Freight Forwarders

1
Freight Forwarders

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

2
Architects of multi-modal shipments

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

3
Freight Forwarders

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• US, Asian definition Intermediaries who
  organize air and sea freight shipments, without
  owning assets

• European definition Intermediaries who organize
  air, sea and truck shipments
• Truck often coordinating owner-operators under
  the forwarders umbrella (sales, billing, hub,
  technology)

4
Forwarders vs. Integrators notes

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• The integrator model (FedEx, UPS) has
  successfully captured a large share of the
  domestic freight market
• but very little of the international freight
  market

• Airborne, Emery, BAX Global, (Eagle) have become
  hybrids, operating like integrators domestically,
  but like traditional forwarders internationally
• -- with little success

5
Numbers

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• 120 million shipments
• Split air and sea freight
• 100-150 billion dollars in transportation cost
• 6-8 average growth in air freight
• Sea freight growth closer to GDP
• New manufacturing strategies favor air freight

• 5,000 forwarders nationwide
• 65 with top 40
• 95 of air freight controlled by forwarders
• 20 of sea freight controlled by forwarders
• But they handle 80
• 200,000 300,000 employees worldwide

6
Together forwarders

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

7
Consolidation? Yes no

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Movement toward consolidation
• Fritz acquired 60 local/regional forwarders in
  late 80s and early 90s
• Deutsche Post acquired and merged major players
  (Danzas, ASG, AEI) in late 90s
• Integrators getting involved
• FedEx Tower Group
• UPS Fritz
• Deutsche Post DHL, Danzas/AEI/ASG
• but simultaneous re-fragmentation
• Local managers control local clients, need little
  capital to start their own company
• Overall the number of forwarders is stable, but
  slow and gradual concentration with the bigger
  players

8
Leading Trend 1Forwarders dont want to be
forwarders

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

9
Leading Trend 1Integrated Logistics Services
Notes

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• First strategy Leverage their global network of
  offices warehouses to integrate broader
  logistics offerings to their clients
• Warehousing
• Inventory
• Light inspection
• Light assembly
• Order fulfillment
• Cross-dock

• Execution generally poor. Reasons
• Existing facilities are in high-rent districts
  (air sea ports)
• Different business model (higher fixed costs)
• Inexperience with pricing these services
• Didnt have appropriate IT systems/support
• Tried failed at running a different business

10
Second strategy Notes

• Acquire leading warehousing/logistics companies
• Kuehne Nagel
• USCO in US
• SembCorp Logistics in Asia
• Ocean Group (MSAS)
• Exel Logistics
• Danzas
• Nedlloyd, Danzas, ASG

• Execution better, but with limitations
• Operations tend to run quite independently, share
  a limited number of clients
• IT systems largely non-integrated

11

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

Leading Trend 1Forwarders dont want to be
forwarders
Former MSAS System
12
Leading Trend 2Time Definite Services

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Offer money-back guarantee
• Attempt to match integrators
• Fit into JIT and current supply chain scenarios
• Attract premium pricing/higher yields

13
Issues with Time Definite Services -- Notes

• Economics are challenging
• If FedEx misses a delivery, they sacrifice 15 or
  so
• A limited number of clients bother to file for
  such a small return

• If a forwarder misses delivery, it could cost
  10,000 or more
• Of that, perhaps 8-9,000 would be paid, out of
  pocket, to the carriers
• Issues of measurement forwarders generally
  cant capture POD data
• Question of whether the market will pay a premium

14

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

Leading Trend 3Reducing transaction costs
US Buyer
UK Seller
150
75
75
Forwarder 2
5
15
One shipment creates 10 invoices 11 payments
1 billion transactions

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

Reducing transaction costs
1000
US Buyer
UK Seller
Global market over 100 million air sea
shipments
Net Profit 75
Net Profit 150
Net Profit 75
150
75
Forwarder 3 Cust Brok
Forwarder 2 Breakbulk
Forwarder1 Export
1) In 785 1 day?? 2) Out 15 1 day 3) Out
5 30 days 4) Out 5 60 days 5) Out 700
90 days
1) Out 785 1 days 2) Out 100 10 day 3)
In 1000 30 days 4) Out 40 60 days
1) Out 500 45 days 2) Out 40 60 days 3)
Out 10 60 days 4) In 700 90 days
500
40
40
15
10
5
5
5
60 days
60 days
?45 days / 1 day
? 10 days
60
? 30
60
16
Reducing transaction costs notes

• Efforts include internet-based methods
• Air GFX for booking, tracking, data
• Cass for payment
• Sea Inttra for booking, tracking, data
• No payment solution in works
• CAPP for trucking booking, tracking, data,
  payment

17
Forwarder Economics

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

Split among two to three forwarders

• With margins of 2-3 after tax
• Customer pressure on price flows down to carriers
  (no room to absorb)
• Shareholder pressure on forwarder management for
  increased margins flows down to carriers (easiest
  pickings)

18
Carrier economics

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Passenger planes bellies viewed as incremental
  revenue
• --at least by some carriers
• Freighters/Ships
• Typically market is unbalanced
• Tendency by local management to view the backhaul
  as incremental revenue (we have to bring the ship
  here somehow)
• In air freight, in most markets (exception Asia),
  belly pricing sets the market level, and full
  freighters follow

19
Forwarder/carrier pricing

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Carriers are in a weak position
• Carriers can increase supply (ships planes)
  only years in advance
• Each shipment discretely rated, even within
  contracts for tens of millions of dollars
• Fixed cost, perishable capacity and decentralized
  pricing (local managers) leads to an open spot
  market
• leads to weak contracts, rarely enforced

20
How forwarders increase their margins

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Mix densities
• 5 tons of toys, rated as 10 tons (dimensional
  weight)
• 15 tons of machine parts, rated as 15 tons
• pay airline for 20 tons
• forwarder pockets 5 tons charged but not paid
  (perhaps 10,000)
• Cheat
• Under-declare weight or volume to airline
• Buy low, sell high
• (typically 5 margin at best)

21
Most common mistakes -- air and sea

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• The assumption that you will get lower rates and
  better service by aggregating your business with
  a single forwarder
• For most multi-nationals, ideal system might be
  an approved forwarder list of 5-10, with local
  operations given some freedom to choose among
  them
• On major lanes, local operations should either
  split business between two forwarders, or
  periodically test the market (with real
  shipments) with other approved forwarders
• Dont get trapped into depending on a forwarders
  information system
• Maintain your own, or get an outide party
  (freight bill auditor) to do it

22
Most common mistakes -- air

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Asking for fixed prices for more than six months
• No possible way forwarder can control this
• May set you up for a higher price than market
• Not being able to accurately communicate your
  density, by product and route
• Not negotiating dimensional weight formulas if
  your freight volumes
• Not continually testing the spot market
• Not being able to provide accurate seasonality
  data (Asia)

23
Most common mistakes -- sea

• Who they are
• Where they are going
• Forwarder economics
• Mistakes clients make

• Negotiating via forwarders (FCL)
• With 200 or more FEUs per year, you can usually
  cut a better deal direct
• Not being able to provide accurate data on
  seasonality
• Negotiating contracts on your own schedule
  (carrier contracts follow a regular pattern)
• Not continually testing the spot market