Whitepaper 2014

THE ECONOMICS OF
TRANSPORTATION MANAGEMENT SYSTEMS

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Even in a soft economy, transportation costs in the United States have continued
to increase, and there is every reason to expect these increases to continue.
According to the 2014 CSCMP State of Logistics Report, transportation costs were
up 2% in 2013, but evidence suggests that when 2014 figures are available the
increases will be somewhat higher. As economic conditions improve, carriers are
expected to experience continuing rising fuel costs and capacity constraints, as
well as driver shortages. The supply of drivers will be particularly concerning as
new government regulations, hours of
service issues, and lack of interest in
the driver lifestyle will combine to
exacerbate shortages and increase
carrier costs. The new driver hours of
service rules which became effective on
July 1, 2013, are especially problematic
for both drivers and carriers, and even
the more efficient carriers such as
Schneider National and others have experienced losses in productivity ranging
from 3 to 5%. While the courts have ruled on these regulations - several times - a
new bill has been introduced in Congress that would roll some of the provisions
back to pre- 2013 levels. These and other factors will almost certainly increase the
rates to the shipping public. Already a major expense for most firms, transportation
costs in 2013 totaled $862 billion, or 5.1% of 2013 GDP, according to the State of
Logistics Report. 

This is putting a tremendous amount of pressure on supply chain managers to

monitor and manage their transportation expenses as closely as possible.
Especially under the difficult economic conditions experienced over the past few

 
 
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years, managers are finding that they are expected to do more with less, while at
the same time, minimize costs and maintain superior levels of customer service.

Concurrently with these often stressful working conditions, management of the

transportation function is simply getting more complicated. The increasing need to
deal with different modes of transport, globalization, and the multiple methods of
delivery required by customers is making it much more difficult to manage than it
was 10 years ago.

In 1610, Galileo Galilei said, “We must measure what can be measured and make
measurable what cannot be measured.” Over the years, this statement has
evolved into the more direct, often quoted axiom, “You cannot manage what you
cannot measure.” But today, over 400 years later, logistics managers still struggle
with the premise. While transportation management systems (TMS) have been
utilized by some firms for over 30 years, it was not until fairly recently that more
sophisticated and readily available technology have made them extremely efficient
measurement and management tools. Today, in order to protect their firms’ costs,
service, and positions in the marketplace, increasingly, supply chain managers are
turning to this technology as a necessary tool. No longer are transportation
management systems a “nice to have” functionality, they are critical to the
management of this important and expensive function. According to the 2013
Logistics Management Technology Usage
Study, in 2012, 34% of the companies
responding were utilizing a TMS. This was
up about 16% from 2011. Fifty percent
were either using or planning to purchase
a system in the near future.

 
 
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Steve Banker, service director for supply chain management at the ARC Advisory
Group, forecasts a 6.8% compounded annual growth through 2015. This data is
consistent with a recent survey by the Warehousing Education and Research
Council, as well. These findings suggest that many of today’s managers are
recognizing the importance of these systems.

Transportation Management Systems are

particularly important to logistics service providers
as they collaborate with their customers in
minimizing costs, while at the same time,
providing “best practice” service to their
customers’ customers. Most providers will agree
that in today's marketplace, prospective clients of
logistics service providers expect them to provide
a fully functional TMS which includes, at the very
least: a load optimizer, a rate and transit time
comparison, an electronic request for service and
load confirmation to and from carriers, a route
optimizer, and an electronic delivery confirmation. According to Jeff Miller,
President of E*Fill America, "This type of TMS functionality is no longer an option
but the price of admission needed to gain entry into the selection process." The
Transportation Specialists Group (TSG) is a third-party logistics and transportation
management firm providing solutions that will optimize its clients' supply chain
operations. According to president, Gary Smith, TSG relies heavily on TMS to
facilitate these solutions. "Having the TMS technology in place gives our clients the
ability to make intelligent, informed decisions about the shipping lanes available to
them. It takes the emotion out of the decision” says Smith. The 2014 Third Party
Logistics Study confirmed that 70% of the respondents expect their logistics
service providers to have a good TMS.  

