Supplying businesses with the freight they need is big business. It’s big for an obvious reason: supplying physical goods across a country and between countries is a fundamental aspect of modern commerce. Almost every material thing we consume has been transported through some part of a freight network. The industry includes big freight forwarding companies that own fleets and small to mid-sized freight forwarding companies that provide specialized service for road, air, rail, and sea transport.
When initiating an accelerator startup program of any kind, you can learn a great deal about the challenges of starting a business by doing a comparison study of how startups in another industry overcame apparently insurmountable obstacles. Launching any kind of startup is difficult, but venturing into the freight forwarding business to directly handle customers’ shipments probably numbers among the most challenging. This is because the industry is huge and lucrative, with no sign of slowing down, because the competition is fierce, and because customers can pick and choose which freight forwarding company they want to work with based on quality of work, pricing and extended credit terms.
As a result, customers expect to be able to get 30 or 60 days credit, and in some cases even 90 days credit. This means that they don’t have to pay their invoices after freight has been delivered but are only legally obligated to honor their invoice long after the freight has been delivered. This arrangement puts a tremendous strain on the operations of a small freight forwarding company with inadequate capital. It is in a bind because there is insufficient cash flow to cover overheads – pay drivers, buy fuel, staff offices. Simply asking a bank or an investor for more money is not a solution because it raises debt and just piles on more interest payments.
Fortunately, a small freight forwarding company can manage its overhead through a financing system called factoring. When a factoring company like TBS factoring buys accounts receivables at a discounted price from a freight company, it pays the company immediately and then waits to collect the invoice payment from the freight company’s client. It’s a win-win situation for all parties, the freight forwarding company gets the money it needs to manage its overheads, the factoring company makes a modest profit by acting as an intermediate between the freight forwarding company and the client, and the client gets to pay their bill after 30 or 60 days after they have received their freight.
Once the problem of negative cash flow is addressed, running a freight forwarding business is fairly straightforward.
Depending on the size, the type of transportation needed, and the destination of the shipment, different scenarios are possible.
The simplest scenario is transportation within a country. In this scenario, a business will collect goods from a distributor or manufacturer and deliver it to the customer.
A more complex scenario arises in transportation between countries. This usually involves several form of transportation; for example, trucking followed by shipping. In this international scenario, a freight forwarding business might collect manufactured good from a distributor and transport it to a warehouse for storage. The freight forwarding business will then keep on shuttling between the location and the warehouse until there is a sufficiently large consignment to make it economical to deliver everything to the final destination.
The Vital Role of Tech Logistics
The entire supply chain management industry is quietly supported by the work of technical logistics. A lot of data has to be organized and analyzed when planning the transportation, storage, and distribution of raw materials or unfinished goods. It’s complicated figuring out exactly how to move raw materials or unembarrassed parts overseas for manufacturing, returned to US soil as manufactured or assembled products, and then distributed to warehouses and retailers within the US.
The manufacturing struggles URB-E, or Urban Electric, a vehicle manufacturer, illustrates how complicated logistics can be in real life for everyone concerned in a supply chain process. In 2015, URB-E or Urban Electric started a business in Pasadena, California. The company had designed a foldable electric vehicle, sourced lightweight aluminum to make up the foldable frame from the US, and assembled the vehicle in their Pasadena headquarters using a seven-person assembly line.
Unfortunately, they could not get very far with their product because they could not find a fabricator within the US willing to make features like the motor, the handle grips, the wheels, the seat, and the battery. American fabricators were only interested in large quantity orders and far less complicated work.
As a result, URB-E needed to have the high quality parts it needed made in China and then shipped to the US. The company managed to get everything to work to assemble their vehicles due to the background role played by tech logistics, a field that leverages technology to make it possible to choose, order, and distribute equipment or parts. Databases, storage, and analysis are necessary to manage all the aspect of a logistics project, ranging from procuring supplies, to managing inventory, to tracking items still in transition.
A Trillion Dollar Industry
Supplying businesses with the freight is big business. How big? According to Supply Management, “The study, by Transparency Market Research (TMR), valued the current market at $8.1tn but this will grow to $15.5tn in 2023. Volumes, estimated to be 54.6bn tonnes in 2015, are likely to reach 92.1bn tonnes by 2024.”