TMS or 3PL?

Many third-party logistics companies (3PLs) tout their ability to manage transportation costs for their shipper customers. But what most logistics managers may not fully appreciate is the extent to which 3PLs rely on software—specifically, transportation management systems (TMS)—to achieve freight savings on their clients' behalf.

Third-party service providers first rose to prominence in the United States back in the '80s, around the same time software vendors introduced the first TMS programs. These applications were specifically designed to produce freight savings by consolidating shipments and selecting the lowest-cost carrier to haul a particular load.

Not surprisingly, third-party logistics specialists were among the early adopters of TMS. In fact, it was their knowledge of the software's capabilities that enabled 3PLs to capture new business by promising to cut their clients' freight costs—even offering to do so on a gain-sharing basis. After all, it's a daunting task for a human being to sift through long lists of carriers to select the best one for a given load. A TMS, however, boasts the "brain power" to do that in a flash.

Today, almost every North American 3PL that offers transportation management services uses a TMS, whether it be a proprietary custom-built application or one purchased from a software vendor. As for whose purchased solutions they're using, ARC Advisory Group analyst Steve Banker says MercuryGate has won a lot of business of late from 3PLs. He adds that SAP and Oracle are active in this area as well. Gartner analyst C. Dwight Klappich also puts MercuryGate on his list of top TMS vendors for 3PLs, along with TMW Systems. Fabrizio Brasca, vice president of solution strategy for supply chain software developer JDA, says his company also furnishes its TMS to a number of leading third-party service providers.

Although the core objective of transportation management software hasn't changed much over the years, the delivery model has undergone a seismic shift. When TMS applications were first created, the user had to buy a license and install the software on its company servers. Nowadays, most TMS applications are "cloud-based," meaning a logistics manager can simply "rent" a TMS and access the application, which is hosted on an Internet server, with a browser.

Given that ease of access, why should a shipper hire a 3PL just for transportation management? Brasca says there are other reasons to outsource beyond simply gaining access to a TMS. "Leveraging a 3PL is, first and foremost, about outsourcing the entire logistics function, with the software just being a consequence," he says. "There are many reasons for outsourcing to a 3PL, ranging from cost to [freeing the company to] focus on its core competency."

The decision to use a TMS for freight management as opposed to hiring a 3PL depends on the company's situation, Brasca continues. For example, a large company might want to manage its own transportation spend because it has a much larger freight volume—and thus, more leverage—than a 3PL might have. In addition, a company might want to control its transportation activities as a way to focus on continuous improvement in shipping.

For his part, Klappich says shippers should opt for 3PLs today when they need help dealing with capacity constraints and finding carriers to take the occasional extra load. On the other hand, if the shipper has adequate capacity for its shipments with its current carrier base, the decision whether to manage freight in-house with a TMS comes down to the knowledge and ability of the logistics staff. "It takes a fair amount of skill [to use a TMS]," Klappich says.