At Olympia Chimney Supply Co., a maker of chimney liners and components, using a manual system to select its freight carriers was tantamount to the "devil it knew." Trouble was, the status quo was giving the company a devil of a time.
Scranton, Pa.-based Olympia would take orders over the phone, then research up to 10 transportation agreements, ZIP code ratings, and fuel surcharge charts to identify what it thought to be the low-cost carrier. But that process proved both time-consuming and imprecise. Carriers' delivery estimates and prices from published rating guides were not always accurate—which could create difficulties for Olympia. The chimney supply specialist offers free shipping on 30 percent of its orders, which means it absorbs those costs. Furthermore, the company is in a commodity business, where shipping costs can mean the difference between profit and loss. The climate was ripe for change.
Using a transportation management system (TMS) developed by provider Transite Technology Inc., Olympia in 2008 automated its carrier selection process. The results were noticeable right away. Least-cost shipping options were instantly available to Olympia's service representatives, enabling them to give customers real-time information on shipping costs and the best carrier to handle the delivery. The software also ensured that company reps were quoting correct information on service levels. On top of that, the system provided financial reporting data and conducted freight audits.
For Olympia CFO Scott Brickel, the experience was an eye-opener. "Some of our reps are really familiar with certain carriers and thought they knew who was providing the best rates," he says. "We found out that wasn't true."
Olympia's conversion came as the supply chain was being roiled by record-high oil prices. But Brickel says the newfound efficiencies helped offset rising fuel surcharges. In fact, in 2008, Olympia's shipping costs as a percentage of sales remained about the same as they were in 2007
Geoff Comrie, Transite's founder and CEO, says Olympia's story is just one example of what he calls the "low-hanging fruit" that shippers could easily pick by using transportation software for carrier selection. While today's TMS suites feature everything from load planning and routing to carrier performance tracking, carrier selection offers "the biggest ROI of anything in TMS," Comrie contends. He adds that depending on the size of a company's freight spend and the magnitude of inefficiencies to be addressed, the payback time can be as short as a few months, especially if a shipper is paying for just the carrier selection module and not an entire TMS suite.
Comrie says the use of a TMS to automate the carrier selection process adds value for shippers in multiple areas. It eliminates the time required to pore through routing guides to match carriers with loads and lanes. It improves customer relations by enabling a shipper's service reps to provide customers with routing information instantly instead of keeping them on hold while they look up data. And it enables the creation of advance shipment notices, an increasing requirement for consignees, notably retailers.
TMS also takes the guesswork and inaccuracies out of routing decisions, no small matter when you consider the amount of money at stake. The Council of Supply Chain Management Professionals estimates that U.S. businesses spend $750 billion a year on transportation and logistics services, and Transite contends they traditionally overpay by about 20 percent.
What's more, on inbound transportation, the use of a TMS can transform a company's shipping department from a cost center into a profit center, Comrie says. With proper carrier selection, a shipper can control a vendor's inbound routing (to ensure, for example, that it uses the lowest-cost provider), pay the freight directly, and effectively mark up the shipping charges on the outbound distribution.
This controversial tactic is being used more frequently, and the carrier selection tool within a TMS facilitates the process. "Using TMS, a lot of shippers have become tremendously savvy in making money in transportation," says Comrie.
Internationally, the benefits can be just as meaningful, though the process can be more complex given the additional steps that accompany an international shipment. For example, Perry Ellis International, a Miami-based maker and distributor of apparel, accessories, and fragrances, turned to a TMS to help it better manage its 14 international service contracts.
Ellis chose a solution developed by Management Dynamics Inc. (MDI), a global trade management software provider based in East Rutherford, N.J. According to a case study supplied by MDI, the software has enabled Ellis's logistics team to do side-by-side comparisons of carrier rate and service options and to calculate in seconds the total "landed cost"—the bottom-line charges for door-to-door delivery of an international shipment. In addition, the system's auditing feature identified and resolved about $220,000 in overcharges showing on the bills of lading, the apparel maker says.
Nathan Pieri, senior vice president, marketing and product development for Management Dynamics, describes his company's TMS as the international trade version of Expedia, the online travel site that lets users compare multiple travel options simply by entering specific search parameters.
Management Dynamics' TMS solutions are offered on an on-demand or software-as-a-service (SaaS) basis, meaning that instead of buying software and installing it on their own servers, customers "rent" the application from the vendor via the Internet. Pieri says prices start in the "low five figures" and escalate depending on the volume of freight tendered.
Slow on the uptake
In theory, the myriad of benefits should make TMS a no-brainer investment. But that doesn't mean everyone is buying. An April survey by supply chain technology provider LeanLogistics found that while 70 percent of executives believe a TMS could improve and streamline their transport procurement functions, more than 80 percent still relied on manual methods. This despite Lean's estimate that automating the process could reduce the time companies spend identifying and selecting carriers by as much as 75 percent.
Part of the reluctance to switch can be traced to cost. A traditional TMS software license can run about $250,000, according to research firm Gartner Inc. But price is no longer the barrier it once was. The on-demand or SaaS model, which promises lower up-front costs and pay-as-you-go pricing, has emerged as a viable alternative, especially for small to mid-sized businesses.
Then there is familiarity. Many shippers use manual processes because they're easy to understand and that's what they were trained to use. But with millions of routings in the marketplace and with carrier options becoming increasingly complex, the "easy" way is often not the best way, Comrie says. "The excessive freight charges [in manual processes] can be very costly," he says.
Chris Timmer, senior vice president of new business development and marketing for LeanLogistics, agrees. The traditional approach to carrier selection is akin to "dialing for dollars," he says. Timmer adds that LeanLogistics prefers to offer its clients a total TMS solution that incorporates a carrier selection function, instead of marketing it as a stand-alone model. LeanLogistics builds a "pre-determined routing guide," where the routing is automatically planned, assigned, and executed without any human interaction, he explains.
Timmer says proper carrier selection has taken on new importance as freight capacity starts to tighten and shippers change their procurement behavior. The LeanLogistics survey found that 70 percent of shipper respondents were now buying transportation multiple times throughout the year instead of the traditional practice of purchasing most, if not all, of their capacity in the year's first quarter when space is more abundant. In addition, roughly the same percentage of shippers said they were coming to market with proposals on a regional or lane-by-lane basis instead of the traditional "network-wide" approach, according to the survey.
"We are seeing a bigger challenge with capacity," Timmer says. "Many of our shippers are getting concerned about capacity constraints and their impact on rates."
Comrie of Transite says the increasing complexity of carrier routings makes TMS-based carrier selection an even more vital part of a shipper's arsenal. As shipment size continues to shrink and companies spread inventory replenishment over an entire year instead of concentrating it in a specific quarter, they find themselves shifting modes from mostly truckload to a mix of truckload and less-than-truckload, with a healthy dose of small package thrown in, he says.
For companies used to having a broker give them a flat rate on the best-priced truckload shipment, these new choices present something of a challenge, Comrie says. "Deciding on the fly with smaller shipments that are more time sensitive is new [to them] and would most likely cost them dearly in excessive freight charges due to lack of proper rating and routing capabilities," he says.
And with shipping often the third or fourth biggest line item on a manufacturer's profit-and-loss statement, the carrier selection function within a TMS that achieves freight savings in the high single digits to low double digits is like shooting fish in a barrel, according to Comrie.
"It beats paying a management consultant to come in and tell you how to improve your production processes by 1 percent," he says.