Whitepaper 2014 THE ECONOMICS OF TRANSPORTATION MANAGEMENT SYSTEMS 1

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1 2014 1

2 Even in a soft economy, transportation costs in the United States have continued to increase, and there is every reason to expect these increases to continue. According to the 2014 CSCMP State of Logistics Report, transportation costs were up 2% in 2013, but evidence suggests that when 2014 figures are available the increases will be somewhat higher. As economic conditions improve, carriers are expected to experience continuing rising fuel costs and capacity constraints, as well as driver shortages. The supply of drivers will be particularly concerning as new government regulations, hours of service issues, and lack of interest in the driver lifestyle will combine to exacerbate shortages and increase carrier costs. The new driver hours of service rules which became effective on July 1, 2013, are especially problematic for both drivers and carriers, and even the more efficient carriers such as Schneider National and others have experienced losses in productivity ranging from 3 to 5%. While the courts have ruled on these regulations - several times - a new bill has been introduced in Congress that would roll some of the provisions back to pre levels. These and other factors will almost certainly increase the rates to the shipping public. Already a major expense for most firms, transportation costs in 2013 totaled $862 billion, or 5.1% of 2013 GDP, according to the State of Logistics Report. This is putting a tremendous amount of pressure on supply chain managers to monitor and manage their transportation expenses as closely as possible. Especially under the difficult economic conditions experienced over the past few 2

3 years, managers are finding that they are expected to do more with less, while at the same time, minimize costs and maintain superior levels of customer service. Concurrently with these often stressful working conditions, management of the transportation function is simply getting more complicated. The increasing need to deal with different modes of transport, globalization, and the multiple methods of delivery required by customers is making it much more difficult to manage than it was 10 years ago. In 1610, Galileo Galilei said, We must measure what can be measured and make measurable what cannot be measured. Over the years, this statement has evolved into the more direct, often quoted axiom, You cannot manage what you cannot measure. But today, over 400 years later, logistics managers still struggle with the premise. While transportation management systems (TMS) have been utilized by some firms for over 30 years, it was not until fairly recently that more sophisticated and readily available technology have made them extremely efficient measurement and management tools. Today, in order to protect their firms costs, service, and positions in the marketplace, increasingly, supply chain managers are turning to this technology as a necessary tool. No longer are transportation management systems a nice to have functionality, they are critical to the management of this important and expensive function. According to the 2013 Logistics Management Technology Usage Study, in 2012, 34% of the companies responding were utilizing a TMS. This was up about 16% from Fifty percent were either using or planning to purchase a system in the near future. 3

4 Steve Banker, service director for supply chain management at the ARC Advisory Group, forecasts a 6.8% compounded annual growth through This data is consistent with a recent survey by the Warehousing Education and Research Council, as well. These findings suggest that many of today s managers are recognizing the importance of these systems. Transportation Management Systems are particularly important to logistics service providers as they collaborate with their customers in minimizing costs, while at the same time, providing best practice service to their customers customers. Most providers will agree that in today's marketplace, prospective clients of logistics service providers expect them to provide a fully functional TMS which includes, at the very least: a load optimizer, a rate and transit time comparison, an electronic request for service and load confirmation to and from carriers, a route optimizer, and an electronic delivery confirmation. According to Jeff Miller, President of E*Fill America, "This type of TMS functionality is no longer an option but the price of admission needed to gain entry into the selection process." The Transportation Specialists Group (TSG) is a third-party logistics and transportation management firm providing solutions that will optimize its clients' supply chain operations. According to president, Gary Smith, TSG relies heavily on TMS to facilitate these solutions. "Having the TMS technology in place gives our clients the ability to make intelligent, informed decisions about the shipping lanes available to them. It takes the emotion out of the decision says Smith. The 2014 Third Party Logistics Study confirmed that 70% of the respondents expect their logistics service providers to have a good TMS. 4

