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DEtErMINING ROI For TrANSportAtIoN MANAGEMENt SoLUtIoNS:

A 5-Step Methodology
Adoption rates for transportation management systems are still relatively low compared to other supply chain management applications. However, the events of the past few years have turned the spotlight on transportation costs and risks, resulting in a surge of interest in transportation management technology. One stumbling block has been to understand how to cost justify these systems to corporate management. This paper will help address that issue.

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TABLE OF CONTENTS

Driving the Need Benets of Transportation Management Technology

3 4

5-Step Methodology for 5 Determining ROI 1.  Determine your transportation 5 spend and related costs 2. Identify problem areas and their 5 impact on corporate objectives 3. Estimate potential savings 4. Estimate solution costs 5. Calculate ROI 6 6 7

Presenting Findings to Management 8 Sample Savings and ROI Calculations 9

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DrIVING thE NEEd

The sharp spike in oil prices in 2008 and the ensuing recession, which directly impacted diesel fuel and bunker oil costs, revealed several unpleasant realities for many companies. First, it highlighted the large percentage of logistics costs tied to transportation. The Council of Supply Chain Management Professionals (CSCMP) State of Logistics reports over the past few years have put transportation at 60-65 percent of total logistics costs. Second, it demonstrated how vulnerable company expense and prots are to changes in these underlying fuel costs. Third, it became clear to many companies that their current methods for managing transportation spend were inadequate for todays volatile cost environment. The recession has been another major contributing factor to transportation cost volatility and risk. The 2011 CSCMP report says that more than 3,000 trucking rms have declared bankruptcy in the past three years - a loss of 13 percent of industry capacity. Along with this has been a drop of over 142,000 drivers since 2007. And the CSCMP report predicts a driver shortage of 400,000 in 2011 and beyond. There have been similar cutbacks in ocean shipping, rail and air cargo capacity. As the economy begins to recover, there already have been reports of signicant price hikes due to this shortage in capacity, as well as difculty in nding capacity in some instances. These interrelated factors of cost, capacity and volatility / risk are driving the need for more advanced systems to manage transportation operations. The question is how to secure support and funding from management for this muchneeded technology. The answer is to align the benets of transportation technology with its ability to address the cost, capacity and volatility / risk issues, as well as with corporate objectives.

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BENEFItS oF TrANSportAtIoN MANAGEMENt TEchNoLoGY

There are three primary areas where transportation management technology can directly impact cost, capacity and risk. These are carrier management, visibility and cost reduction. If you do not have a centralized corporate carrier management program in place with the ability to leverage and enforce agreements through your transportation management system (TMS), you are likely paying too much for freight without ensuring capacity. By creating core carrier programs that leverage shipping volumes from all of your ship points, you can negotiate favorable pricing and get carrier commitments to capacity. The TMS can then leverage these agreements when assigning loads, as well as enforce compliance during freight settlement. Advanced TMS solutions typically offer web-based portals for visibility and communication between shippers, carriers, suppliers and customers. This visibility, coupled with built-in event management capabilities, allows all parties to react immediately to the inevitable changes and disruptions that occur in transportation operations. By taking immediate action, cost impact is reduced, capacity issues can be more readily handled, and customer service is improved. Direct cost reduction, however, is how TMS solutions are typically cost justied a critical element in getting technology purchases approved. Fortunately, TMS solutions have consistently demonstrated their ability to reduce costs and produce ROI in relatively short timeframes. Figure 1 shows a representative range of savings achieved by RedPrairie TMS customers across several key transportation activities. For the purpose of your cost justication analysis you will want to estimate where within these ranges your savings might fall.
Figure 1 - Typical Savings from Advanced TMS Solutions
Less-than-truckload (LTL) to truckload (TL) optimization

5% to 20%
International Transportation & Logistics (ITL) processing

8% to 12%
Use of a load control carrier program

3% to 5%
Continuous moves

4% to 8%
Optimized carrier assignment

3% to 6%
Freight settlement

1% to 2%
Streamlined operations

2% to 5%
Order consolidation

5% to 10%
Improved eet routing and scheduling

7% to 25%

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5-StEp MEthodoLoGY For DEtErMINING ROI

The 5-step methodology below should provide the ammunition you need to justify to management the need for, and ROI of, advanced TMS technology. While the methodology is simple and straightforward, gathering the necessary information may not be. Suggestions are given below to help direct this effort. Finally, you should consider the amount of administrative time your transportation analysts spend consolidating loads, contacting carriers, tracking shipments, and doing the many other routine tasks that could be automated and optimized with a TMS. The sum of your outbound, inbound and administrative expenses is your total transportation spend.

