March 1, 2008
technology review | Transportation Management Systems

Can a TMS really save you money?

can a TMS really save you money?

For shippers in specific circumstances, the answer is yes. But what are those circumstances?

By James A. Cooke

At a time of ever-increasing fuel surcharges, Jel Sert Co. has managed to do the seemingly impossible: hold the line on its transportation expenses. When it tallied up its freight expenditures for 2007, Jel Sert, a snack food and dessert maker perhaps best known for its freezer pops, found that it had managed to keep its spending to the same level it did in 2006— $15 million.

But the company did more than simply hold the line on transportation expenses last year, says Michael Martinez, Jel Sert's director of distribution. It actually reduced its per-shipment cost. In 2006, the company paid $15 million to move 20,000 shipments, he says. "But [in 2007,] we shipped 1,000 more truckloads [while keeping] the dollar spend the same. It's like having 1,000 free truckloads."

How did it manage this feat? Jel Sert says the key to its success was a transportation management system, or TMS. In December 2006, the company began using its first TMS—a Web-hosted version from Lean Logistics. Almost immediately, the software identified ways to streamline operations and consolidate loads. (For more on Jel Sert's story, see the sidebar.)

Jel Sert's case is hardly unusual, say the makers of TMS solutions. They claim that companies that use the software, which is designed to help users manage their transportation operations by overseeing the planning and movement of shipments, routinely see reductions in their freight bills. Yet experts in the field warn that not every shipper may be in a position to reap huge savings from a TMS. Shippers have to meet certain criteria if they hope to score big.

It pays to automate
TMS applications are nothing new. In fact, they've been around for almost two decades now. But these days, shippers have a couple of choices when it comes to how they use the software: They can buy a software license from the vendor and install the application on their corporate servers. Or they can do as Jel Sert did and arrange to have the software delivered "on demand." Under this model, which tends to be the less costly approach, the user essentially rents the application from a vendor that hosts the program on its own servers and delivers it over the Internet for a fee.

With rates rising and fuel surcharges soaring, analysts say interest in transportation management systems has grown over the past couple of years. And that interest shows no sign of receding. The Stamford, Conn.-based research firm Gartner Group forecasts that TMS software vendors will see revenues march steadily upward this year. Gartner expects sales to climb from $493 million in 2007 to $554 million this year—a gain of 12.4 percent.

Though TMS vendors tout their wares as a way for shippers to stem the tide of rising transportation costs, the potential benefits vary according to the state of a shipper's current operations. "The savings depend on how messed up you are to begin with," says Adrian Gonzalez, director of ARC Advisory Group's Logistics Executive Council in Dedham, Mass. He notes that in general, companies that rely on manual processes—where, say, employees call up carriers to tender loads and fax out routing instructions— have the most to gain from implementing a TMS. "The range of savings will depend on how manual your processes are to begin with," he says. "It could be significant, with the range of savings from 5 to 20 percent."

Analyst John Fontanella of Boston's AMR Research Inc. agrees with Gonzalez that manual operations have the most to gain from installing a TMS, but his estimate of the potential savings runs somewhat lower. Fontanella puts the savings at somewhere between 5 and 10 percent of transportation expenditures. To warrant the expense of purchasing or renting a system, he adds, a company must spend at least $8 million a year on transportation. "Below that it's tough to justify the cost of a TMS," says Fontanella.

What a TMS can do
Assuming a company has a large enough annual freight bill to justify the expenditure, how can a TMS improve its operations? For starters, the software can automate the day-to-day freight management activities. Transportation management systems are designed to handle standard communications with carriers, sending emails or faxes to book a shipment or schedule a pickup, for example. They're also set up to compile rate databases, collecting information on various carriers' rates and terms by contacting them via email and asking them to submit their rates online. Not only does that eliminate the need for employees to contact carriers individually and record rate information on an Excel spreadsheet, but it also makes rate comparison a snap.

In addition to compiling rate databases, many TMS systems boast procurement features that allow shippers to solicit electronic bids from carriers, Gonzalez notes. This, in turn, enables shippers to identify opportunities to negotiate volume discounts with those carriers. "For companies that don't put out their freight to bid and have a fragmented carrier base, they can use the TMS to take a centralized approach to aggregate their spend across their divisions and negotiate better rates with carriers," explains the ARC analyst. "The TMS also has optimization technology that can analyze all the carrier bids and take into account business rule requirements or any constraints."

Along with rate comparisons, transportation management systems typically can analyze shipment patterns and look for ways to consolidate orders—for example, combining several shipments into a single truckload for delivery to multiple customers, rather than sending several less-than-truckload shipments. "Savings often come from optimization, minimizing the number of less-thantruckload shipments," says Gonzalez.

In addition, a TMS can make short work of tasks like building loads and assigning orders to a particular shipment—tasks that tend to tax the human brain's capacity. "When you're trying to build loads manually, it gets overwhelming too quickly," says transportation consultant Foster Finley, a managing director at AlixPartners in Detroit. Say, for example, a manager is looking for the best way to move a $300 LTL shipment heading west, he says. Sorting through hundreds of shipments manually to find the best solution would be an all but impossible task. But turn the problem over to a TMS, and in minutes, it's likely to come up with an opportunity to add it to an existing truckload move for an additional $50 stop-off charge.

A stick for discipline
A TMS can offer other benefits as well. What many companies overlook is the potential for a TMS to help them impose discipline on transportation operations throughout the company's various sites. Fontanella notes that a TMS can be a particularly useful tool for ensuring that individual sites comply with corporate policies and adhere to the terms of any contracts the company has signed with carriers.

The software can also help steer users to the lowest-cost carriers. If all company DCs use the same TMS for load tendering, Finley says, the system can be set up to ensure that shipments are booked on preferred carriers. "When you're tendering a load and you have multiple tariffs," he says, "you can use the TMS to make sure you have the carrier with the lowest rate accepting the load if possible."

In the past, TMS applications were generally geared to domestic highway and rail movements. Today, however, most TMS applications are designed to identify savings opportunities not just in domestic movements but in international ones as well. "The bigger TMS vendors are expanding their footprint to cover more areas," says Gonzalez. "They are becoming more multimodal."

Companies that operate private fleets can also realize savings by using a TMS to streamline their operations. Gonzalez says that a TMS can be used to analyze routes or even find a backhaul load. A TMS can also eliminate the need for manual appointment scheduling. "Many companies still pick up the phone to schedule a delivery or appointment," says Gonzalez. "[With a TMS,] you can direct someone to a Web site where they can book themselves a slot online."

Future flexibility
Although most companies justify the cost of a TMS on the basis of transportation savings, that might not be the case in the future. Someday, companies may turn to this type of software more for the flexibility it offers them to react to changing conditions in the marketplace. Consultant Stephen Craig of CP Consulting says a TMS makes it easier for a shipper to change its transportation strategy each year or even respond to transportation market changes. In fact, a TMS can be used to model a company's current shipping approach and then come up with different scenarios for saving money.

The customers that get the most from their transportation management systems, he says, will be those that use the software for more than simply solving short-term problems. "A TMS is not going to help you beat fuel surcharges," says Craig. "But a well-implemented TMS is a good way for folks to deal with the changes that are just not stopping."

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

More articles by James A. Cooke

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