5 What was just a few years ago a small cottage industry, now provides one of the major pieces of software used in the supply chain industry. There are literally hundreds of systems to choose from. Of course, some firms have developed their own proprietary systems, but many are turning to one of the many software vendors offering the TMS capability. Some companies prefer a one-client system developed specifically for their use, and others utilize hosted software-as-a-service systems. Often a smaller firm will not require an extensive TMS and can utilize one of the cafeteria plans available. Under this type of arrangement some providers will offer individual modules, and the user can buy what they need initially and add on as they need it. Most of these firms seem to prefer routing, scheduling, rating, carrier selection, consolidation of shipments and load tendering tools. All users, whether large or small, seem to agree however that a good system will have two basic modules - planning and execution. Most will also agree that they are experiencing savings in transportation spend of at least 5-6%. Savings, of course, are averages but have been confirmed by extensive research by consultants, educators, publications, and others. Savings will also vary by individual firm depending on what improvement opportunities are available and how well the users manage the systems. If a manager has information available 5

6 and doesn't act on it, he or she is not going to save much. TMS expert, Adrian Gonzalez, said several years ago, Real-Time Performance Management (RPM) is the next frontier in achieving operational excellence; and TMS will play a critical role by providing more accurate and timely visibility to costs and other KPI s. This prediction has proven to be true and those firms utilizing a TMS are experiencing cost savings in several areas. The business intelligence that can be gained from a TMS can be invaluable to the user firm. All the rates, routes, contracts, and other relevant data are captured in the system and reside there for later revision and analysis. Having visibility to all the data relating to your transportation function and being able to improve performance through a careful analysis of this information can reduce a transportation spend by anywhere from 2.5 to 3%. Some of the things that can be done with information derived from a TMS are: The issuance of carrier report cards, providing consolidated information about all the key carrier metrics such as performance and billing accuracy; The development of an executive dashboard graphically displaying all your key performance indicators; and Modeling. The TMS gives you the ability to analyze any type of "what if" scenario to compare different modes, carriers, and services. MCG Logistics utilizes the CTSI-Global TMS. James Manning, President & CEO says, The CTSI-Global TMS technology is a must for MCG to provide key analytics. Utilizing the modeling tool is a critical component of our process. 6

7 Furthermore, many MCG clients move their loads in a more efficient manner through MCG utilizing the CTSI-Global applications enabling us to deliver both hard and soft savings to our clients. One of the major areas in which firms have experienced cost reductions by using a transportation management system is contract management. The system provides a central repository for all carrier contracts and greatly enhances the process of modifying rates and terms. Through standardization at a central location, a firm can manage changes, benchmark, make comparisons, and perform analyses of surcharges across various modes and carriers. This eliminates a significant administrative burden. To manage contracts manually is a time-consuming, often error-prone activity. Experts estimate that administrative costs for an averagesized firm can be reduced by as much as 10%. Obviously, the more contracts a firm has, the greater the cost reductions will be. And this doesn t include the savings that may be realized in freight spend as a result of more efficient, standardized management. 7

8 One of the more complex decisions a supply chain manager must make is which mode or carrier to use in moving its products. In the past, mode selection has been fairly straightforward, but the growth in intermodal service and the improvements in rail schedules of recent years, have made the motor carrier/ intermodal decision much more competitive. Even after the appropriate mode has been selected, the choice of a carrier within that mode sometimes can be a daunting task. The goal of the user, of course, is to provide the best possible service at the lowest possible cost. As a result, there is much more to carrier selection than simply utilizing the least cost provider. The firm must be able to develop a carrier base that recognizes the carriers performance and cost in each traffic lane it utilizes. A routing guide can be developed and constant monitoring facilitated. Reasons for not using the preferred carriers can be documented, as can the carriers own performance. The contract management module is also helpful here in that it will keep current the information necessary to make educated decisions. 8

9 Mobile Mini, another user of the CTSI-Global system, has experienced operational efficiencies through the routing of loads, obtaining multiple freight quotes, selecting carriers, creating bills of lading and monitoring shipment status. Says Mark Baldwin, Fleet Manager, Most importantly, the TMS has allowed us to meet our customer commitments without having to rely on additional expense for expediter carriers. Estimates of reductions in freight expenditures through more efficient carrier selection range from 5 to 10%. However, one major logistics service provider realized savings of over 12% by eliminating the human factor. In their particular case, they found that carrier selection that was not influenced by relationships resulted in significant cost reductions. This can be a much more significant problem than many of us realize. This industry has to a large extent been built on relationships, and these may still affect our carrier choices. Having a database of all the rates paid to various carriers greatly enhances a firm s negotiating capability. The user can determine trends and easily make comparisons among the various modes and carriers. Armed with detailed information about what rates are being paid, to which carrier, as well as alternatives that are available, a logistics manager will have a decided advantage in the discussion. Savings can range from 5% to a high of 15% through well-documented negotiations. 9

10 One of the more popular modules of a TMS provides a tool for optimizing loads and routing. Over the years, as shipments have become smaller and capacity has become more problematic, firms have found themselves faced with smaller, more expensive LTL shipments. The optimization technology available today will enable shippers to analyze shipments and aggregate orders, build drop shipments and stop offs, set up continuous moves, shift modes, or consolidate smaller shipments into one truckload. Most experts will agree that this module can reduce freight spend by as much as 10%. Consolidation of shipments is even more profitable for the logistics provider and its customers. LSPs have consolidated shipments for over 50 years; but today, with their large client bases and sophisticated optimization tools, they are able to combine what would have been LTL shipments into truckloads, reducing freight and handling costs, as well as carbon footprints. The leading providers have excellent systems that automatically will optimize both loads and routes. A case in point is that of Scranton, Pennsylvania-based Kane Is Able. The Kane TMS allows them to provide faster delivery times, reduce carbon footprints, economically refresh inventories with regular, smaller shipments, and in addition, afford their customers savings ranging 10

11 from 20 to 35% of their freight costs. This is a classic example of how creative thinking about an old concept, using a modern TMS, can result in new successes. C.H. Robinson also has taken steps to make it easier and more economical for its customers to consolidate shipments. It is probable that consolidation is going to become much more important particularly in the retail industry. Since 2010, Amazon.com has spent almost $14 billion on new distribution centers. The company now has 89 centers, and more are planned. Their goal is to be in a position to deliver most of their orders on the day they are received. With the increase in online purchases, expected to total $1.4 trillion by 2015, consumers are becoming more demanding and overnight service no longer is enough. This suggests an opportunity for a logistics service provider to move into a densely populated area and offer a service that provides various manufacturers and distributors an opportunity to consolidate their products with those of other manufacturers and distributors for same-day delivery. Many firms cannot afford to take the Amazon approach of building huge facilities in multiple markets, nor should they. An efficient logistics service provider with a strong TMS can enable their retail clients to compete quite effectively with the Amazons of the industry, at a reasonable cost. One of the more time-consuming activities of a transportation manager is that of tendering loads to the various carriers in their database. While it is sometimes difficult to quantify, the automation of this somewhat tedious process can result in administrative savings, as well as reductions in freight expenditures. The use of a shipment execution module can automate load tendering and create an online bill of lading that can be transmitted to the carrier using either EDI or . Carriers 11

12 can respond immediately if there is an error, and corrections can be made immediately, thus avoiding later issues. Appointments can be scheduled and proof of delivery provided, all electronically. Load builders aid in reviewing, approving, or modifying load plans. Order status can be determined throughout the transaction; and if necessary, replacement shipments can be made promptly. In addition to administrative savings (which could be significant depending on volume of traffic), the accurate execution of every shipment, every time, can yield freight savings of 1 to 3%. A state-of-the-art TMS will have a freight bill audit and payment module. Arguably, this can be one of the most gratifying of all the modules. The primary appeal is the strong possibility of reduced costs. It costs a large firm about $11 in fully allocated costs to pay a freight bill manually. Using a freight bill payment (FBP) module, the cost will be approximately 5-10% of manual handling. Add to this another 2 to 5% saved through the reduction in incorrect and/or duplicate freight bills, and the savings can be significant. While the cost reduction can be significant in and of itself, the real value is added through the business intelligence generated by the system. Even before the bill is paid, the system will assure that the correct rates and accessorial charges are paid. Post-payment activity can include almost any 12