1. Determine your transportation spend and related costs

Gathering the freight payments for one year across all company ship sites and third party providers is a good place to start. It should include payments to parcel carriers since a TMS with integrated parcel shipment optimization can help reduce these costs. You should be able to get these numbers from your accounts payable department. If you have a private eet, accounting should be able to tell you what these expenses are on a monthly or annual basis as well. If you cannot get these numbers from accounting with a high degree of condence, this is an additional argument for the value of a TMS. If this is the case, you should be able to work with accounting or your freight payment provider to gather the raw data directly from freight invoices received prior to payment and allocation to the general ledger. A more difcult challenge is estimating what your company spends on inbound freight. Often the charge for inbound freight is buried within purchase orders. Not only do your vendors not have incentives to choose the most economical mode and rates for these shipments, they do not have access to your outbound shipment plans where opportunities for backhauls and continuous moves could be used to further cut costs. Your purchasing department may be able to give you estimates of shipping rates for inbound orders, but otherwise you will have to make educated guesses based on inbound shipment volumes and modes.

2. Identify problem areas and their impact on corporate objectives

The reasons to implement a TMS are not all nancial, at least not directly. For example, improving the customer experience may be a corporate objective. But customers may be frustrated because they dont know when your shipments will arrive and which orders are on them, and trying to schedule appointments is haphazard and painful. A TMS with web portals can provide the visibility and communications to avoid these problems and provide the improved customer experience management is seeking. There are likely a number of corporate objectives like this that transportation management improvements could positively impact. If you can identify these and show how an advanced TMS can help reach those goals, it can add additional justication beyond the direct cost savings.

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5-StEp MEthodoLoGY For DEtErMINING ROI

3. Estimate potential savings
Estimating what savings a new TMS might offer in your environment is not an easy task. Estimate too low and you may not be able to justify the system. Estimate too high and you may set up unrealistic expectations you cannot meet later. A good place to start is with the transportation spend areas you examined in step 1 above. Within each of those areas consider the potential savings ranges from Figure 1 and estimate where your savings might fall within those ranges. For example, if you have LTL shipments that could be consolidated into full truckloads you will want to consider the number and size of your LTL shipments, as well what percentage you think could be consolidated based on your shipment prole. If there is signicant opportunity for consolidation, use a savings estimate toward the high end of the range. If there is limited opportunity, use a lower percentage from the range. Go through each of your areas of spend in this way to arrive at a total savings based on the sum of your estimates. Rather than use a specic number, you may want to use a high and low range to account for the fact these are only estimates. The higher your condence level in your estimates, the narrower can be your range.

4. Estimate solution costs

It is important to consider all costs when calculating ROI from any system implementation. The vendor proposals will have some of these costs, such as software, hardware, implementation fees and annual maintenance. If the vendor does not provide all of these components, you will have to get them from other providers or make reasonable estimates. Be careful when comparing costs between vendors to make sure it is an apples to apples comparison. Sometimes vendors will throw in extra modules or services you dont really need to make their proposal appear more valuable. Or they may offer a lower license fee but make it up in higher maintenance costs. The amount of implementation services they offer can also vary widely. Go through their proposals carefully and ask questions if you arent sure you have all the facts. Also consider if there is any need and associated cost for modications to the base system for your needs. Another option that is rising in popularity is to rent the solution on a Software as a Service (SaaS) basis. Here you typically pay a modest implementation fee up front and then pay for the use of the system over a contracted period such as 3 to 5 years. These charges typically include software, hardware, services and maintenance bundled together into a single monthly fee. However, this may not be an option if the vendors base system does not meet your needs. Another major cost many companies overlook or underestimate is the internal costs to implement the system. This includes project management, technical resources, integration costs, testing and training. It should also include on-going costs to run and maintain the system and interfaces. The sum of the license, implementation, internal and maintenance costs is what you will compare to estimated savings in determining the ROI of this investment.

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5-StEp MEthodoLoGY For DEtErMINING ROI

5. Calculate ROI
There are a number of ways companies evaluate technology investments to determine if they make economic sense in their environment. Be sure to check with your nancial department to see which method your company uses so you can present your analysis to management in the format required to get approval. The simplest method is to compute the payback period. In this approach, the total cost from step 4 above is divided by total savings from step 3 to determine the number of months or years until the investment is repaid in savings. Often a maximum payback period such as 2 or 3 years is the threshold investments must meet in order to be funded. Another common approach is to compute the net present value (NPV) of the savings. The NPV considers the time value of money in comparing future savings to current costs. It recognizes that the money spent on a new system could have been

spent on other investments paying an acceptable return. Typically companies have a minimum return percentage that investments must earn to qualify for consideration. Work with your nance department to calculate the NPV of your savings over time and compare to the costs from step 3 to determine the ROI on the transportation investment.

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PrESENtING FINdINGS to MANAGEMENt

Once you have completed your ROI analysis you will need to present your ndings to management in order to get approval to invest. If you have followed the ve steps above, made realistic estimates of costs and savings, and produced your ROI report in the format desired, you will have the information required to present a solid case to management. However, it is important to understand that your proposal is not just competing against minimum corporate investment standards. You are also competing with an unknown number of other internal projects which may also meet the investment requirements. To increase your likelihood of approval, youll need to demonstrate how the investment in transportation technology will help achieve corporate goals. This goes back to the problem analysis you did in step 2 above. In the example cited of improving customer experience, if you can show that implementing a new TMS will increase customer satisfaction by improving on-time delivery, providing easy to use appointment scheduling, and greater visibility to shipment information, you will be more likely to win approval. The more areas you can demonstrate support of corporate objectives, the greater your chances of approval ahead of competing projects. Winning approval from management to invest in new technologies to improve your operations is never an easy task, especially in tough economic times. But transportation management solutions have an excellent track record of fast and sure ROI. Following the methodology outlined in this paper will arm you with the information you need and signicantly improve your chances of success.