 
 
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What was just a few years ago a small cottage industry, now provides one of the
major pieces of software used in the supply chain industry. There are literally
hundreds of systems to choose from. Of course, some firms have developed their
own proprietary systems, but many are turning to one of the many software
vendors offering the TMS
capability. Some companies
prefer a one-client system
developed specifically for their
use, and others utilize hosted
software-as-a-service systems.
Often a smaller firm will not
require an extensive TMS and
can utilize one of the cafeteria
plans available. Under this
type of arrangement some
providers will offer individual
modules, and the user can buy
what they need initially and
add on as they need it. Most of these firms seem to prefer routing, scheduling,
rating, carrier selection, consolidation of shipments and load tendering tools. All
users, whether large or small, seem to agree however that a good system will have
two basic modules - planning and execution. Most will also agree that they are
experiencing savings in transportation spend of at least 5 - 6%.

Savings, of course, are averages but have been confirmed by extensive research
by consultants, educators, publications, and others. Savings will also vary by
individual firm depending on what improvement opportunities are available and
how well the users manage the systems. If a manager has information available

 
 
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and doesn't act on it, he or she is not going to save much. TMS expert, Adrian
Gonzalez, said several years ago, “Real-Time Performance Management (RPM) is
the next frontier in achieving operational excellence; and TMS will play a critical
role by providing more accurate and timely visibility to costs and other KPI’s.” This
prediction has proven to be true and those firms utilizing a TMS are experiencing
cost savings in several areas.

AVAILABILITY OF INFORMATION OR BUSINESS INTELLIGENCE

The business intelligence that can be gained from a TMS can be invaluable to the
user firm. All the rates, routes, contracts, and other relevant data are captured in
the system and reside there for later revision and analysis. Having visibility to all
the data relating to your transportation function and being able to improve
performance through a careful analysis of this information can reduce a
transportation spend by anywhere from 2.5 to 3%. Some of the things that can be
done with information derived from a TMS are:

 The issuance of carrier report cards, providing consolidated information

about all the key carrier metrics such as performance and billing accuracy;
 The development of an executive dashboard graphically displaying all your
key performance indicators; and
 Modeling. The TMS gives you the ability to analyze any type of "what if"
scenario to compare different modes, carriers, and services.

MCG Logistics utilizes the CTSI-Global TMS. James Manning, President & CEO
says, “The CTSI-Global TMS technology is a must for MCG to provide key
analytics. Utilizing the modeling tool is a critical component of our process.

 
 
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Furthermore, many MCG clients move their loads in a more efficient manner
through MCG utilizing the CTSI-Global applications enabling us to deliver both
hard and soft savings to our clients.”

CONTRACT MANAGEMENT

One of the major areas in

which firms have
experienced cost reductions
by using a transportation
management system is
contract management. The
system provides a central
repository for all carrier
contracts and greatly
enhances the process of
modifying rates and terms. Through standardization at a central location, a firm
can manage changes, benchmark, make comparisons, and perform analyses of
surcharges across various modes and carriers. This eliminates a significant
administrative burden. To manage contracts manually is a time-consuming, often
error-prone activity. Experts estimate that administrative costs for an average-
sized firm can be reduced by as much as 10%. Obviously, the more contracts a
firm has, the greater the cost reductions will be. And this doesn’t include the
savings that may be realized in freight spend as a result of more efficient,
standardized management.

 
 
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MODE AND CARRIER SELECTION

One of the more complex decisions a supply chain manager must make is which
mode or carrier to use in moving its products. In the past, mode selection has been
fairly straightforward, but the growth in intermodal service and the improvements in
rail schedules of
recent years, have
made the motor
carrier/ intermodal
decision much
more competitive.
Even after the
appropriate mode
has been selected,
the choice of a
carrier within that mode sometimes can be a daunting task. The goal of the user, of
course, is to provide the best possible service at the lowest possible cost.

As a result, there is much more to carrier selection than simply utilizing the least
cost provider. The firm must be able to develop a carrier base that recognizes the
carriers’ performance and cost in each traffic lane it utilizes. A routing guide can be
developed and constant monitoring facilitated. Reasons for not using the preferred
carriers can be documented, as can the carriers’ own performance. The contract
management module is also helpful here in that it will keep current the information
necessary to make educated decisions.

 
 
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Mobile Mini, another user of the CTSI-Global system, “has experienced operational
efficiencies through the routing of loads, obtaining multiple freight quotes, selecting
carriers, creating bills of lading and monitoring shipment status.” Says Mark
Baldwin, Fleet Manager, “Most importantly, the TMS has allowed us to meet our
customer commitments without having to rely on additional expense for expediter
carriers.”

