Exchanges must move beyond spot buy

By Staff -- Purchasing, 3/8/2001

The race is on this year as online transportation exchanges strive to reach beyond the paltry spot market buying activity that many of them were designed to grab a stake in.

While representatives from many of these exchanges say they have learned much from 2000's year of growth and mistakes, they say the spot buy lesson is perhaps the most important one of all.

"The spot buy is a wonderful vision. But it is an incomplete vision," says John Martin, senior vice president of sales and marketing for the Illinois-based National Transportation Exchange.

Many online exchanges were created to take advantage of the quick, last-minute transportation buy. Of the some 100 online transportation exchanges that existed by mid 2000, nearly all of them provided one variation or another of spot market buying opportunities. Those who designed the sites believed the market could yield vast profits, and the Internet provided a handy way of raking them in.

Some exchanges today maintain that they can still turn a profit here, and make the spot market work for them. They describe the market as an "ad hoc" fluid market that manufacturers must turn to for the constant glitches that occur in their shipping schedules. These glitches can be costly in a manufacturing environment that uses just-in-time schedules and depends on precisely timed supply shipments directed to assembly lines.

"Well, all I can say is our capacity builds daily," says Rick Renner, managing director for the Ohio-based UrgentFreight.com. "Our participation from carriers grows on a weekly basis. And the more carriers you have actively participating across the board, the more opportunities there are going to be, from the shippers' point of view."

And there are manufacturers out there that are looking for this sort of help. Steve Ahern, manager of corporate logistics for the New Jersey-based Honeywell, says he turns to GoLogistics.com for this very reason.

"We work with LTL carriers on spot pricing," says Ahern. "We go to the site instead of calling around, using the Fax or going back and forth. This eliminates that process, and makes it much easier for the carriers and Honeywell to do business together."

A basic problem

But others don't necessarily share his sentiments. And they say the basic problem faced by many exchanges-carrier skepticism and shipper indifference-relentlessly points back to the spot market. Neither side truly needs the business, they say. In fact, the spot market represents only a fourth of the overall transportation market. The real needs of manufacturers, 3PL players and carriers actually go well beyond this market.

"We don't think the overall use of the exchanges is growing dramatically," says Lanigan. "The people that came out with exchanges may have overestimated how much freight is moved on a spot basis. The vast majority of it moves under contract. That's where most of the spend is."

The sobering news seemed to begin to sink in halfway through last year. Many exchanges tried to grab a foothold on the market, only to watch as the market didn't take off. The shippers didn't seem to need it as much as everyone thought.

"Clearly, the basic spot market exchanges have not gained traction," says Lanigan.

This isn't to say that there was no interest whatsoever in the market. Lanigan says smaller shippers have a stronger interest here. These are smaller manufacturers who have sporadic shipping needs and turn more often to the spot market for help. His argument is backed up by Rafael Carmelo, logistics coordinator of the Connecticut-based Louis Dreyfus Corp., who says his comparatively small company does not have the capability or the desire to enter into long-range transportation contracts.

Carmelo uses GoCargo.com to order ocean cargo shipments once a week. He says the orders save him a lot of money and a lot of time.

"Actually, it's hard for us to do long-term contracts," says Carmelo. "Instead of trying to reach every single shipment line, I just go to the Internet and ask for a bid on a lode movement. It's very easy."

A trickle

But Lanigan says these sort of shipping needs are too few and far between today. Exchanges that banked on this sort of business found it coming in at a trickle. While the exchanges could entice the smaller manufacturers to get on board, they had less success with larger companies that turned to long-term contractual agreements to handle their shipping needs.

"We see that the larger shippers are not interested in using these," says Lanigan.

It was this belief that encouraged some of the more resilient exchanges to adopt new strategies. These included seeking ways of offering online contractual transportation buys and catering to an entirely different market.

One such story came from Logistics.com, which is now dabbling in a private exchange as well as a public one. The exchange now has the advantage of catering to the "preferred providers" who use it to handle any shipments that might fall through the cracks of normal contractual agreements.

Lanigan says the exchange features an online tool that allows shippers to make modifications to their existing contracts. If a company signs on a new, major supplier, for example, purchasing managers can go online to the site and modify a contract.

"If a major supplier is added, or if they want to create new lanes, we can deal with the exceptional lanes via the Internet," Lanigan says. "They can use this to create new contracts. I think this is leading to the creation of multiple levels of procurement, and that is a real value."

But if Logistics.com is having success in getting manufacturers to make their contracts online, the success isn't necessarily spreading to other exchanges. Some representatives say there is a real trick to enticing companies to make contract transportation buys over the Web. And they have yet to have success at it.

These exchanges say they have learned to look at the spot transportation market as a starting point. The exchanges that will survive, they say, will be the ones that can grow from here into more solid ground. The solid ground is where the contracts lie. Childs of FedEx Custom Critical, for example, says the exchanges must now consider the spot market a place to begin with. But they must build on it.

"Sure, that's where you start," says Childs. "But the other issue that has to be addressed from a market standpoint is where is the contract situation? How does it fit in with these exchanges?"

"No one knows the answer yet," he adds. "A lot of freight goes under contract. And I don't know if [the exchanges] are addressing that."

Feedback

Exchanges have spent the better part of the past year seeking feedback from their customers. Those that hadn't started trying to move far beyond the spot market soon got the message that they should try and do so.

"Most companies are realizing that spot market exchanges solve only a small part of the problem," says Ben Gordon, chairman of the Massachusetts-based 3PLex Inc. "And consequently, customers are insisting that the Internet and software companies move beyond the spot market."

It's this realization that is driving the Web site expansions today. But moving beyond this market may be easier said than done. Some exchange representatives say carriers come to their sites with the express purpose of tuning into those spot buys. The exchanges represent an extra outlet for them, one where they can make standing freight available for a quick pickup.

"The carriers told us they are using the Internet sites in the spot market," says Linda Beth, vice president of e-business solutions for the Wisconsin-based Schneider National Inc.

Frustrations

But Beth is also quick to point out that there have been problems with these sorts of transactions. Even those who have spot market buy needs find themselves frustrated by too many of the exchanges. Beth says many sites don't provide enough room for meaningful information about carriers.