Catalysts
Put the two trends together. Declining freight rates and increased visibility have a compound effect. While forwarders and service providers are being pushed to offer lower rates than ever before, they are simultaneously being asked to provide more value than ever. Reduced revenue and increased expenditure is a recipe for disaster. Corroding EBITDA, with dismal prospects.
As bleak as this sounds, Phil is certainly not suggesting that forwarders fold up shop. While doing business pretty much as forwarders have been is no longer a sustainable option, the industry is now evolving to contend with these challenges.
One approach is to achieve economies of scale by increasing size. The recent spate of forwarder-forwarder M&As, which recently hit a nine-year high, is one of the reasons some providers are taking this avenue as a (short-term at least) solution to sustain their growth path.
Others have got bigger by integrating along the value chain. There has been plenty of opportunity here. Taking on warehousing, and offering contracted service offerings are two obvious examples. The problem with only now taking this approach, according to Phil, is that other companies have already taken up much of this opportunity. They have the gained the expertise and are better poised to take up the rest of the opportunity. Those forwarders who failed to make this move years ago, have now, to a large extent, missed out.
A second approach to find efficiencies. Reduce those costs that can be controlled. As examples, DHL and DB Schenker have both embarked on Transport Management System mega-projects. Automating processes thereby decreases labor costs. But the sheer size and cost of this type of project is risky business. “Solutions must be able to be deployed fast”, says Phil, “or forwarders face cost blowouts, not cost savings.”
On a smaller scale, some automated solutions have already been somewhat broadly adopted – such as e-AWBs.
But there is a gaping need to find more affordable efficiency gains. And there is plenty of scope across the forwarder’s value chain. Hence the plethora of recent entrepreneur, venture capital, and forwarder interest in new logistics technology. Big data technology advances means that even smaller forwarders can realistically expect to gain more efficiency, and reduce costs.
Phil concluded with some sage advice. “When looking to choose from the new efficiency solutions out there, forwarders should be very careful that they do not needlessly sacrifice value from those parts of the value chain which they do well.”
“The inevitable slowing of global economic growth, declining freight rates, and increasing visibility into what has been an opaque industry, is forcing forwarders to become more efficient. Each option carries risk. But only those willing to innovate, and who have the management skills to do it well, will survive.”
However, contrary to popular opinion, technology changes are not the threat to the industry. The true threats are declining rates and changing shipper expectations, which have become catalysts for change. Harnessing the emerging technology is not the threat. It is the best response to these threats.