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Why There’s No Longer Room for Middle Men in Supply Chain Management
Bitcoinist | Mar 30, 2018 | 02:00
Middlemen used to be necessary parties in supply chain management. Producers, shippers, and retailers had no way to find each other without the aid of a central hub of contacts operated by brokers or other intervening parties. In return for access to these connections, all other parties paid significant fees to the central brokers creating connections. It was the most efficient model available at the time because as any producer or shipper will tell you, connections are truly valuable commodities in the supply chain world.
Of course, these middlemen had plenty of connections, but they usually didn’t have access to anywhere near the majority of parties in their chosen industries. A realtor, for example, might have known of plenty more homes for sale than the average beginning home buyer, but their knowledge base was still essentially limited to their own networks. A realtor specializing in one neighborhood would be ignorant of plenty of available homes just in the next neighborhood over.
The same disconnect happened in all industries that relied on brokers to connect parties. In the supply chain world, a factory might contact a broker and get connected with a truck service that could take an indirect route between the factory and the retailer. A trucker who could operate a more direct (and thus, faster and cheaper) route might have already been operating in that area. Although, if they weren’t in the broker’s Rolodex then, that more efficient connection remained undiscovered and unused.
That was before the internet and the rise of the digital age. Low-friction digital platforms have revolutionized how connections are found and formed and transactions are made across hundreds of industries. Freelancer platforms and secure payment gateways have allowed more and more workers to join the gig economy. When workers and clients can find each other without involving middlemen, they don’t have to pay middlemen fees, and that makes the system more accessible and efficient for everyone involved. In this ecosystem, brokers such as realtors have to contribute added value such as legal expertise and professional accreditation to transactions instead of just setting up connections. In many industries, brokers are no longer needed at all.
So why is the supply chain management world stuck in the past? TechCrunch reports that 67% of all shippers (i.e. parties who need merchandise moved) rely on paper records. Shipping brokers typically take a 15-20% commission on each load, and book, on average, only about 3-4 deals per day. This fairly low booking rate could stem in part from the high fragmentation of the broker industry. TechCrunch reports that the top 20 brokers in the shipping industry generate only 4% of the industry’s revenue. This indicates that a huge number of brokers are forming a small number of deals individually.
This system is as inefficient as the Rolodex mentioned above. Because each broker is a small operation with limited resources to build networks, there are plenty of missed connections. A carrier and a shipper going to different brokers (and they’re likely going to go to different brokers in such a fragmented environment) are going to miss out on a lot of opportunities to work together even as they pay brokers high fees.
This system, unfortunately, punishes truckers most of all. Inefficiencies in the matching system mean that many trucks on the road are in fact empty, traveling from one drop off point to another pick-up location without carrying anything in between. Many truckers get paid less or even nothing for these empty miles, despite taking up their gas and time. Empty trucks are safety hazards; a recent study found that they’re two and a half times more likely to crash than loaded ones. They unnecessarily drive up the supply chain’s carbon footprint and the contribution to infrastructure wear without any accompanying increase in actual productivity.
The supply chain management world needs to get into the 21st century. Truckers and shippers will benefit from a system that replaces the inefficient, fragmented broker model with a digital platform that allows them to find each other without a middleman. Peer-to-peer payments mean that they no longer have to use brokers to make secure financial transactions. Brokers can still be a part of this world, but only when they operate efficiently and provide added value to the system.
Fr8 Network is building a platform to bring supply chain management into the future. Shippers and carriers can join the Fr8 Network to access the Fr8 Network board, where they can create profiles to post jobs and job requests. Fr8 Network’s bi-directional recommendation engine helps truckers find jobs that can minimize empty miles, taking one load one way and another for a different client on the way back. A sophisticated rating algorithm helps users find trustworthy partners.
The system runs on Fr8 tokens, which must be spent to access certain transactions. All Fr8 Network users must put up tokens as collateral to ensure completion of an agreed-upon transaction. This system incentivizes transparency and a responsible use of the platform. Meanwhile smart contracts built into Fr8 token blockchain ensure secure, reliable peer-to-peer transactions, including transfers between cryptocurrency funds and fiat currency.
How will cutting out the middleman improve the supply chain world?
Images courtesy of AdobeStock
