Category Archives: Managerial Econ

Posts relevant to Managerial Economics.

Truck freight matching as factoring

Some large unicorn startups are targeting freight matching for truckers as a great way to guarantee better utilization of trucks for smaller independent truckers, and offer the additional benefit of helping sustainability. Empty return trips are definitely a source of unnecessary air pollution.

Two big ones are Convoy in the US, and Zeus Labs in the UK. The concept is Uber-like and simple: match freight that has to move with trucks looking for a load. It’s easily handled with software. So far, so good.

Now these large, well-capitalized firms are using their financial power to offer factoring to their trucker clients. In effect, the truckers are selling their freight invoices to the large firms for ready cash of something like 80% of the value. The claim in the article is ‘up to 85%”. It’s up to the factors then to collect the full value of the invoice, possibly as much as 90 days later. This is due to the ‘slow pay’ practices of many shippers.

This factoring or loaning of money could be useful for a trucker, in order to get paid right after delivering the load. The question is whether the price is right. The factor can make a lot of money due to the reduced payment for the invoices. It clearly is a good business for the factor.

But as in small business everywhere, it’s not always the best policy to sell your invoices for early money. The discount may be too high to offer a decent profit on the trip. Truckers might be trapped by the idea of quick money into reducing their profits from each load by too much to sustain them. It’s a classic small business risk, that has to be examined closely.

I’m not sure truckers are all prepared to make this evaluation. But the offer of early payment can be attractive.

By Charlie Bartlett, Technology Editor 25/04/2022

Frenzy of investment as truck freight matching oils the wheels – The Loadstar

FMC to consider regulating ocean carrier billing practices

Demurrage and Detention are on everyone’s minds in ocean logistics today. The FMC proposes to regularize the information and timing of billing practices.

This could be very helpful in reducing the chaos of D&D billing today. It’s impossible to tell exactly which incidents happened when, and even who should pay. Those kinds of questions must have evidence to settle them, and it’s not being provided in bills. That results in long conversations and debates over the bills. It’s a huge time-waster, and fertile ground for complaints, refusals to pay, and legal action. These add cost while reducing consumer value.

In any principal-agent situation, when the cost of monitoring rises too much, the overall deal can’t be made. D&D charges are part of the cost of monitoring ocean trade. And in principal-agent models, monitoring costs often take the form of data collection and verification.

For years, ocean container traffic flowed fairly smoothly, and the events that triggered D&D charges did not happen very often. In those days, perhaps we could get away with settling claims by email and phone discussion. But with massive congestion worldwide, and only weak motivation to pick up empty containers, those days have changed.

We need accurate information for the parties to be able to resolve the D&D charges, and get the right bills paid by the right party. The FMC has it about right to take this first step, to regularize the bills.

Once that happens, if the D&D problem continues to be big, firms will recognize the value of investing in correct data gathering, and sharing it, and establishing standards for handling it.

John Gallagher, Washington Correspondent Monday, February 7, 2022

FMC to consider regulating ocean carrier billing practices – FreightWaves

US importers using box ships to store cargo

US importers are not so worried about cargo waiting offshore to be unloaded. As long as they have enough for their sales or manufacturing, the cargo can sit on a container ship and the principal cost to the shipper is the interest cost. With interest rates at historic lows, that isn’t much.

The graph below from project44, a Chicago, I- based visibility platform, shows the number of TEUs at anchor by month from January through November 2020, on the left. The rise starting in August is significant. Using data from HSBC, which show a 3.2% annual interest rate, using an average container value of $40,000, they calculate almost $50M per month in new delay costs, and cumulative inventory interest costs over $850 million.

The point is that these costs are a lot lower than inventory costs at warehouses. While the cargo is held at sea under riskier conditions, in the warehouse other costs kick in, not the least of which is space required. Insurance charges on the financed inventory also accumulate. And there’s the work, both labor and mechanical, of shuffling the inventory around; it’s very variable given the specific warehouse layout, but can be significant also.

So shippers are using the offshore jam-up rather than wishing it away. Only when the demand for products ratchets up so that the offshore inventory is needed will the stakes change. While we have significant COVID likelihood today, that isn’t likely to change much.

It’s always interesting to look at the overall question of inventory cost in the supply chain. Advantages to shippers can come from unlikely places.

By Nick Savvides 12/01/2022

US importers using box ships to store cargo – cheaper than warehouses – The Loadstar