August 31, 2017
Echo Global Logistics Chairman and CEO Doug Waggoner spoke with LM's Jeff Berman about a wide array of industry topics, including capacity, rates, NAFTA, and technology, among others. A transcript of the conversation is below.
LM: How would you describe the current state of the freight economy as it relates to the general economy?
Doug Waggoner: Through the first half of 2017, it was a lackluster freight market, which has been improving slightly since then. It has been an elongated recovery, but suddenly in June we saw capacity get tight very quickly. Truckload pricing has been declining for eight sequential quarters, and we saw more spot market business in June when capacity got tight. So, the question in our minds has been: ‘is this a temporary bubble of the start of a new trend?’ I think it is a little bit of both. On one hand, when capacity gets tight, it is because of excess supply or demand or a combination of the two. In June, it may have been a tightening of supply relative to demand. In the spring, there is usually a seasonal uptick, coupled with a late produce season this year. There were also end of month and end of quarter dynamics, when people ship a bit more, and there was RoadCheck, too. There were quite a few diverging factors that suddenly caused capacity to tighten up, what was surprising to me was how quickly it tightened up. Things subsided somewhat in July but it is too soon to call that the beginning of a new trend, but I am hopeful it is.
LM: How do you view the pending ELD mandate in December?
Waggoner: Whatever we are experiencing now in terms of a tight market will likely get worse.
LM: What do you think will happen should capacity tighten up as a result of ELD implementation as it relates to pricing and what will the impact be for shippers?
Waggoner: If you are a shipper, and Echo is also a shipper in that we buy lots of capacity for our customers, there are signs that pricing is going to head up. If you look at how much pricing on a per-mile basis has declined in the last couple of years, in the case of Echo it has had a pretty significant impact on our revenue and what our customers are paying, and I don’t think it can go much lower. When you put a restriction on supply or increase demand, and suddenly there is tightness in the market, it will pop up pretty quickly. We saw that earlier this summer, with prices popping up double-digits literally overnight, with the question of it would stay like that. Even though December is a slower time of the year, ELD could have some impact on capacity.
LM: How should shippers prepare for what is coming with ELD?
Waggoner: They need to work with their transportation partners and try to come up with longer-term pricing arrangements that are win-win for both parties. Neither carriers nor brokers want to get stuck and get locked in on pricing they cannot live with in the future. Conversely, shippers do not want to get surprised by any unexpected increases. It is times like now that partnerships between shippers and their transportation providers are the most important. If you expect pricing volatility in the future, then you need to build a structure that is good for both parties. There are too many ‘gotcha’s” in this business, when the market gets tight and the rates go skyrocketing and carriers and brokers cannot make money. The other side is that they overly raise prices that penalize the shippers. We need to come up with systems and deals between shippers and transportation providers to smooth out some of the volatility, because at the end of the day carriers and transportation providers have to make money, and shippers want to do it in the most economical way possible. But we need to smooth out the spikes and volatility.
LM: With some of your larger shipper customers, do you have ways of working together on smoothing things out on the pricing side?
Waggoner: One way is to have a more transparent relationship, where if you are dealing with a non asset-based transportation provider, like Echo, in which we are very open about what we pay for a truck and what we sell a load for, but we need the ability to float with the market. On the other hand, the shipper needs certainty about capacity and know it is not getting gouged by the market when things get tight, as transportation providers usually lose money when the market gets tight. It is problem of locking in rates for a year; sometimes it protects the shipper, and sometimes it protects the carrier. If you are willing to play that game and come up with something that floats more with the market and have transparency about it, it can be good for both parties. There were times in 2014 when rates went up and people could not find capacity and shippers were either not able to deliver their products or were paying much more than they budgeted. This also resulted in poor customer service, too. That is a situation where the shipper gets burned. Again, there is a need to figure out more cooperative ways to do pricing with the understanding there is volatility in the transportation market, and that volatility is only going to get worse. Trucking companies do not have a lot of assets parked against the fence, so there is no real flex capacity. My understanding is that fleet utilization rates are high, so when demand rises carriers don’t have a lot more to add.
