ARC BRIEF. On Demand TMS: An Ideal Platform for Enabling Continuous Improvement. Keywords. Summary. By Adrian Gonzalez

Transcription

1 ARC BRIEF OCTOBER 2007 On Demand TMS: An Ideal Platform for Enabling Continuous Improvement By Adrian Gonzalez Keywords On Demand, TMS, Managed Services, Benchmarking, Best Practices, ACE Hardware, LeanLogistics Summary The Transportation Management Systems (TMS) market surpassed the $1 billion mark for the first time in 2006, reflecting the growing desire of companies to gain better visibility and control of their transportation processes and spend. Numerous case studies exist of companies reducing their transportation costs and improving their service levels Bridging the gap between after implementing a TMS, particularly in the first year. implementation success and But what happens later, after the initial gains are achieved, continuous improvement is the the implementation project is deemed complete, and the hidden value of on demand or focus shifts to continuous improvement? The rest of the network-based TMS. Once on story is often less impressive, because many companies the network, companies discover a more significant and lasting lack the necessary information and resources to undertake value proposition: the network continuous improvement initiatives. as a platform for benchmarking and accessing best practices Bridging this gap between implementation success and capabilities. continuous improvement is the hidden value of "On Demand" or network-based TMS. Faster time-to-value and lower upfront costs are the primary reasons companies select an On Demand solution, the fastest growing segment of the TMS market. But once companies start managing their transportation operations on the network, they discover a more significant and lasting value proposition: the network as a platform for external benchmarking and accessing best practices capabilities, essential components for enabling continuous improvement. The full value of On Demand TMS is unlocked when managed services are also provided to help companies with resource and time constraints execute their performance improvement projects. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN

2 ARC Brief, Page 2 Analysis The scope, functionality, and architecture of Transportation Management Systems (TMS) have changed significantly over the past decade, and so has the vendor landscape. What was a $487 million industry in 1998 is now over $1 billion. And TMS users are no longer just a handful of employees in the transportation department, but hundreds or even thousands of people across the enterprise and value chain, executing a wide range of business processes. Total Shipments of Transportation Management Systems (TMS) Source: Transportation Management Systems Worldwide Outlook, ARC Advisory Group, 2007 CAGR = 7.3% Demand for TMS is Stronger than Ever But despite all these changes, the primary objective for implementing a TMS remains the same: to meet customer service level requirements at the lowest cost. Achieving this objective, however, is more challenging than ever. Transportation costs are increasing, due to rising fuel prices and other factors; order-to-delivery cycle times are shrinking, as customers place smaller, more frequent orders and demand faster lead times; globalization is introducing new complexities and constraints; and exceptions, such as order changes and transit delays, are now the norm. Simply put, demand for TMS is growing because companies, particularly those still managing their transportation operations with spreadsheets and faxes, are realizing that cost increases and service level failures are inevitable unless they gain greater visibility and control of their transportation operations. The Value and Shortcomings of Visibility Solutions The addition of Visibility, Event Management, and Performance Management capabilities is, arguably, the greatest enhancement made to TMS over the past decade. The first wave of "visibility" solutions, enabled by the In-

3 ARC Brief, Page 3 ternet and Web portals, focused on answering a simple, yet important, question: Where is my shipment? Today, these solutions are much broader in scope and functionality, providing companies with a more detailed view and understanding of their orders, shipments, inventory, Most companies using a assets, costs, and lead times. Best-in-class solutions also traditional TMS still perform incorporate business analytics and scorecard functionality, below their maximum potential enabling companies to measure and manage their performance-to-plan more effectively, as well as the because their only frame of reference is themselves; they have no visibility to how well performance of their carriers and other trading partners. they're performing compared to industry peers and other In short, Visibility, Event Management, and Performance companies with similar Management capabilities of a TMS serve as a platform for transportation networks. real-time process control and continuous improvement. Many companies have achieved significant benefits from these applications, particularly in the first year of implementation. But despite this success, most companies using a traditional TMS still perform below their maximum potential because their only frame of reference is themselves. While they can measure and manage performance relative to their past and current plans, they have no visibility to how well they're performing compared to industry peers and other companies with similar transportation networks. Benchmarking: Beyond the Numbers Many ARC clients come to us seeking benchmarking information, for reasons similar to this one, from a logistics executive at a leading high-tech company: "Every time I present our performance numbers to the executive management team, showing them how we continue to improve on all our metrics, I get the same response from the CEO: Good, but how does this compare to [our biggest competitor]?" This question is difficult to answer. Compiling a "critical mass" of data to make meaningful comparisons is only part of the challenge. In roundtable discussions ARC conducted last year with 34 logistics executives, the main problem most companies have with quantitative benchmarking is making "apples-to-apples" comparisons. A metric's numerical value is influenced by many factors, including metric definition, data capture methodology, process workflows, and technology use. Simply put, a number without context is just a number. Or in the paraphrased words of one of the roundtable participants, "Knowing that my competitor's on-time delivery is 98% and

