Issue #11: The Freight Industry Is Changing
The freight industry is changing. It’s evolving for the better. It may not seem like that right now but things are moving in the right direction.
Layoffs suck for most involved — it’s incredibly disruptive to have your job end via Zoom, Meets, or worse, Teams. It’s alarming and sends your world into a tailspin. Rather than letting things spin out of control, if you have an entrepreneurial itch, now is the time to scratch it, rather than letting things bubble up.
Think about the problems you ran into on a daily basis. Think about the problems your coworkers, customers, and carriers have. It’s likely a repeatable problem that happens elsewhere in the industry. Maybe you can solve that problem with technology.
Freight Tech is changing
I know it seems like I keep referencing my brother’s podcast, The Freight Pod, but it’s just such an addicting thing to listen to if you’re a student of the freight industry and if you love this industry. Listening to his episode from a couple weeks ago with Eddie Leshin, you can hear how much technology factored into the success of American Backhaulers, along with the tech that carried over and is still present today at CH Robinson, and the same concepts are applied at Coyote, Arrive, and so many other brokerages. Technology is central to every brokerage business. Yes, People and Process are also core, but technology is on the forefront of everyone’s minds right now.
We’re seeing a divergence happen as tech startups in the logistics space are splitting into two camps, those who are trying to disrupt and replace legacy providers (we saw how that has worked out for the DFMs — and I was guilty of trying to do this at Forager), and then you have supply chain enablers. Supply chain enablers are the companies building software to help logistics providers, trucking companies, and manufacturers do their jobs more efficiently, generate more revenue, and connect with more parties.
When I was building Forager, albeit fairly late into the process, my dad told me that we had an identity crisis. “You’re trying to build two companies at the same time, a brokerage and a tech company. You need to pick one and stop doing the other, you can’t do both.” It didn’t fully make sense to me until it was too late, and we ended up being acquired by Arrive at the end of January 2022, thankfully resulting in a different outcome than the one that Convoy experienced a few months ago.
I learned my lesson and picked technology this time around.
I’m a big believer that freight brokerages and forwarders aren’t going away. There will always be a need for service and support when things go sideways. Network effects at large brokerages are real, and quite often a key part of their differentiator. Everything boils down to price and service and you need scale to achieve both of those things profitably. Yes, you can build and manage a small brokerage with top notch service, but you likely aren’t landing Fortune 500 shippers who will dump a ton of volume into your network.
If you’ve been listening to Andrew’s podcast, you’ll know by now that there are two different models for brokerages, the centralized split model, aka Chicago-style, where you have a demand side (shippers) and a supply side (carriers) who each focus on their speciality. You have even deeper specialization when it comes to operations and specialized modes like Mexico, Canada, intermodal, or drayage. On the other side, there are brokerages who operate in the cradle-to-grave decentralized model. The case can be made that a brand new brokerage will be better suited to operate as cradle-to-grave until there’s enough volume to warrant splitting out a carrier group.
There’s effectively two playbooks to choose from, but you have to factor in a few other decisions when building a brokerage:
Transportation Management System (TMS): build or buy? Brokerages have poured tens of millions of dollars into building their own proprietary TMS, built the way they need it, using the lingo they need to use, with customer codes and carrier codes and load numbers all formatted a certain “unique” way, even though this same pattern is seen in all TMSs.
Scheduling Support: brokerages will hire as many customer service representatives as possible in order to execute on scheduling requirements for every single load. It’s all about brute forcing this workflow because no one has solved scheduling and it’s a complete mess.
Pricing: Everyone works to blend two key sources, their historical load data and pricing data from either a load board or FreightWaves. Brokerages pay 6 to 7 figures for access to these load boards for posting and pricing, while desperately trying to avoid falling into a trap with a fraudulent carrier.
