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TMS: Your key to the new economy
Monday, 01 February 2010 00:00

Research shows that shippers that have invested in TMS are seeing cost reductions, improved delivery reliability, and inventory reduction. Over the next few pages we’ll establish why TMS can no longer be ignored.

It’s hard to imagine a link in the supply chain that doesn’t involve a software application. However, according to recent research from ARC Advisory Group and AMR Research, there’s still plenty of room for more automation within the freight transportation market where more than half of the shippers surveyed say they’re still relying on manual management systems.

“Only about 38 percent of companies are using a TMS right now,” says Greg Aimi, research director for supply chain at AMR Research in Boston. Of those firms with over $5 billion in annual sales, the numbers increase to about 60 percent, Aimi adds, while those with less than $5 million in revenues are much less likely to be using a TMS.

Adrian Gonzalez, director of ARC Advisory’s Logistics Executive Council, has seen similar adoption numbers, and estimates that roughly 40 percent of shippers have a TMS in place. “A lot of shippers are still using the spreadsheet, fax machine, and telephone route to manage the transportation component,” says Gonzalez. “Aside from the company that ships one truckload a week and can get by without a TMS, there are many firms out there that should be streamlining their operations, but aren’t.”

But that doesn’t mean that the TMS sector isn’t making inroads. According to Aimi, it has grown by 11 percent annually, and is up from 30 percent penetration just three years ago. He credits fuel volatility, fuel surcharges, and a challenging economy with helping to drive shippers to find ways to work smarter, better, and faster. In return for those TMS investments, shippers are seeing freight budget cost reductions, more competitive delivery reliability, improved customer service, and inventory reduction.

If those results sound enticing, and if your company has yet to purchase a TMS—or fully utilize an existing system—then you’ve come to the right place. Over the next few pages we’ll make a case for why TMS can no longer be ignored as a key component heading into the new economy.

No excuses

TMS may rank as one of the most mature and fastest-growing segments within the supply chain software market yet not all shippers are taking advantage of it. Some companies ignore the TMS route completely, while others implement the systems and never tap the full potential.

Even with the on-demand model removing some of the barriers to entry for smaller companies—namely in the way of lower startup fees, infrastructure requirements, and implementation time—adoption hovers below 40 percent.

“There’s no excuse not to have a TMS, what with the various deployment and pricing options that are out there on the market,” says Gonzalez. “The solutions range from those suitable for large, international enterprises to those developed for single-location firms that want to get away from spreadsheets and faxes, and everything in between.”

Gonzalez says TMS is particularly important for firms that want to maximize the savings presented at the procurement engagement level. “If you don’t have a TMS, and if you’re using spreadsheets and fax machines to handle the routing and shipping, then a large portion of the savings identified at procurement will evaporate and never materialize,” he explains.

A quick walk through the warehouse will reveal whether or not those cost savings are being realized at your firm, says Gonzalez. “Spend some time in your transportation operation and see if a lot of people are on the phone and/or feeding paper into fax machines,” he says. “If they are, then you’re leaving profits on the table.”

Aimi says companies that don’t have an automated transportation process are missing the boat by running on what he calls a “somehow, some way” mentality that won’t cut it in the new economy. By implementing a centralized, automated transportation function, companies can begin to break out of that mode and create more productive transportation operations.

“In a completely manual environment, a logistics planner can handle 10 to 12 loads per day,” says Aimi. “With automation, that same person can handle anywhere from 100 to 120 loads per day, with most of that person’s effort focused on handling the exceptions, while the TMS takes care of the work.”

Dwight Klappich, research vice president for Gartner says the reputation TMS has for producing high payback within a short period of time also makes it a “can’t miss” application for shippers in the new economy. “In this business environment, projects that don’t produce good returns don’t get funded,” says Klappich, who pinpoints the typical payback from a TMS at 12 months or less.

Carrier selection and management also becomes easier when technology is introduced to the transportation component, says Klappich. The entire process becomes more consistent and disciplined, he says, and helps shippers break out of the “pick the carrier who gave the best Christmas gift last year” mentality.

The company that writes $10 million in checks every year to an outside freight provider, says Klappich, would save $500,000 annually by simply cutting freight costs by 5 percent. “The corporation that wants to always pick the lowest-cost carrier can rely on a TMS to make that happen every time,” says Klappich “That translates into real money for the bottom line.”

Maximize existing technology

Even among the 40 percent of companies that have a TMS in place, not all are using the applications to their fullest potential. Many TMS users shoot for the “low-hanging fruit” such as route optimization, carrier connectivity, and electronic communication with carriers, says Aimi, and wind up missing out on other valuable aspects of the software such as metrics reporting and asset tracking.

“They try to tackle the stuff that they believe will give their company the most benefit as quickly as possible,” says Aimi, who advises firms to maximize their TMS by using multi-phase implementations supported by benchmarks. “The goal should be to get to the stage where you’re utilizing TMS to its fullest degree.”

Gonzalez says companies looking to maximize their TMS investment should look at the application as a “living, breathing solution” that operates in an environment where rates, networks, carriers, and locations change constantly. “Treat your TMS like an automobile by making sure rates are accurate, constraints make sense, and other dynamic elements are maintained and updated regularly,” says Gonzalez. “By maintaining your TMS you’ll not only be able to drive continuous improvement but you’ll also be able to see which lanes are problematic from a service or cost standpoint—and tackle the problem before you lose a lot of money over it.”

And remember, says Klappich, that those dollars saved by a TMS can be sent right to the company’s bottom line, particularly for those firms that are using carriers as opposed to their own fleets. “There are a lot of applications with the same ROI as a TMS, but for companies using carriers to haul their goods, every dollar saved is a dollar that can be kept inside the company,” he says.

Out in the cold

With the TMS sector expected to grow at a steady rate of 8 percent to 10 percent annually over the next few years, according to Aimi, there are sure to be more shippers realizing the fast and significant ROI associated with such systems.

On-demand options that require lower up-front costs and implementation times continue to grow in popularity within the transportation sector, where keywords like “centralization” and “automation” will be top-of-mind for shippers in the new economy.

Aimi, who says the average shipper can slash 10 percent to 25 percent from its annual freight budget within six to 12 months of implementation, believes that there’s a lot of room for adoption in the new economy. “For the second half of 2009, TMS vendors saw a resurgence of interest in their systems,” he adds. “I expect that to continue and to result in steady growth for the TMS sector in 2010.”

Klappich is also bullish on the future of TMS adoption, and notes that on-demand options will be of particular interest to shippers. “Over the last 18 months, and largely due to economic conditions, we’ve seen on-demand become a preference rather than an option,” says Klappich.

Also driving growth within the TMS sector will be the need to replace antiquated or “partial” solutions in preparation for the economic recovery and the business growth—and transportation challenges—that will come as a result. Add in the return of fuel volatility and tighter capacity, says Aimi, and the case for a solid TMS that can handle multiple tasks in a fast-paced environment is clear.

“If the economy picks up at any pace at all, we’re going to run out of capacity for trucks,” says Aimi, who points out that trucking firms have significantly slashed capacity and the number of drivers in order to “stay afloat” during the recession. Now, he says, there’s simply “not enough credit to go around” to help those carriers ramp back up quickly to meet the demand.

That’s where a TMS will come in. “If you’re not using a TMS to be the first shipper to tender to your carriers,” says Aimi, “there’s a good chance that you won’t be getting the trucks you need.”

Logistics Management, 2/1/2010