4 ARC Brief, Page 4 mine is 92% is somewhat useful, but what I really want to know is why they are better and how can I close the gap." Most quantitative benchmarking efforts identify "what" Most quantitative benchmarking can be improved, but they provide little or no information efforts identify "what" can be about "why" differences exist with other companies or improved, but they provide little "how" to improve performance. In contrast, qualitative or no information about "why" benchmarking, such as comparing your business process differences exist with other companies or "how" to improve maps with those of other companies, provides more insightful and actionable information. "If I learn that another performance. company can do in five steps what it takes me ten steps to accomplish," the roundtable participant continued, "I'm closer to understanding why we're underperforming [compared to the competition] and what actions we can take to get better." Qualitative benchmarking is often equated with "best practices," a term that's generating a lot of discussion these days, much of it focused on what defines a best practice and their applicability across companies and industries. These are all interesting questions to debate from an academic perspective, but practically speaking, what most companies want to know is this: What are industry leaders doing differently from us, with regards to business processes, technology deployment, management principles, organizational structures, etc.? Identifying the common attributes of these leaders and converting this knowledge into continuous improvement activities is what ultimately creates value. Managed Services: The "Who" in Continuous Improvement Even if companies have access to good benchmarking and best practices information, finding the time and resources to execute continuousimprovement activities is often a challenge. The people with the necessary skills and experience to execute these projects are usually consumed with their day-to-day responsibilities, such as ensuring customer commitments are met and managing exceptions. Obtaining support from the IT group to make system changes or enable new functionality is another hurdle many companies face. In fact, lack of IT support is a leading reason why companies are deploying On Demand or software-as-a-service (SaaS) TMS. Companies have traditionally addressed these resource constraints by hiring outside consultants, or they ultimately decide to outsource their entire operations to a Logistics Service Provider (LSP). These are good options for

5 ARC Brief, Page 5 many companies, but not all. The consultant approach can be costprohibitive for some businesses, and the engagements usually have a fixed scope and timeframe. Outsourcing to a LSP, on the other hand, can greatly disrupt a company's organizational structure, as the LSP Managed Transportation Services is like having a team of logistics handymen readily available to tighten whatever is coming loose essentially replaces a company s internal resources and assets, requiring a significant shift in roles, responsibilities, and management structure. and repair whatever needs But a middle-ground solution is emerging that bundles fixing. It focuses on "the little managed services with an On Demand TMS. This relatively things" that often get pushed aside by other priorities and new solution, which ARC calls Managed develop into bigger and more costly problems down the road. Transportation Services (MTS), is ideal for companies that want to outsource only a portion of their transportation activities, while still maintaining direct control over their carrier relationships and other key functions. (For a more detailed discussion of MTS, see "Managed Transportation Services: The Next Frontier for On Demand TMS", ARC Advisory Group, March 2006). For companies with resource and time constraints, Managed Transportation Services is the "who" in continuous improvement. The best way to illustrate this point is with an analogy. My family recently moved to a new house and we hired a contractor friend to renovate a bathroom. This renovation project is analogous to what a company would hire a consultant to do: a relatively large and complex project, with a defined scope and timeline. As Jerome worked on the bathroom, we discovered several things around the house that also needed attention: a bedroom door that wouldn't close right, missing caulk around a sink, nail holes on the walls, etc. These are all things that I am capable of fixing myself, but with long workdays, business trips, and three children to care for, finding the time to do them is nearly impossible. So my wife asked Jerome to take care of these things too, during pauses in the bathroom project, because she knew they would never get done if she waited for me. "I love having Jerome around the house," my wife told me one day, "it's like having a live-in handy man who fixes problems as they pop up." Simply put, Managed Transportation Services is like having a team of logistics handymen readily available to tighten whatever is coming loose and repair whatever needs fixing. In many cases, MTS focuses on "the little things" that most companies could do themselves if they had the time and resources, such as fixing a capacity issue with a specific lane. But it's these

