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Online freight exchanges

The forthcoming auction-based freight exchanges could take the logistics market by storm. Peter Rowlands puts them in context, and considers what they have to offer

Almost exactly twenty years ago, the first serious contender in the field of computer-based load-matching services emerged on the UK market. It was called Datafreight, and was developed by British Road Services, which was then the main road transport division of logistics giant NFC.

Soon afterwards a second system called Cargofax was launched by the Road Haulage Association. Its technology was based on that of Datafreight, but it became effectively a rival. Later it was hived off to an outside owner.

Empty running has of course always been the scourge of the transport industry, and some of today's substantial haulage businesses started out in life as "clearing houses", using the telephone to match spare capacity with loads in return for a commission. Back in 1980, with the dawning of the computer age, there was a widespread belief that computers could streamline and automate that process to everyone's advantage.

Despite the early promise of the new systems, industry at large showed itself to be decidedly underwhelmed. There was perhaps a feeling that the vested interests of their backers raised questions over their neutrality, and also a sense that they were no more than clearing houses in a new guise, showing details of vehicles and loads that could not be matched any other way. Neither ultimately stood the test of time.

Jump forward to the present day and you find surprising parallels. Rival Web-based load-matching services are emerging thick and fast, each claiming to be the most effective and useful in its field; and so far most people in the transport industry are looking on with a mixture of enthusiasm and reserve.

Transport contractors can see potential benefits in fleet utilisation from being able to match traffic with spare vehicle capacity, but they are also worried that some of these new systems might eat into their margin in a business where profits are often low enough already.

Shippers and consignors for their part can see the attractions of dipping into a vast virtual pool of available vehicle capacity, but may need convincing of the consistency and reliability of the contractors who offer their services through it.

The great difference between the new systems and those of two decades ago is the emergence of the Internet as the standard communication medium. In the past, load-matching services were based on direct dial-up links between users and providers. In cases such as that of Freightback, launched as recently as 1995, users actually telephoned a service centre for verbal details of loads.

The Internet offers universal access. A consignor posts an available load, and in some cases every carrier in the country (in fact in the world) may be able to see it just minutes later. Likewise if a carrier posts an empty vehicle, any shipper with available cargo can see that.

Such opportunities have scarcely been lost on a market that is always looking for innovation, and in the past couple of years an array of Web-based load-matching services has emerged. Some are quite modest, essentially being run by transport or Web enthusiasts. Others such as Freecargo (www.freecargo.co.uk) are more professional, and have benefited from more substantial backing.

Until lately the function of such sites was quite clearly defined. They were mutual help services, emerging from the third-party freight market and intended to be used by it. They gave carriers a platform from which to communicate traffic information to fellow-operators, often free of charge.

In the words of Richard Pryce, the haulier who runs the UK service of Freecargo on behalf of its Dutch originators: "We've never involved manufacturers in the service. If we did it would kill the job, because they'd want to force the rates down. It's just aimed at transporters and forwarders."

Similar approach

A similar approach has been taken by other site operators including Road Tech Computer Systems, the company behind the Roadrunner traffic management system (widely used in the haulage business).

Road Tech operates an online Load Centre (www.roadrunner.uk.com), and managing director Derek Beevor makes it clear that this is aimed primarily at the haulage business.

"We do have a facility for shippers to advertise loads, but they post these 'blind'," he says. "The basic service is kept to transport companies."

Indeed, Road Tech's online service is endorsed by the Road Haulage Association, whose members are offered a year's free participation from the time they first register. The links between the two organisations are close, since Road Tech has also developed the RHA's own widely-admired Web site.

The system against which the latter-day Web-based load-matching services originally pitted themselves was Teleroute (www.teleroute.co.uk), which dates back to the mid-1980s. It was started in France, and took advantage of that country's early adoption of Minitel communication devices. It also started using videotext a technology that has of course been largely overtaken by the Internet. This option is still available, although now the company has been repositioning itself as a Web-based operator, and says it plans to treble the size of its UK operation by the end of this year.

Possibly the most perfect embodiment of the mutual-help load exchange service is one operated through the Web site of the Transport Association, a close-knit transport operator group. TA's traffic information service (www.trans-assoc.org.uk) is available only between members, and no price negotiations are conducted on the site; operators simply use it to find possible loads, and then contact the providers direct to negotiate terms.

However, the whole load-matching arena is now changing more fundamentally under the influence of the emerging Web-based B2B trade exchanges. In essence, these offer manufacturers in given market sectors the opportunity to declare their purchasing requirements over the Internet and obtain tenders from prospective suppliers. It was only a matter of time before this concept was going to be applied to the freight market.

So far three main contenders have emerged in the British market. The one that has achieved the most exposure, largely through some shrewd pre-launch marketing, is eLogistics (no relation to e.logistics Magazine), whose address is www.elogistics.com. However, it now faces some brisk competition from Mars Group, which opened its internal traffic exchange service to the outside world this spring under the name Freight Traders (www.freight-traders.com).

A third force that promises to make equal waves in the market is the service planned by TransLinX (www.translinx.com), which is part of the rapidly-growing Just2Clicks.com empire (this also owns the Webfreight "virtual carrier" service). TranslinX already has a traffic exchange service up and running on its Web site, but it is planning a far more wide-ranging portfolio of services for later this year, and seems to be set fair to give both its rivals a run for their money.

All three of these companies are focusing at least part of the attention on the providers (as opposed to carriers) of loads, and aim to offer them a mechanism for obtaining the best possible price for their getting their goods moved. Accordingly they are all basing their proposed offerings on the concept of a "reverse auction" which simply means an auction in which the bidders (that is, the carriers) push the price down rather than up.