Estimates of reductions in freight expenditures through more efficient carrier

selection range from 5 to 10%. However, one major logistics service provider
realized savings of over 12% by eliminating the “human factor.” In their particular
case, they found that carrier selection that was not influenced by relationships
resulted in significant cost reductions. This can be a much more significant
problem than many of us realize. This industry has to a large extent been built on
relationships, and these may still affect our carrier choices.

RATE NEGOTIATION

Having a database of all the rates paid to various carriers greatly enhances a firm’s
negotiating capability. The user can determine trends and easily make
comparisons among the various modes and
carriers. Armed with detailed information
about what rates are being paid, to which
carrier, as well as alternatives that are
available, a logistics manager will have a
decided advantage in the discussion.
Savings can range from 5% to a high of 15%
through well-documented negotiations.
 

 
 
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LOAD OPTIMIZATION AND CONSOLIDATION

One of the more popular modules of a TMS provides a tool for optimizing loads
and routing. Over the years, as shipments have become smaller and capacity has
become more problematic, firms have found themselves faced with smaller, more
expensive LTL shipments. The optimization technology available today will enable
shippers to analyze shipments and aggregate orders, build drop shipments and
stop offs, set up continuous moves, shift modes, or consolidate smaller shipments
into one truckload. Most experts will agree that this module can reduce freight
spend by as much as 10%.

Consolidation of shipments is even

more profitable for the logistics
provider and its customers. LSPs
have consolidated shipments for over
50 years; but today, with their large
client bases and sophisticated
optimization tools, they are able to
combine what would have been LTL
shipments into truckloads, reducing
freight and handling costs, as well as
carbon footprints. The leading providers have excellent systems that automatically
will optimize both loads and routes. A case in point is that of Scranton,
Pennsylvania-based Kane Is Able. The Kane TMS allows them to provide faster
delivery times, reduce carbon footprints, economically refresh inventories with
regular, smaller shipments, and in addition, afford their customers savings ranging

 
 
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from 20 to 35% of their freight costs. This is a classic example of how creative
thinking about an old concept, using a modern TMS, can result in new successes.
C.H. Robinson also has taken steps to make it easier and more economical for its
customers to consolidate shipments.

It is probable that consolidation is going to become much more important

particularly in the retail industry. Since 2010, Amazon.com has spent almost $14
billion on new distribution centers. The company now has 89 centers, and more
are planned. Their goal is to be in a position to deliver most of their orders on the
day they are received. With the increase in online purchases, expected to total
$1.4 trillion by 2015, consumers are becoming more demanding and overnight
service no longer is enough. This suggests an opportunity for a logistics service
provider to move into a densely populated area and offer a service that provides
various manufacturers and distributors an opportunity to consolidate their products
with those of other manufacturers and distributors for same-day delivery. Many
firms cannot afford to take the Amazon approach of building huge facilities in
multiple markets, nor should they. An efficient logistics service provider with a
strong TMS can enable their retail clients to compete quite effectively with the
Amazons of the industry, at a reasonable cost.

SHIPMENT EXECUTION

One of the more time-consuming activities of a transportation manager is that of

tendering loads to the various carriers in their database. While it is sometimes
difficult to quantify, the automation of this somewhat tedious process can result in
administrative savings, as well as reductions in freight expenditures. The use of a
shipment execution module can automate load tendering and create an online bill
of lading that can be transmitted to the carrier using either EDI or email. Carriers

 
 
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can respond immediately if there is an error, and corrections can be made
immediately, thus avoiding later issues. Appointments can be scheduled and proof
of delivery provided, all electronically. Load builders aid in reviewing, approving, or
modifying load plans.

Order status can be determined

throughout the transaction; and if
necessary, replacement shipments can
be made promptly. In addition to
administrative savings (which could be
significant depending on volume of
traffic), the accurate execution of every
shipment, every time, can yield freight
savings of 1 to 3%.

INVOICE AUDIT AND PAYMENT

A state-of-the-art TMS will have a freight bill audit and payment module. Arguably,
this can be one of the most gratifying of all the modules. The primary appeal is the
strong possibility of reduced costs. It costs a large firm about $11 in fully allocated
costs to pay a freight bill manually. Using a freight bill payment (FBP) module, the
cost will be approximately 5-10% of manual handling. Add to this another 2 to 5%
saved through the reduction in incorrect and/or duplicate freight bills, and the
savings can be significant. While the cost reduction can be significant in and of
itself, the real value is added through the business intelligence generated by the
system. Even before the bill is paid, the system will assure that the correct rates
and accessorial charges are paid. Post-payment activity can include almost any

 
 
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type of reporting the managers' desire, including such things as routing
compliance, expense by mode, and expense by product.

INVENTORY VISIBILITY

One of the major routes to profitability for any firm is the effective control of
inventory levels. A TMS can provide visibility to inventories of raw materials,
supplies, and finished goods, as well as inventories in transit from suppliers to
customers. With this information an effective control can be established throughout
the supply chain and total inventories can be reduced. The total cost of carrying
inventory often can be quite high, and by utilizing a TMS, a firm can achieve cost
reductions of as much as 2-3% of its total revenue.

CUSTOMER COMMUNICATIONS

Customers and other receivers have become

much more particular about the service they
are receiving and demand real-time visibility
to their orders. A TMS provides this ability
and receivers can determine the status of
orders and shipments. The system can also
produce ASN's or Advance Shipping Notices
so the receiver will know what products are
on the way before they arrive. This is
particularly important to customers like Walmart who operate sophisticated cross-
dock distribution centers.

 
 
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Michael Fairchild, Director of IT, Sales and Operations Support at Givens

Companies stated, “At Givens we derive value from the CTSI-Global TMS by
automating extremely complex business rules. For instance, many of our clients
are shipping to big box retailers and cannot afford to fall out of compliance due to
the exposure of charge backs. The TMS is configured to recognize these
customers and alert our coordinators to orders that will not meet delivery
requirements due to time constraints. With this information, we are able to expedite
where necessary and avert what otherwise would be a potential delivery failure.”
Savings in this area are more difficult to quantify; but some firms acknowledge 1-
2% of transportation expenditures.

PERFORMANCE IMPROVEMENT

As Galileo suggested, the ability to manage a

function is dependent on the firm’s ability to
measure performance. In the past, transportation
management has proven to be one of the most
difficult activities to measure. With today’s
transportation management systems however,
measuring internal and carrier performance no
longer is such a challenging task. Key
Performance Indicators (KPIs) can be established
and performance measured against them. TMS
vendors have developed systems that will enable
firms to take advantage of “big data.” It has been
said many times that “information is power.” That might well be true, but with

 
 
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trillions of bytes of data being gathered constantly, the real power is in having a
capability that will enable the use of the information effectively. Transportation
Management Systems can meet that need. Savings in this area can be almost
unlimited, but even a modest effort will yield cost reductions ranging from 1 to 5%.

CONCLUSION

If a firm already has a highly effective system, the indicated savings will be less;
but few if any firms that have installed a TMS did not achieve savings in several
areas. As mentioned earlier, with all the issues that face transportation users
today, the function is becoming increasingly difficult to manage. Capacity
problems, driver shortages, rising fuel costs, and deteriorating infrastructure, to
name a few, contribute to the complexity of this important activity; and it is virtually
impossible to manage effectively without sophisticated technology. The necessity
for carrier and mode shifts is becoming much more frequent, and often decisions
must be made on a moment’s notice. In many cases, millions of dollars are being
spent unnecessarily, and with ever increasing cost pressures, a firm cannot afford
this inefficiency. Transportation Management Systems have been the answer to
the information, visibility, and execution needs of hundreds of firms. Not only will
they facilitate the status quo, they offer unlimited opportunities to significantly
reduce costs.
 

 
 
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ABOUT



 

Clifford F. Lynch is Principal, C. F. Lynch & Associates, a supply chain

management advisory firm. He has several decades of experience in the supply
chain and is recognized as an expert on outsourcing and other aspects of the
supply chain. He is also is the author of several books and numerous articles on
the subjects of logistics and supply chain.

Website: www.cflynch.com
Phone: 901-619-2182
Email: cliff@cflynch.com

CTSI-Global provides shippers and 3PLs with freight bill audit and payment,
customized transportation management system (TMS) applications, business
intelligence, logistics consulting as well as a variety of global solutions that meet its
clients’ business requirements and supply chain needs. Its supply chain
management expertise and technology helps companies manage and control all
aspects of their supply chains - physical, informational and financial - within one
global database; giving them more control, improved efficiencies and a cost-
effective process to result in greater savings.

Website: www.ctsi-global.com
Phone: +1-888-836-5135
Email: solutions@ctsi-global.com
Subscribe to CTSI-Global’s supply chain blog, The Link – Your Link to Supply
Chain Community.

‘The Economics of Transportation Management Systems’ was authored by Clifford F. Lynch, Principal,
C.F. Lynch & Associates. 
 

©2014 CTSI‐Global.  All rights protected and reserved. 

 
 
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