Unpredictable freight costs, increasing regulatory control, and declining demand have conspired to make this a demanding time for shippers and third-party logistics providers (3PLs). In this Supply Chain Leader Virtual Roundtable, thought leaders discuss today's challenges and tomorrow's opportunities in transportation and logistics management.
Our contributors include:
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Greg Aimi, Research Director, AMR Research |
Jim Blaeser, Publisher, American Shipper |
Fabrizio Brasca, Vice President, i2 |
SCL: Given slumping demand and excess capacity, it seems many companies have recently found the timing right to (re)negotiate carrier rates, both domestic and international. How are leading companies leveraging technology to achieve best practices in this area? How have they applied metrics to measure their success, both short-term and long-term?
Jim Blaeser, American Shipper: American Shipper recently evaluated more than 200 transportation buyers' procurement practices and processes, and the technologies used to support them. The Transportation Procurement Benchmark Study outlined some compelling reasons to leverage technology in the procurement process. Companies that "automate" their procurement processes are more likely to:
- Achieve decreases in contract freight rates as compared to previous year
- Weigh service levels, risk and price more effectively
- Reach satisfaction with the procurement process and results overall
As far as best practices go, we used three measures to pick the "winners" from the pool of survey respondents. Winners negotiated lower rates, effectively weighed service/risk/price, and implemented the results of their bid processes within a month. Our analysis found that about 10 percent of these respondents were categorized as winners. Further examination of this segment shows that winners followed these best practices:
- Make procurement a focus for continuous improvement
- Leverage technology to assist, streamline or automate their procurement processes
- Procure transportation centrally as opposed to regionally
- Measure service level guarantees as opposed to just buying the lowest cost options
Some of these may seem like common sense, but it's astonishing how few transportation buyers follow these practices. For more details, the report is available for free on our Web site: www.AmericanShipper.com/Procurement
Greg Aimi, AMR Research: This is a good time to consider putting your freight out for bid. The upper hand has now shifted from the carriers to the shipper, to be sure. But I would advise companies to proceed carefully. Many shippers have told me that to win bids, carriers will include overly competitive rates for certain lanes for which they have little intention of accepting—so shippers should be concerned about sustained serviceability. Ask yourself if you can reliably obtain capacity to cover loads at the rate quoted, or if the carrier can ultimately afford to haul your freight at that rate on a long-term basis. Unless the rate is sustainable for the carrier, they ultimately won't haul the freight, causing the shipper to seek out more expensive options at execution time, and thus diminishing the value of the original rebid.
Expanding strategic partnerships with a smaller number of reliable carriers is good practice when rebidding freight. Use transportation modeling tools to produce a good picture of your freight demographics. Coupled with an automated bid optimization system, you can get the best results. Of course, no bid is worth anything if you don't have a transportation management system to ensure that daily compliance with corporate carriers is achieved.
Working with carriers whose ideal lanes coincide with your freight demographics generally produces the best results. Once prices go up, you don't want your primary carriers—that is, the ones with the lower rates—to seek out more attractively priced freight. Use the modeling results, market knowledge, transportation competency and technology tools to provide a better chance of success and ensure a balanced transportation procurement process.
Fabrizio Brasca, i2: Greg makes an excellent point that ties in well with something that Jim mentioned. Given the economic times, carriers are being more aggressive in their acquisition and retention of freight lanes and, consequently, their pricing strategies. This emphasizes the importance of not just participating in new contract negotiations, but also ensuring that there is both consideration of service versus cost trade-offs and that the prices that are being quoted are tied to capacity and performance metrics. This is critical to downstream actualization of the negotiated value.
Additionally, having the downstream processes to monitor and alert for non-compliance is also crucial, whether it is via an advanced transportation management solution or through various ongoing reports and analytics. In an ideal world, the procurement solution should be tightly coupled with a transportation management solution as well as analytics to realize a true "closed-loop" set of processes.
SCL: What is the current state of TMS technology adoption in the marketplace, and how does it vary specifically when you compare shipper to 3PL or domestic to international? How do you see it changing relative to new functionality, deployment options or organizational philosophy?
Aimi: Although the use of transportation management systems has grown by 11 percent in the last two years, AMR Research still finds that only 39 percent of companies are using them. Even within that group, almost half have only been using a transportation management system for less than three years. So, while specialized transportation management systems have been around for more than 10 years, their usage is still relatively immature, especially for companies with less than $5 billion in revenue.
Now these numbers are for shippers. Third parties have been much slower to adopt off-the-shelf software until recently—say, the last 5-6 years. It has only been within that time frame that the packaged software matured enough and contained sufficient third-party functionality to be used as the IT system for the 3PL.
The SaaS [software as a service] delivery model, coupled with multi-tenancy networks, has really taken off in transportation. It's a natural model for managing a problem that is multi-organizational and multi-geographical by nature.