6 ARC Brief, Page 6 little things that often get pushed aside by other priorities, and like the missing caulk around the sink, develop into bigger and more costly problems down the road. MTS is also an example of a broader trend ARC has identified, namely the converging business models of software vendors, consulting firms, IT services companies, and Logistics Service Providers. Many Although lower upfront costs and manufacturers and retailers are looking at their fragmented supply chains and becoming overwhelmed by faster time-to-value are the most visible and publicized their ever-growing complexity. Buying and implementing benefits of On Demand TMS, companies using these solutions supply chain software is now the easy part, even though are discovering a more powerful it's still a time-consuming and costly process. The real and lasting value proposition: it s challenge is finding experienced supply chain experts who an ideal platform for enabling can connect all the pieces together (software, process continuous improvement. changes, metrics, best practices, continuous improvement, etc.) to create business value. Call it the marriage of software with Knowledge Process Outsourcing. (For a more detailed discussion of this trend, see "Supply Chain 'Geek Squad'," ARC Advisory Group, June 2007). A More Powerful and Lasting Value Proposition The On Demand deployment model continues to gain momentum in the TMS market. For example, in a recent ARC survey of 28 leading TMS vendors, almost 60 percent of them ranked subscription and transaction fees, the typical pricing model for On Demand deployment, as the fastest growing revenue segment over the next five years. The two main reasons companies are choosing On Demand solutions, based on many customer interviews, are lower up-front cost and faster time-to-benefit. Rich Products, for example, decided against implementing a TMS in-house because it would have taken too long and cost too much to deploy a solution across their large network, especially since their IT team was already busy with an SAP implementation. John Meenaghan, National Transportation Manager at Rich Products, summarized it best: Our core competency is in frozen foods, not in implementing and maintaining a TMS application. But although lower upfront costs and faster time-to-value are the most visible and publicized benefits of On Demand TMS, companies using these solutions are discovering a more powerful and lasting value proposition: it s an ideal platform for enabling continuous improvement.

7 ARC Brief, Page 7 By default, an On Demand TMS creates a network of shippers, carriers, suppliers, consignees, and other trading partners. LeanLogistics, for example, has over 40 shippers, 2,000 suppliers, and 4,000 carriers connected to its network. Almost $4 billion in freight is managed using a common TMS, which currently processes 5 million loads and 150 million transactions per year. All of this data, flowing through a single system, enables networklevel benchmarking, so companies can compare their performance against an external benchmark and quickly pinpoint problem areas. Suppliers Carriers On Demand TMS Shippers Performance Data from Network of thousands of companies, executing millions of loads and transactions using a common TMS You Network facilitates external Benchmarking used to identify performance improvement opportunities and industry leaders Step 1 Step 2 Step 3 Step 5 Step 4 and the Best Practices they employ, which are fed back into the software and also leveraged in managed services engagements. The Hidden Value of On Demand TMS The data also facilitates the identification of industry leaders. By understanding the practices employed by these leaders, solution providers like LeanLogistics can incorporate these "best practices" into the software. This feedback mechanism links product innovation with practices proven to deliver industry-leading results. And as these practices evolve over time, in response to changing business conditions or customer requirements, the capabilities of the TMS will also advance. In summary, continuous improvement initiatives, in transportation and other supply chain processes, yield the greatest benefits when companies can compare their performance against external benchmarks; understand and adopt (as appropriate) the practices employed by industry leaders; and use software technology to automate and streamline these best practices and track and manage their performance. There are many ways to enable

8 ARC Brief, Page 8 continuous improvement, but the unique attributes of an On Demand solution, particularly the creation of a trading partner network, make it an ideal platform for linking benchmarking, software, and managed services together. Case Study: ACE Hardware Ace Hardware ( Ace ) is the largest retailer-owned hardware cooperative in the industry, with over $3.4 billion in wholesale sales and about $70 million transportation spend. The company implemented LeanLogistics' On- Demand TMS in February 2006, resulting in a 4.8 percent reduction in transportation costs. (For additional information about this implementation, see "On Demand TMS: Transforming the Inbound Process," ARC Advisory Group, October 2006). Profile The largest retailer-owned hardware cooperative in the industry 14 DCs, 7 Freight Consolidation Centers, 3 Import Warehouses Private fleet with about 400 tractors and 1,200 trailers About $70M in transportation spend Implemented LeanLogistics On-Demand TMS in February 2006 Key Objectives 2007 TMS savings objective: $5.4 million Conduct a holistic transportation procurement engagement Identify more regional carriers Identify and use more asset-based carriers (reduce # of brokers) Results $3.9 million (annualized) savings opportunity Savings from new carriers and incumbents who lowered their rates Standardized operating procedures across the network Internal fleet backhaul rates now linked to a credible market benchmark ACE Hardware Saves Big Using Carrier Procurement Service Although the first year results were impressive, ACE raised its expectations for 2007, setting a TMS savings goal of $5.4 million. "We need to get continuous value from the TMS," explained Scott McLean, Director of Transportation at ACE. The company decided to conduct a procurement engagement to achieve some of these savings, especially since the transportation market was softening. Prior to implementing the TMS, ACE didn't have a granular understanding of its overall transportation network and spend, and it typi-

