04 May How to choose a transportation provider
For many companies, transportation is one of their largest expenses which is why it is important to do your homework when selecting a transportation partner to do business with. When selecting a transportation partner, it is important to do your due diligence to reduce your exposure to liability.
One of the first things you should look at when choosing a transportation company is their credit report for both asset and non-asset based providers. The law looks at your relationship with your transportation provider as an Principle/Agent relationship which means that the 3rd party that you hired basically works off of commission and is under your direction kind of like a commissioned employee. It gets a little more technical than that and I am not qualified to get into the legal aspect of that.
Why is it important to have a basic understanding of the agent principle relationship between you and your logistics provider? The answer is liability. Who is ultimately liable for the misdeeds of the logistics company? The shipper is.
There are many different things that can happen if you make a poor choice when hiring a transportation provider, but today we are going to discuss double payment. In the event that a logistics company does not pay actual carrier that transports the shipment, the carrier can seek payment from the shipper. If I were a transportation manager, nothing would frustrate me more than paying on an invoice and then a couple months down the road, getting slapped with a lawsuit for carrier nonpayment on the same invoice. Don’t think it can happen to you? Yes it can! In fact it’s likely going to happen at some point in your career. I have some friends that specialize in transportation collections and they get $2,000,000.00 monthly in placements where the transportation company did not pay the carrier that actually transported the shipment and they specialize in going after shipper liability.
Many asset based companies also have a brokerage division. Many times the shipper will think that their freight is going on the carriers own assets, but in fact they are brokering it. Sometimes the shipper knows that they are brokering the freight, but they turn a blind eye until something happens. What can go wrong with this scenario? In the event that their asset side is struggling financially and they are having trouble staying afloat, where are they going to get the money to pay their drivers, insurance companies, fuel, equipment payments? You guessed it! They are going to pull money from their brokerage side to keep their trucking side afloat. Can you blame them? Of course not. If it were me in that situation, the people that work for me would have priority over vendors. They may be able to shuffle money back and forth but eventually it’s going to catch up to them and they are likely to stop paying their vendors all together. If this happens, you might not know it for months and then all of a sudden you get a call from an attorney demanding payment on invoices you already paid and by the time it’s all said and done it could easily total up to millions of dollars.
Also, there is shipper liability if the driver “hits a school bus full of children”. Does that happen often? No, but you should plan for the worse. One of the benefits of partnering with a quality transportation provider is that they have cargo and liability insurance. At Pathmark for example, we have cargo and liability insurance that acts as a buffer between the shipper and the carrier thus, reducing liability for the shipper. In the event that the carrier does not pay their insurance bill and it becomes cancelled, we have a contingent cargo policy of $250k in addition to the carriers insurance.
Here is what you should look for when choosing a transportation provider:
- Safety Rating– If you sign up an “asset based” carrier, check their safety rating. This is important that you look at their inspections. If they have been in business for a while, and you see no inspections then there is something wrong and they are using their carrier authority as a front to take loads, then broker them out. If you see a high out of service rate, that means that they are getting a red light to stop at ever scale for further scrutiny by the DOT and your shipment could be delayed up to 3 days if the driver is out of hours.
- Insurance Coverage– That is a no brainier. If you work with a 3pl it can be beneficial with the additional coverage they provide. At Pathmark, we utilize a monitoring service for insurance and safety tied into our software system. If a carrier does not meet our requirements, our system will not let us match a truck to a load.
- Credit- You will want to run and monitor credit for both asset based, and non-asset based carriers. If you see something wrong on their asset side, it’s almost guaranteed something is going to happen with their brokerage side.
- Service- If you choose a broker with a good credit rating, they are able to match up the best carriers with your loads since credit weighs heavily with quality carriers. If you choose an asset based provider with a good safety rating, then they are less likely going to have a load sitting at a scale for 3 days.
Basically, what this all boils down to is due diligence. It’s much better to find issues with your transportation provider before you start doing business with them, than after.