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Sample Savings and ROI Calculations

The following example is taken from an actual RedPrairie customer engagement. RedPrairie visited three [sample company] locations and received a presentation highlighting each locations operation. Based on these presentations and the question and answer sessions that followed, RedPrairie prepared a report providing an estimate of the savings opportunity offered by implementation of RedPrairies Transportation Management solution. Based on the operations described at each facility, RedPrairie believes that a conservative estimate of savings for [sample company] can be produced using the categories in Figure 1 as a guideline. The savings categories for which adequate information was available to provide an estimate include: lessthan-truckload (LTL) to truckload (TL) optimization, freight settlement, streamlined operations, and order consolidation. In each area, a very conservative estimate was utilized to calculate the potential savings because RedPrairie recognizes that [sample company] already had a good level of process control for freight management in place with its existing systems. The primary savings opportunity for [sample company] was in LTL to TL optimization. Each location had a substantial amount of LTL freight and none had a tool for optimizing the consolidation of LTL to TL. Using an extremely conservative estimate of 8.5 percent reduction in freight spend for LTL, the total estimated savings from LTL to TL optimization was approximately $1,020,000 for the three locations surveyed. The next greatest savings opportunity was order consolidation. This savings opportunity applied to the both parcel and LTL shipments. Using an estimate of 2 percent reduction for the parcel and LTL freight spend, this represented approximately $540,000 potential savings. Streamlining operations is the next area of potential savings for [sample company]. Operations would be streamlined in several ways, most importantly through the use of the TMS solutions Event Management System to increase visibility to shipment status and to reduce the amount of time required to monitor shipment status. It is believed that one location will be particularly impacted by this functionality, and based upon the session at that location, will be able to reduce its cost of operations by one to one and one half FTEs through improved monitoring capabilities. This reduction in FTE is in addition to the estimated 1 percent reduction in total freight spend (totaling $325,000) that all three locations are estimated to achieve. A reduction of one FTE is included at $35,000 per year, for a total potential savings from streamlining operations of $360,000. The nal area of savings for [sample company] was in freight settlement. This area includes both freight pricing for customers and freight costing for carriers, sub-contractors and third party providers. The freight settlement category includes price and rate maintenance as well as freight audit and payment. All three locations will benet by an estimated 0.5 percent savings of total freight spend, yielding approximately $162,500 savings. In addition to this amount, one location estimated it could reduce its operations by one to one and one half FTEs from improved invoicing capabilities. A reduction of one FTE is included ($35,000 per year) for a total savings in freight settlement of $197,500 per year.

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Sample Savings and ROI Calculations

The total estimated annual freight spend (including two FTEs) for the locations visited was $32,570,000. Using the estimated savings described above, the total annual savings for these three facilities was $2,117,500, representing a 6.5 percent savings. This savings estimate is highly conservative and well within the typical saving ranges achieved by RedPrairies customers. Assuming a total implementation cost, including software, hardware, implementation services and internal costs of approximately $2,000,000, the payback period would be just under one year. A simple return on investment calculation would yield about a 105 percent ROI in the rst year. Payback of one year or less is common with RedPrairie TMS implementations, so this sample falls within normal savings ranges.
Figure 2 - Sample Savings from TMS Implementation

Area
Less-than-truckload (LTL) to truckload (TL) optimization Freight settlement Streamlined operations Order consolidation Total Annual Savings

Savings
$1,020,000 $197,500 $360,000 $540,000 $2,117,500

About RedPrairie
RedPrairie delivers productivity solutions to help companies around the world in three categories workforce, inventory and transportation. RedPrairie provides these solutions to manufacturers, distributors and retailers looking to support business strategies that increase revenue, reduce costs and create competitive advantage. With over 20 global ofces and solutions that are installed at more than 34,000 customer sites in over 40 countries, companies trust RedPrairie workforce, inventory and transportation solutions to deliver an increase in productivity with the exibility to adapt as business needs change. At RedPrairie, we understand todays operational demands and were committed to delivering solutions that work. Were committed to delivering solutions for the real world.

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RedPrairie Corporation has made every effort to ensure the accuracy of the information included in this document. This document is subject to change without notice. The information contained in this document may not reect the nal design in some instances. Copyright 2010 RedPrairie Corporation. All rights reserved. This publication contains proprietary information of RedPrairie Corporation. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of RedPrairie Corporation. RedPrairie and the RedPrairie logo are registered trademarks of RedPrairie Corporation. E e is a trademark of RedPrairie Corporation. All other trademarks and registered trademarks are the property of their respective holders.
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