9 ARC Brief, Page 9 cally added carriers and lanes in piecemeal fashion. But after using the TMS for a year, the company now had the visibility and data it required to present their entire network to carriers for bidding. Since this was the first time ACE was conducting a procurement engagement of this scale, the company sought outside expertise to help them. "We looked at other vendors and consultants, but they were too expensive or their solution was too complex for what we needed," LeanLogistics Carrier Procurement Service Offering McLean explained. The company ultimately decided to use a transportation procurement service from LeanLogistics (part of its "Path to Value" program). Several factors Assemble Request for Proposal (RFP) Establish lane templates, influenced their decision, including: accessorials, etc. Augment carrier base with The data required for the procurement process was Lean's network carriers already in the LeanLogistics On-Demand TMS. Also, Develop Web portal for Lean designed a Web portal for carriers to access and carriers to access and input input information; the electronic format of the bid responses facilitated the uploading of rates into the TMS information Provide network analytics after the procurement process was completed. Support multiple bidding rounds ACE wanted to cast a "wide net" with this procurement engagement. Lean introduced ACE to the large Upload carrier rates into TMS Develop savings reports base of carriers connected to its network (the RFI was sent to almost 500 carriers). Implementation was relatively quick, since the new carriers ACE added to its network were already connected to LeanLogistics and familiar with the TMS. ACE wanted to maintain control of the process, i.e., be the "face" to the carrier. LeanLogistics' services and support was primarily behind the scenes. According to McLean, LeanLogistic's domain expertise was the clear differentiator. "LeanLogistics are transportation ops guys that work with technology," he said. "They understand the transportation business and what we're trying to accomplish." For example, McLean cited how LeanLogistics helped them implement best practices for managing accessorials and fuel surcharges. The procurement engagement uncovered a $3.9 million (about 4 percent) annual savings opportunity for the company. This savings is in addition to

10 ARC Brief, Page 10 the benefits ACE was already achieving with the TMS. Lower rates from new carriers contributed to the savings opportunity. But many incumbent carriers also lowered their rates, in response to competitive bids or by acquiring new lanes they previously weren't handling for ACE. The company's ability to link its internal fleet backhaul rates with a credible market benchmark was another benefit of the project. Transportation can now show the merchandising group, for example, that its backhaul rates are the same or better than third-party carrier rates. Today, McLean is using the On Demand TMS to track and manage carrier performance, and he expects to pare down the carrier base over time. "Knowing how [our performance] is trending compared to the market is very important," says McLean, with regards to benchmarking and its role in driving continuous improvement. ACE's results demonstrate how linking benchmarking, software, and managed services together, via an On Demand platform, close the gap between initial implementation success and continuous improvement. Conclusions Most companies using a traditional TMS still perform below their maximum potential because their only frame of reference is themselves, i.e., they have no visibility to how well they're performing compared to industry peers and other companies with similar transportation networks. Most quantitative benchmarking efforts identify "what" can be improved, but they provide little or no information about "why" differences exist with other companies or "how" to improve performance. What most companies want to know is this: What are industry leaders doing differently from us, with regards to business processes, technology deployment, management principles, organizational structures, etc.? Identifying the common attributes of these leaders and converting this knowledge into continuous improvement activities is what ultimately creates value. Even if companies have access to good benchmarking and best practices information, finding the time and resources to execute continuousimprovement activities is often a challenge.

11 ARC Brief, Page 11 Although lower upfront costs and faster time-to-value are the most visible and publicized benefits of On Demand TMS, companies using these solutions are discovering a more powerful and lasting value proposition: it s an ideal platform for enabling continuous improvement. An On Demand TMS creates a large network of shippers, carriers, suppliers, consignees, and other trading partners. All of this data, flowing through a single system, enables network-level benchmarking, so companies can compare their performance against an external benchmark and quickly pinpoint problem areas. The data also facilitates the identification of industry leaders. By understanding the best practices employed by these leaders, solution providers can incorporate these practices into the software. This feedback mechanism links product innovation with practices proven to deliver industry-leading results. For companies with resource and time constraints, Managed Transportation Services (MTS) is the "who" in continuous improvement. In many cases, MTS focuses on "the little things" that often get pushed aside by other priorities and develop into bigger and more costly problems down the road. MTS is also an example of a broader trend, namely the converging business models of software vendors, consulting firms, IT services companies, and Logistics Service Providers. This paper was written by ARC Advisory Group on behalf of LeanLogistics. The opinions and observations stated in the paper are ARC's. For further information or to provide feedback on this paper, please contact the author at adriang@arcweb.com.