Sequential exchange

ELogistics is planning a more sophisticated version of this called "sequential exchange", although it will not be available in time for initial trials in the summer. In brief, this will allow bids to remain in play over a period, during which the lowest-bidding carrier may find a better use for the vehicle it has offered. If so, that tender is withdrawn and the bidding floats up again until a figure is accepted by the shipper.

There are also other differences between these systems some minor, some fundamental. ELogistics, for instance, seems to be taking the most vigorous approach to recruiting and screening participants. Head of marketing Tim Meadows-Smith likes to present the organisation as "a logistics service" rather than purely a trade exchange (full interview on page 20).

The other two appear to be adopting more of a hands-off approach, although this may of course evolve with time. In fact all three organisations already have plans to expand their services well beyond freight exchange alone. Freight Traders, for instance, has struck an agreement with the Freight Transport Association under which services such as traffic information will be made available to participants. TranslinX is developing related services such as remote vehicle tracking and online PODs.

A problem often inherent in the less sophisticated of the services emerging from within the haulage industry is that posted loads may not always be withdrawn from display immediately they are allocated. This means those site operators tend to face an initial "disbelief factor" among users. The new exchange operators, however, seem to have recognised this, and are taking pains to ensure that loads are cancelled automatically from their systems as soon as an electronic "handshake" seals the deal between carrier and shipper.

Where the new-generation services diverge most conspicuously from the mutual-help model is that their operators aim to charge a commission to carriers successfully negotiating loads. ELogistics says this might range between 1 and 15 per cent of the transaction value according to the carrier, with a figure of 5 per cent looking typical. Freight Traders has specified a flat 4 per cent rate.

TransLinX currently offers a better prospect; managing director Mark Roberts says successful bidders will pay only a 2.5 per cent commission, at least for the first year. He accepts that it may prove necessary to edge this rate up later, but points out that at the moment the service is free to both shippers and carriers. Moreover, unlike the other two, this one has already been running (admittedly in an early form) for some months. "We want to get the concept over," he says, "and create a marketplace."

How comfortable will the market be with these commissions? Predictably, there is an undercurrent of feeling among some hauliers that these systems could undermine profitability. They tend to be hesitant to speak out about them, although Edward Roderick, the chief executive of leading logistics group Christian Salvesen, had no such reticence. "We're very cautious about them," he told e.logistics Magazine. "As far as we can see, they're simply taking margin out of the business. We're not very interested in being involved."

Overall benefits

The freight exchange developers naturally take a very different view. They maintain that by improving vehicle utilisation, they will actually bring overall benefits to the logistics business, even after the commission has been paid. With an overall global figure for empty running put at around 30 per cent, there is clearly room for massive improvement even though operational constraints mean that much of this theoretical capacity could never actually be filled.

The developers also point out that self-help traffic exchange services in a sense represent the vested interests of carriers, whose objective is to keep freight rates up. From the shipper's point of view, a reverse auction system might seem to offer no more than a fair method of countering that tendency.

The difference in perspective is brought out graphically by the contrasting approaches of the FTA (generally representing shippers) and the RHA (representing carriers). While the FTA has welcomed the Freight Traders scheme, the RHA has declared itself strongly opposed to the very concept of auction-based exchanges, and nails its flag firmly to the Road Tech mast. Significantly, Road Tech charges just £1 a day to participating hauliers using its online service, and has no plans to increase that rate.

One dimension implicit in the emerging freight exchanges is very new, and represents a radical departure from previous load-matching services. That is the idea that the exchange operators themselves (through links with financial institutions) should underwrite the cost of transport movements, protecting carriers against default on payment on the part of shippers. This could give an enormous boost to these systems, since historically it has always been a gamble for carriers to trade with unknown or unproved shippers (or vice versa).

That guarantee will not come free, nor will it necessarily be a standard offering; but it could still lend appeal to these systems, especially for the many small hauliers scraping a living from backloads. ELogistics in fact plans to make the guarantee more or less standard, which could account for the slightly higher commission rates it seems to be planning. TranslinX will make it an optional extra. Freight Traders for its part is talking about an optional "escrow" system.

In a sense there is no magic about these guarantees; they are really a form of debt factoring. Their appeal lies partly in the fact that they will be arranged when the transaction is struck, and organised by the freight exchange operator. All the carrier will need to know is that the money is guaranteed to come in (probably within thirty days, according to present estimates).

From the shipper's perspective, there is likely to be some reticence about the capabilities of unproved hauliers. The exchange operators are addressing this too, by developing services such as goods in transit insurance. This is already firmly on the ELogistics agenda, for instance.

Further reassurance is likely to be provided if shippers know they are dealing only with known carriers in the first place. ELogistics has made this a key plank in its platform, aiming to create closed-loop "communities" of registered carriers and shippers in vertical-market sectors. Freight Traders aims to offer closed auctions alongside the open version, and also makes provision for named carriers to be excluded from bidding. Several of the exchange operators will allow users to give ratings to carriers, and TranslinX makes a strong feature of this.

While there are obvious parallels among the new contenders for the online freight exchange market, there are also many differences in approach and detail. TransLinX, for instance, seems to be catering more actively for carriers as well as shippers. Among its plans, it intends to offer mobile options which will allow drivers to call up details of available loads when they are out on the road.

TranslinX, incidentally, has just launched a specialist service for car transporters, and reports that Walon has already signed up to it.

The subtle differences between systems are too numerous to list here, but should not be underestimated. We cannot do better than recommend anyone interested to consult the companies themselves, or visit their Web sites.

Only time will tell how quickly these freight exchanges catch on, or how the market will regard them and which of the current contenders stay the course. What is clear is that one way or another they look set to become a permanent feature of the freight scene.

 

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