LM: How do you view the last, or, final market, which continues to gain traction as e-commerce continues to rapidly grow?
Waggoner: We do some final mile business with selective accounts although it is not a broad offering for Echo. It is definitely a mode of transportation that is going to continue to emerge only because there are so many non-Amazon companies that need and want to compete with Amazon. Amazon has raised the bar for how consumers expect their shopping experience to go. If you are a big box retailer competing with Amazon, you need to come up with a solution for getting your products to customers’ doorsteps if they don’t want to come to your store. If that is how they feel, then they will order through Amazon instead. I think all retailers are scrambling to have a ‘combat Amazon’ strategy and, by definition, that requires, some sort of final mile solution.
LM: What Amazon is doing is forcing other retail shippers to be proactive or perish, it seems. Does that force non-Amazon retailers to up the collaboration with its transportation and logistics providers as a matter of survival, so to speak?
Waggoner: Yes, everybody is evaluating their supply chain right now and extending them to customer’s doorsteps. The other thing is there are a lot of different flavors for final mile companies that are somewhat based on commodities, whether it be appliances or a driver delivering a package for Amazon. There is a lot of fragmentation in that business, with a lot of $20-$50 million revenue companies that are interesting businesses but not scaled across the country. They may be in a few cities and are looking for capital to expand. It is amazing how many of these companies there are and many have a nice little business. A large retailer may have different final mile providers, depending on the city or region.
LM: Shifting gears, with NAFTA renegotiation getting a lot of attention, how do you view that from a cross-border perspective?
Waggoner: For a while, some of the manufacturing that used to occur in Mexico went to China, and the standard of living and wages in China have gone up plus the costs of transportation, too, so a lot of that has since come back to Mexico. In recent years, Mexico has become an important part of companies’ supply chains. Mexico is an important trading partner fort the U.S. and are and always will be more so in the future than they have in the past.
LM: There is a lot going on within trucking with the Uber for freight and load matching and disruptive technologies out there, with many seeing decent venture capital funding. How do you view that and what these companies are trying to do?
Waggoner: There are many players out there and a lot of venture capital money chasing whatever they believe the next big thing is going to be. People look at our industry and see the fragmentation and they believe it is ripe for disruption. The problem is that when you have a ‘build it and they will come’ strategy, I don’t know if that works if you cannot get ubiquitous adoption in order to get to critical mass. All these companies can be successful in niches and geographies, but I don’t see where they are going to change or truly disrupt. In brokerage, size and scale matter and so does density, relationships, and technology. We believe we have a marketplace of shippers and truckers, and we can automate that marketplace just as easily, or more easily, than someone that does not have a marketplace and is trying to build it.
LM: There is a lot going on in terms of technological innovation in transportation and logistics for IoT, block chain, TMS, and many others, too. What are the emerging technologies you are most focused on?
Waggoner: I would say predictive analytics and artificial intelligence. Companies like Echo have so much data and what tends to be true is that there are patterns in data that a human will never discover, but if you uncover those patterns you will see a lot of insight about where your business is going or how you could tweak it to operate more efficiently and profitably. We have made some investments in that area and have a number of projects on the books. It is amazing to see what data scientists can do with our data. We think of artificial intelligence more for back office processing. We move around 15,000 shipments per day using other people’s trucks, and there is a lot of activity associated with that for things ranging from invoicing customers to getting paid by customers, supplying the cash, communicating with carriers, receiving their invoices to paying them. All that back office work are things done by humans and transactions that AI can do as it is basically looking at conditions and making decisions and routing something. Things that happen with e-mail, voicemail and phone calls and a lot of the workflow can be automated and take humans out of the equation using AI. You can create bots to read e-mails, decipher what the e-mail is trying to say, route it to the appropriate person and learn from that data and take something you are 80% certain about understanding a situation and handle it in an automated fashion and the 20% of the time you are wrong you can learn from that. It is a way of being more efficient and cost-effective.
About the author
Jeff Berman is Group News Editor for Logistics Management
, Modern Materials Handling
, and Supply Chain Management Review
. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman