Brokers: ''Kickback'' from Carrier

Copyright 2006, Traffic World, Inc.

Q:

Until recently we were using a small broker to handle a substantial part of our freight.

We became suspicious of this broker after one of our dock supervisors reported a troubling conversation with one of the owner-operators working for a carrier the broker hired. Our employee had casually mentioned something about the load being pretty good paying, and he said the driver told him "Oh, we don''t see anything like that kind of money; the carrier has to kick a lot back to the broker," or something to that effect.

After the supervisor talked to his boss and word went upstairs, we did a careful review of the broker''s activities. We found out the broker seemed to be giving a disproportionate number of loads to the carrier in question. On review, it also seemed as if the freight bills on those loads were unusually high compared with what we were paying elsewhere.

We tried talking to the broker about this but got nowhere; his attitude was that "of course" he marked up carriers'' bills before invoicing us, but that this was "common industry practice." I understand brokers need such markups to generate their revenue, but it was my understanding the industry standard was in the 6-to-8-percent range or maybe a little more.

But after we stopped using the broker we found that our freight bills for the shipments in question suddenly dropped by 30 percent or more!

This seems to me tantamount to fraud. We really resent being taken for suckers by this kind of scam. Is there some action we can take?



A:

The only action you can take is to keep better track of what it''s costing you to move your goods. Neither broker nor carrier did anything illegal.

Your best way of not "being taken for suckers" is not to be suckers, which I''m afraid you sort of have been up to now. To have been paying a third or more extra for transportation service without even noticing it kind of marks that big "S" on your foreheads, and quite clearly this broker had his eyes open enough to see it and his ethics loose enough to take big-time advantage.

In fact, even the ethical issue is more than a little cloudy.

In a market-mediated economy such as ours, the "right" price and the "fair" price are elusive concepts. Basically, sellers are motivated to charge as high a price as the market will bear, and they do so by and large without legal constraint.

As you correctly note, brokers bill shippers based on the price the carrier charges them plus some incremental markup.

This isn''t the way it used to be; in the old days it was carriers who sent out freight bills and collected charges, and they then remitted commissions to the brokers who had arranged the service. Needless to say, this was less than fully satisfactory to the brokers, since they were at the carriers'' mercy in getting paid; with the advent of deregulation in the early 1980s they soon changed over to the present system.

Under neither structure, though, were or are there legal or regulatory limits on how much compensation a broker could receive. Once upon a time I know 6 to 8 percent was about standard as a matter of practice, although even then it varied.

If there''s still some arbitrary "norm" these days I''m unaware of it, and as for a ceiling the sky is quite literally the limit.

For that matter, the same holds true if you''re dealing directly with carriers. In LTL service, for example, discounting these days not uncommonly runs to 70 or 80 percent or even more; yet carriers occasionally are still able to bill at full, undiscounted rates, and are happy to accept the windfall in such cases.

The days when carrier rates had to be "reasonable" under regulatory law is long gone.

The way to keep such things from happening is obviously exactly the same as in other economic sectors - shop around. Even the dimmest bulb among consumers knows there are savings, often big ones, to be had by comparison shopping and price haggling, and unless you''re printing up money in your basement (not recommended by the Secret Service) you ought to be looking for those savings, too. If you depend blindly on third parties to handle your shopping, you''re asking for exactly the kind of problem you got.

I''m certainly not advising you to keep away from third parties; that''s not at all my point. But you need to make them, as well as carriers themselves, compete for your business, and the only way to do that is to keep a weather eye on the market. And your focus shouldn''t only be on price, notwithstanding that this is where you got zapped this time out; you need to also compare transit times, service, claims ratios, all of the elements that together distinguish good suppliers from poor ones.

If you want to stay mad at this broker for gouging you, that''s up to you. But you need to lay the true blame where it belongs, which is at your own feet. You''re never likely to recover the excess you paid for past shipments no matter what you do, but if it teaches you to monitor your dealings with all your suppliers more closely in the future, it''s probably a cheap lesson.



-- Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at P.O. Box 76, Morganton, Ga. 30560; phone, (706) 374-7201; fax, (706) 374-7202; e-mail, BarrettTrn@aol.com. Contact him to order the 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.





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