Blaeser: We believe that logistics service providers [LSPs] in general are in bad shape when it comes to technology and specifically transportation management systems [TMS]. When we benchmarked LSPs in the fall of 2008 (www.AmericanShipper.com/TMS), we found that about 25 percent of the market operated on systems that were more than 5 years old. To put it in perspective, that's longer than most individuals keep a personal computer. Also, few of the LSPs we surveyed operated on what we would consider modern systems.
To an LSP, TMS is a critical component—perhaps the "beating heart" —of its operation. There are many LSPs that clearly need TMS upgrades, but the economic climate seems to have stymied many of those efforts. This is truly unfortunate because 3PLs will more likely weather the economic downturn better than their asset-based counterparts and they should be the first to implement TMS modernization efforts. For asset-based providers—and troubled ocean carriers in particular—plans to upgrade this critical system may be delayed for awhile due to their inability to bounce back from the downturn.
Brasca: From our point of view, there are a number of different phenomena occurring in the marketplace. First, within our customer base, we see several of the larger shippers adopting transportation solution technology not just as a siloed cost-saving measure, but to actually establish a stream of operational excellence as a strategic differentiator. More granularly, successful organizations are doing this by establishing a commonality of approach that includes:
- Establishing a true cross-divisional shared service for transportation
- Focusing on reality-based, constrained network optimization and resource utilization
- Designing a holistic network view of routing and planning, instead of one that is based on location
- Creating a measurement and tracking approach to freight cost allocation
Second, leading organizations are focusing on the value driven by optimization, and consequently, they are adopting modeling solutions to help test, prove and quantify the potential savings that a particular network may yield. This also provides the added benefit of preparing companies for any process and organizational changes that may be required for full value realization.
To echo Greg's comments, we see a significant trend toward solutions that are deployed as externally accessed services rather than internally—for both smaller and larger organizations. Furthermore, the establishment of multi-tenant and content-rich environments with carrier connectivity is particularly important for the middle tier of the marketplace.
SCL: Global trade continues to expand and international logistics takes on added significance. What are the key technology capabilities that are enabling companies to address the complexities and challenges inherent in global trade?
Aimi: The international and domestic TMS markets have drastically different adoption curves. For the most part, shippers have outsourced international freight for years. I don't see that changing dramatically in the near term. Some companies with lots of cross-border trade have begun to purchase global trade management [GTM] software, however, and have started to manage the process themselves. The largest selling module of GTM software by far is denied party screening—which isn't really logistics software at all. Most, however, simply want an overarching visibility or "control tower" system whereby all the various parties around the globe supply information about their specific responsibilities to the company's logistics network. Companies can outsource global transportation management, but they can't or shouldn't outsource GTM responsibility.
Brasca: I agree fully with Greg. In our experience, we have seen increased adoption of more traditional transportation solutions beyond the borders of North America, particularly in areas such as Latin America and Eastern Europe. While there have been some instances in which organizations have looked to insource global trade functions, the greater majority have felt comfortable leaving that to the freight forwarding community.
A seemingly obvious issue that we have also seen: what we define as transportation solution best practices here in North America may not translate or have applicability outside our borders. For example, to assume that truckload optimization is a key requirement for geography like India is illogical since there the more reliable mode is rail. Similarly, in China, the carrier network is governed by local brokers who currently own the loading and the routing of the trucks. As these two examples show, more time must be spent understanding what the potential value drivers are for each region and then focusing capabilities in those areas. From a technology perspective, this emphasizes the value of a flexible service-oriented architecture approach that enables easy, implementation-level workflow configuration.
Blaeser: We've been studying trends in GTM with AMR Research for a few years now and are starting to identify some interesting trends in this space. When we concluded our most recent benchmarking survey with AMR were surprised by the persistent lack of shipper attention to total landed cost (TLC) calculations.
In our 2008 study, we found that 43 percent of respondents described their TLC calculations as "an activity based estimate of all costs the product is estimated to incur from source to destination." In 2009 this number slipped to 41 percent, which suggests the movement to pursue TLC controls has lost momentum. Perhaps more disturbing, the number of respondents in 2009 who said they have no TLC management capabilities increased threefold. We believe this may be due to dramatic decreases in freight rates across all modes and a simultaneous stabilization in fuel prices over the period that spans the 2008 and 2009 iterations of our benchmarks.
It's our view that importers have taken their eye off the TLC ball. Freight rates will eventually stabilize at considerably higher levels and fuel costs will rise again. Importers should continue to invest in enhanced TLC calculation tools.
SCL: Legislation and regulatory action also contribute to the growing complexity in logistics, particularly at the international level. What are companies doing to respond to these changes from a process and technology perspective? What connections/parallels can you draw to the sustainability movement?
