Fragmentation has traditionally harmed the freight industry, from almost every player’s point of view.
Shippers’ diverse distribution networks and consumers spread around the world make it difficult to define a single set of shipping practices. The abundance of carriers, often with fewer 10 trucks, each run custom lanes dependent on their drivers’ needs and market conditions. Lastly, brokers utilize different selling models while promoting distinct niches.
But in a recent blog post, Dan Lewis, co-founder and chief executive officer of digital freight marketplace Convoy, suggests that FreightTech offerings have paved the way to disrupt fragmentation with a new model of shipping: the hybrid carrier model.
Freight’s unharnessed economies of scale
Lewis’ main focus is on the principle of economies of scale, through which cost advantages are achieved by increasing a level of production. Put simply in freight terms, the more shipments available within your network, the more likely you are able to bring down costs and waste for shippers.
Yet, Lewis explains this has not been achievable for truckload market participants.
“Shippers work with dozens or even hundreds of truckload carriers and brokers who compete for their business. This is currently the best strategy for shippers to get competitive coverage, pricing and service, but it leads to a transitory or what-have-you-done-for-me-lately mentality that limits the opportunity for each individual provider to think long term, and it prevents big bets that could lead to step-function improvements in service and cost,” said Lewis.
The digital freight marketplace executive points to other industry dynamics, including siloed brokerage models, market fluctuations, and loading and unloading delays, that limit the ability to achieve economies of scale.
A new model
To overcome obstacles common to traditional methods, Lewis offers up the hybrid carrier model fueled by FreightTech innovation and industry integration. This model is produced through the leveraging of universal trailer pools, digital integration of all load volumes, and transparency on available capacity and order execution.
Related: Trailer pooling gains more interest in Repowr’s $8M Series A raise
“Over the last decade, billions of venture dollars have gone into the truckload freight industry on the promise of digital transformation. That investment spurred, amongst other important innovations, the first generation of universal trailer pools and digital platforms for truckload brokerage. … These platforms have remained proprietary, but this is changing. In the coming years, we will see some or all of these platforms open up, and the next wave of innovation will be built on top of them, enabling today’s brokers and carriers to become tomorrow’s hybrid carriers too,” said Lewis.
While some of these “ingredients” have been adopted, including universal trailer pooling, still “walled away” are integrations for data sharing, communications and load execution, Lewis argued.
“Very few offer a universal shared trailer pool/trailer management system directly tied to a power-only marketplace of carriers who can rent/reposition those trailers as part of their work. … This prevents network and scale economies from forming and reduces the cost, service, scale and data benefits that any single provider can offer to shippers,” Lewis told FreightWaves in an email.
Two ingredients also remain contentious — a single source for truckload volume paired with a single source of capacity.
“Leading platforms will only get better, leading to increasingly better cost, service and insights for shippers. For the first time, shippers will have a compelling reason to consolidate their freight onto fewer providers,” said Lewis, who didn’t count Convoy out for leading the pack.
“The proof, as they say, is in the pudding. While it will take years to know exactly how this plays out, Convoy is one of the companies that has invested in building a hybrid carrier platform already. The results that we have seen from our [version one] are very promising.”
Is this freight’s future?
A few questions remain unanswered.
Service industries, particularly those that are people-based with specializations, have traditionally found it difficult to consolidate and obtain economies of scale.
Add on freight’s incredibly low barrier of entry and it becomes more laborious to control and harder to get everyone to play along.
Lewis does confront this, suggesting that many shippers are doing this with their other service providers, just not for logistics.
“Most of the time, when companies source services, they choose just one or a few providers, not dozens or hundreds. They want to reduce the overhead of managing vendors and gain the volume discounts and priority service of top customers. For example, companies pick one payroll processing system, hire one partner for warehouse logistics and contract one food services vendor to manage their cafeterias. The leaders gain advantages as they get bigger, and customer growth accelerates,” he explained.
Improved technology can also improve a service industry to create economies of scale, and with increased as-a-service business models entering the freight space, integrating freight service providers becomes uncomplicated.
Related: Carriers bet on Capacity-as-a-Service
Lastly, how much can such a fragmented industry, with such a wide variety of services, consolidate to create economies of scale, and will Convoy lead the way?
“We don’t believe there will be a single winner that will consolidate the entire market onto its platform. We do expect that there will be a small number of hybrid carrier platforms that become industry leaders and benefit from economies of scale [and] network effects,” Lewis told FreightWaves.
“Many brokers and carriers will continue to manage their shipper-customer relationships and all of those complexities. But, instead of each having their own marketplace for carriers or expansive teams that book freight with carriers, they will be able to run their freight through the hybrid carrier platform that they use, which enables them to offer hybrid carrier capabilities.”
Watch now: Navigating Volatility in Freight Markets: Convoy’s Dan Lewis talks with Craig Fuller
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