Coverage: brokerages tend to flood their floor with carrier sales reps, again brute forcing their workload and developing a backhaul-based carrier network, with reps split out into regions who consistently call the same carriers and store that tribal knowledge in their heads, waiting for the next load to pop up. A lot of the best carrier reps at a brokerage will tend to ignore the automated matching suggestions that their system pumps out, thinking they’ll outsmart the machine. The most common method among brokers has been to “post and pray” — posting all their freight to a public load board and hoping they find coverage with a carrier who won’t double broker their freight or steal a load.
Tracking: my first job at Coyote was tracking freight. It was before we had cell phone GPS or API-powered tracking. I was calling drivers, asking for updates, and then updating the system. Today, we thankfully have great products like Project44 but it’s still completely dependent on a broker using the tool properly and a carrier opting in properly.
AP/AR: getting paid and paying carriers is absolutely critical to a freight brokerage business. Let’s ignore the whole issue with floating the difference in pay terms and focus on the actual workflow. Oftentimes, brokerages use one system for invoicing customers, another system for paying carriers, and both those systems are either integrated with their TMS or their accounting software. Sometimes, nothing is integrated and there’s a lot of double- or triple-entry.
Can one company solve all those issues I just listed?
Absolutely not. Some of the greatest software companies in the world couldn’t solve all these problems with one app. Are you telling me that a freight brokerage can? I think we’re approaching the end of the days of brokerages building their own software and adding true enterprise value that outweighs the cost to build it. None of this work is secret sauce. Everyone runs the same playbook.
Software companies who fall into the Supply Chain Enablers category are going to help move the industry forward by taking chunks of this workflow and working to digitize, optimize, and automate it. Yes, you need a comprehensive TMS that acts as your freight command center. But that TMS should be capable of pulling in the best products that solve some of these super complex issues, rather than forcing you to use all their built-in tools. It’s about building an eco-system collaboratively, not building it on your own.
I’ve been fortunate to see and invest in some great startups who are working on solving these issues (you can see which ones on my LinkedIn, not using this post as a plug). I’ve also seen great software from companies like Mastery and Highway that I wish I had the chance to invest in, and will keep recommending simply because I think they help move the industry forward.
It’s time to build better tech for logistics and supply chain.
It’s time for collaboration and it’s time to build great logistics technology. All the problems I just talked about are purely from the perspective of a freight brokerage. Freight forwarders have similar but different problems that they need solved. Manufacturers have needs from procurement to purchasing to logistics to distribution, all of which fall under the supply chain category. Carriers have trouble getting paid, trouble sharing tracking details, and trouble scaling their business past a certain point. Fraud is rampant across the industry and the existing players aren’t doing enough to fix it, they’re allowing it for the sake of revenue.
Maybe we need better tools that enable all these critical parties involved in the global supply chain, rather than more digital freight brokerages trying to put the big guys out of business. There are a lot of smart people who lost their jobs due to layoffs/restructuring, or that are sitting somewhere twiddling their thumbs, hating their day job. Think about those complaints you hear from your coworkers and your customers day in and day out. I think about the complaints I heard from my coworkers while at Arrive and that was a factor in the decision I made to start Cargado.
Are you building in this space?
If you’re building something cool in this space, there’s so many early-stage investors out there who understand supply chain and logistics. I know of a lot of great early investors who are focused on investing in logistics and supply chain technology:
Ironspring Ventures (Ty Findley)
Grid Capital (Peter Christman)
Zenda Capital (Esteban Reyes)
Wischoff Ventures (Nichole Wischoff)
Primary Ventures (Zach Fredericks)
Fontinalis Partners (Chris Stallman)
Equal Venture (Rick Zullo)
Dynamo Ventures (Santosh Sankar)
Autotech Ventures (Burak Cendek)
Schematic Ventures (Julian Counihan)
Bain Capital (Ajay Agarwal, Zeeza Cole)
I’m excited about what we’re building at Cargado and excited to partner with other startups in the space that are working to help move the industry forward.