Freight brokerage: What the warehouse manager needs to know
Tuesday, June 16, 2015
A freight broker is a company or individual who serves as a liaison between a buyer of transportation and one or more carriers.
The popular vision of this occupation was vividly described by Cliff Lynch: "All too often, the term freight broker conjures up visions of Joe Bob parked in a booth at the Flying Z truck stop with his cellphone, a pad and pencil, and a generous portion of chicken-fried steak." Joe Bob is sitting beside the "posting board" located in every truck stop looking for loads.
Many shippers have this instantly negative reaction to freight brokerage, but the reality is somewhat different. Transportation giants, such as BNSF Logistics, C.H. Robinson and Schneider National, realize a significant portion of their revenue from freight brokerage operations.
Freight brokers fill a pivotal role, particularly when transportation is in short supply. Brokers provide an efficient distribution of transportation services, by matching the needs of shippers with the capabilities and capacities of carriers.
A broker often can locate transportation when the shipper cannot, assisting a company experiencing a seasonal surge. It also helps if the company has transportation equipment that is located in the wrong spot. Changes in supply chain can come about suddenly, and the broker provides the agility to handle the unexpected change.
As definitions are considered, it is important to distinguish brokerage from forwarding. The freight forwarder creates a bill of lading, and frequently gathers and consolidates freight. In effect, the forwarder becomes a shipper, but the broker typically does not.
Freight brokers are licensed by the Federal Motor Carrier Safety Administration, a process that requires them to post a performance bond. While we usually think of brokerage in connection with motor freight, the function also exists with other modes of transportation. Air brokerage is unregulated. The brokerage of marine transportation is known as NVOCC, nonvessel operating common carrier.
A broker should protect the shippers interest, while recognizing an equal obligation to protect the carrier's interest. If a broker has committed to handle a load at a fixed price and discovers a higher price must be paid to secure an available carrier, he absorbs the loss rather than refuse the load.
The freight broker is responsible for exercising reasonable care and diligence. The broker can be held liable for a careless decision in choosing a carrier.
A multimillion-dollar judgment against a large broker was reported recently due to a fatal accident involving the motor carrier selected to move a shipment. The broker denied liability because it did not control the carrier, its driver or independent contractors. The driver had a suspended license and falsified log books.
The jury determined the broker should have conducted a thorough investigation of the safety records available from FMCSA. In legal terms, this theory is known as vicarious liability, meaning that the operator is liable for the acts of a third party, as if he were standing in its shoes.
Insurance is available through a "contingent cargo liability" policy. Similar in concept to the legal liability policy held by many public warehouses, a key feature of the coverage is the ability to have the insurance carrier handle legal defense.
In addition to insurance coverage, a trade group called Transportation Intermediaries Association (TIA), is dedicated to maintaining a quality standard for freight brokers and forwarders. Also, everyone can gain access to the safety records of motor carriers by accessing SaferSys.org, a service maintained by FMCSA. A $20 fee is charged for each carrier inquiry.
It's all about financial responsibility
Brokerage, like any other form of outsourcing, always carries some risk. Particularly in today's turbulent economy, the prudent buyer should take these steps to control financial exposure:
- Insist on inspecting audited financial statements, emphasizing the qualifications of the auditor.
- Verify that bond coverage, if available, is adequate to cover the actual risk.
- Determine the net worth of the broker, and consider a minimum net worth threshold.
The prudent buyer will keep financial due diligence at the top of the list when qualifying potential freight brokers, or in fact any other logistics service provider. Furthermore, because financial stability can change, periodic reviews should be conducted throughout the relationship.
While most logistics service providers are sound, well-managed businesses, the occasional failures within the industry demonstrate the importance of thorough diligence in selecting a supplier.
Advantages in using a brokerage firm
The following features may be available through the use of a freight broker:
- A broker can optimize freight expenditures, resulting in a reduction of transportation costs.
- Supplemental services offered, such as claims handling, may allow the shipper to improve control over the transportation function without adding new employees.
- Some brokers offer information systems to monitor transportation performance.
- Because the broker optimizes loads and modes, those concerned with sustainability will recognize a greener transportation landscape.
- Because brokerage is scalable, the prudent shipper can be lean in an uncertain economy, with the ability to grow quickly as the market recovers.
- A responsible freight broker has the expertise to maintain compliance with local rules and regulations in a global environment.
Other available services
Some freight brokers handle claims. A few even will guarantee proper settlement of a legitimate claim. If the carrier will not pay the claim, the broker will do so. The broker will also protect the carrier from improper claims from a shipper.
Some brokers promise to assume other credit risks. While current federal regulations do not require the broker to pay the carrier, a responsible broker will guarantee payment, regardless of the actions of the shipper. In other words, the best brokers will protect both the shippers and the carriers.
Freight brokers may offer to manage inbound transportation, including vendor compliance, and the use of consolidation and truckloads with stopoff features.
Others will analyze load and mode utilization. That includes a comparison of the economics of parcel shipment, LTL and truckloads with stopoffs.
Would you like to jump in the pool?
Freight brokerage is known for its ease of entry. Many logistics service providers have recognized that brokerage can be a profitable extension of their services portfolio. TIA recognizes the growth of the industry and publishes a guideline for newcomers.
While the true cost of entry may be somewhat higher than the published numbers, entry into this field could be a profitable decision for many wholesale distributors and logistics service providers.
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