Aimi: Regulatory compliance for security reasons will only continue to expand. Since the dawn of EDI [electronic data exchange] and of course, the internet, electronic communication in advance of action is just a natural evolution. This should be seen as good for business—it promotes so much more efficiency—rather than an arduous regulatory mandate. Ubiquitous electronic communication about logistics activities can help the organization create a much more lean and efficient supply network and ensure that we are all safer in the meantime.
Sustainability initiatives are similar, with a different goal in mind. We don't want to use more than necessary, overuse resources or lose track of things that can cause harm to the planet or its inhabitants. Electronic systems to optimize processes and resource use, and to keep track of things, are essential to performing in a world where the requirements for high levels of performance on these two scales will only increase.
Blaeser: We believe the trade community has never been at the center of as much legislation and regulation as it is today. The Employee Free Choice Act, Lacey Act, and Importer Security Filing [ISF] regulation are just a few of the major political initiatives set to reshape the way importers conduct their activities.
American Shipper has covered ISF, or "10+2" as it's better known, since its beginning and we continue to track the regulation as it evolves toward the January 26, 2010 implementation deadline. At the heart of the issue is the source for the 10 data elements importers need to provide to Customs and Border Protection in advance of the shipments' entry into the United States. For example, obtaining a manufacturer's name and address may be difficult for importers since these details are often closely guarded by middlemen.
What importers are really grappling with here is a supply chain visibility problem on a very large scale. Tracking thousands of items back to their original manufacture is clearly a challenge that needs to be met with a technology-driven response. And time is not on the importer's side as the deadline and penalties are very real.
Based on our research, we recommend importers take the following actions now:
- Measure your organization and understand how far along you are in becoming compliant. American Shipper and our partner BPE have benchmarked more than 200 importers on ISF compliance initiatives. The results are available for free at www.AmericanShipper.com/ISF
- Begin filing ISFs immediately. If your company is already filing ISFs, work to improve their timeliness, accuracy and completeness. These are the criteria by which your filings will be measured.
- Apprise senior management of the importance of complying with ISF regulations. The penalties for non-compliance will be severe and potential shipment delays can be equally damaging.
SCL: As we look to 2010 and beyond in anticipation of an economic upturn, what kind of trends can we expect to see in the areas of freight forecasts, carrier capacity and other relevant logistics components? What key strategies should companies be evaluating and what actions should they be taking in preparation for that future?
Blaeser: Shippers will undoubtedly come out of this downturn very lean. Staffing and budgets are noticeably smaller. We're seeing an acceptance of supply chain technology as a way to cut costs and create efficiencies. As the market improves, shippers will be rewarded for their forward-thinking investments in technology. They will be able to more quickly and cost effectively scale their operations to meet new market demand.
Carriers, on the other hand, will struggle for some time. They simply built too many planes, railcars, ships and truck trailers for today's freight volumes. We recently published reports from IHS Global Insight and Seabury Cargo Advisory as part of our Trade Forecast series (www.AmericanShipper.com/TF), which point to a long road to recovery for ocean and air carriers. Steady volume growth is not expected to catch up to this available capacity for awhile.
Aimi: There is no question that if the economy picks up at any pace at all, we are going to be faced with a capacity and driver shortage again. The transportation industry will not be able to secure credit fast enough to replace the slashed capacity caused by the downturn. If we look to the last capacity crunch, electronic tendering—the early tender gets the truck—is key to getting access to available capacity.
Also, we would then expect to see a boost in the need to use brokerage services, since capacity is tight and the normal core carrier methods will not suffice. Expect to see the growth of bid/quote portals, increased usage of private and dedicated fleet, and mode transfers to inter-modal and rail where possible. Using TMS that automatically provides shippers with these options, where possible, will create a logistics department that suffers the least when the stuff hits the fan.
Brasca: We anticipate several developments in the months to come. To echo the comments of my colleagues, while it will take some time for the economy to rebound and capacity to shift, indeed it will shift, and the crunch will be deeper than we have seen in the past. Organizations should proactively consider areas where they may be vulnerable to such a shift and should consequently spent time and resources on war gaming and what-if scenario analysis. Similarly, and again extending Greg's comments, the adoption of capacity portals as a part of the overall transportation management workflow will be critical for those organizations dependent upon commercial freight providers.
Another developing trend we see, particularly around the thought leaders in the shipper community, is the pursuit of more granular and esoteric value outside of the standard transportation management workflow. As transportation solutions now become more mainstream, we see industry leaders looking to find new ways to differentiate themselves and maintain their advantage in operational excellence. Areas such as containerization, or resource capacity optimization, and constrained, dynamic shipment sourcing provide significant value both within and outside traditionally accepted transportation management scenarios and will gain significant adoption as they become more conventional.
Interviews were conducted by Lauren Bossers, Supply Chain Leader editor.
We want to hear about the issues and opportunities you're facing with regards to transportation and logistics. Please share your thoughts in the comments section.