13 type of reporting the managers' desire, including such things as routing compliance, expense by mode, and expense by product. One of the major routes to profitability for any firm is the effective control of inventory levels. A TMS can provide visibility to inventories of raw materials, supplies, and finished goods, as well as inventories in transit from suppliers to customers. With this information an effective control can be established throughout the supply chain and total inventories can be reduced. The total cost of carrying inventory often can be quite high, and by utilizing a TMS, a firm can achieve cost reductions of as much as 2-3% of its total revenue. Customers and other receivers have become much more particular about the service they are receiving and demand real-time visibility to their orders. A TMS provides this ability and receivers can determine the status of orders and shipments. The system can also produce ASN's or Advance Shipping Notices so the receiver will know what products are on the way before they arrive. This is particularly important to customers like Walmart who operate sophisticated crossdock distribution centers. 13

14 Michael Fairchild, Director of IT, Sales and Operations Support at Givens Companies stated, At Givens we derive value from the CTSI-Global TMS by automating extremely complex business rules. For instance, many of our clients are shipping to big box retailers and cannot afford to fall out of compliance due to the exposure of charge backs. The TMS is configured to recognize these customers and alert our coordinators to orders that will not meet delivery requirements due to time constraints. With this information, we are able to expedite where necessary and avert what otherwise would be a potential delivery failure. Savings in this area are more difficult to quantify; but some firms acknowledge 1-2% of transportation expenditures. As Galileo suggested, the ability to manage a function is dependent on the firm s ability to measure performance. In the past, transportation management has proven to be one of the most difficult activities to measure. With today s transportation management systems however, measuring internal and carrier performance no longer is such a challenging task. Key Performance Indicators (KPIs) can be established and performance measured against them. TMS vendors have developed systems that will enable firms to take advantage of big data. It has been said many times that information is power. That might well be true, but with 14

15 trillions of bytes of data being gathered constantly, the real power is in having a capability that will enable the use of the information effectively. Transportation Management Systems can meet that need. Savings in this area can be almost unlimited, but even a modest effort will yield cost reductions ranging from 1 to 5%. If a firm already has a highly effective system, the indicated savings will be less; but few if any firms that have installed a TMS did not achieve savings in several areas. As mentioned earlier, with all the issues that face transportation users today, the function is becoming increasingly difficult to manage. Capacity problems, driver shortages, rising fuel costs, and deteriorating infrastructure, to name a few, contribute to the complexity of this important activity; and it is virtually impossible to manage effectively without sophisticated technology. The necessity for carrier and mode shifts is becoming much more frequent, and often decisions must be made on a moment s notice. In many cases, millions of dollars are being spent unnecessarily, and with ever increasing cost pressures, a firm cannot afford this inefficiency. Transportation Management Systems have been the answer to the information, visibility, and execution needs of hundreds of firms. Not only will they facilitate the status quo, they offer unlimited opportunities to significantly reduce costs. 15

16 ABOUT Clifford F. Lynch is Principal, C. F. Lynch & Associates, a supply chain management advisory firm. He has several decades of experience in the supply chain and is recognized as an expert on outsourcing and other aspects of the supply chain. He is also is the author of several books and numerous articles on the subjects of logistics and supply chain. Website: Phone: [email protected] CTSI-Global provides shippers and 3PLs with freight bill audit and payment, customized transportation management system (TMS) applications, business intelligence, logistics consulting as well as a variety of global solutions that meet its clients business requirements and supply chain needs. Its supply chain management expertise and technology helps companies manage and control all aspects of their supply chains - physical, informational and financial - within one global database; giving them more control, improved efficiencies and a costeffective process to result in greater savings. Website: Phone: [email protected] Subscribe to CTSI-Global s supply chain blog, The Link Your Link to Supply Chain Community. The Economics of Transportation Management Systems was authored by Clifford F. Lynch, Principal, C.F. Lynch & Associates CTSI Global. All rights protected and reserved. 16