The gap is astonishing. According to recent research by the American Productivity & Quality Center (APQC), the average U.S. business spends $25.30 for each $1,000 in annual revenue on outbound transportation. Top-performing companies pay just $6.35 per $1,000, while bottom performers shell out $53 – more than twice the national average.
The cumulative impact is even more dramatic. Over a year’s time, a low-performing company with $5bn in revenues will spend $266m more on outbound transportation than a top performer of equivalent size, according to Eyefreight, a vendor of transportation-management system (TMS) software.
There are a number of ways that companies can reduce their transportation spend. They can renegotiate contracts with suppliers, find other carriers, and do a better job of maximizing their use of space on trucks. But Eyefreight chief executive officer Ken Fleming says those efforts bring relief that’s temporary at best. Freight costs are continuing to rise, he points out, pushed upward by the chronic driver shortage, unpredictable fuel-price trends, the nation’s crumbling infrastructure and stricter regulations in areas such as driver hours of service. For their part, carriers aren’t likely to agree on an endless series of rate cuts.
Shippers that are paying too much for transportation tend to be hampered by a lack of total visibility of their carrier spend. They’ll agree to a contract rate, only to be hit with high accessorial fees when they get the bill. “They need to find another way to control the spend, to make sure they’re paying for what they’re getting,” says Fleming.
High performers are simply doing a better job of measuring rates and monitoring their carriers on a regular basis. By avoiding surprises in the form of unexpected charges, they’re able to cut their transportation expense by an average of 10 percent, and as high as 30 percent, Fleming claims.
Having all relevant information up front allows shippers to address the issue of accessorials during the negotiation phase, he says. Leaders have a much better idea of which shipments were delivered on time, how often they had to resort to expedited transport, and how well the customer was served. Comes time to renew a contract, the shipper can raise those issues with the carrier.
The work involved in keeping tabs on carriers can be immense. Some companies prefer to outsource the management of their freight costs. They allow third parties to manage the bills and negotiate with carriers, much in the way that a debt-laden consumer might make arrangements with a credit-card company for repayment. The carrier might not recoup the full amount of the challenged bill, but both parties avoid a line-by-line audit and further delays in resolving the issue.
Not good enough, says Fleming. “They use brokerage firms to reduce the cost, but it doesn’t repair the problem. If you don’t have visibility, it’s never going to go away.”
A longer-term solution lies in the use of a good TMS application, but here’s the second shock: a large number of shippers don’t have one. Fleming says that approximately 85 percent of the companies to whom Eyefreight talks haven’t got a TMS of any kind. They are managing hundreds of millions in freight spend through the use of spreadsheets, manual processes and endless phone calls to the carriers.
There’s an odd disconnect at play. Larger companies were generally the first to embrace TMS software, but Fleming says the vast majority of tier-one businesses today still don’t possess them. Nowadays, it’s the smaller entities that are more likely to acquire a single TMS across their organizations, possibly because their supply chains are less complex in terms of geographic footprint. A shipper that only distributes goods throughout the U.S. by road might be more willing to buy the software, or turn the whole operation over to a third-party logistics provider.
A big global company, by contrast, might be using TMS for portions of its supply chain – say, domestic over-the-road transport – while resorting to manual efforts for ocean or air, or the movement of specialized heavy equipment. Ironically, they’re the ones who stand to benefit the most from a “control-tower” approach to managing total freight spend.
The fact that Fleming touts TMS software as the solution to managing complex freight spend is no surprise – Eyefreight sells the stuff. Nevertheless, he makes a valid observation about the tendency of many companies to persist in the use of labor-intensive manual methods for dealing with carriers. What’s more, he sees the cloud, or software as a service (SaaS), as playing an increasingly vital role in the development of TMS.
Companies expanding operations in multiple countries will find it easier to apply the software when it’s in the cloud, Fleming says. In such instances, visibility is key to keeping track of the changes that occur in overseas markets, such as new regulations and route restrictions. Supporting software must be able to constantly adjust.
The cloud is also a boon to “best-of-breed” software vendors like Eyefreight. In recent years, the big enterprise resource planning (ERP) vendors have moved into many other types of applications, especially execution-based tools such as TMS and warehouse management systems (WMS). Independent vendors have found it increasingly tough to compete with these enterprise-oriented giants.
The arrival of cloud technology might have saved the independents. Infrastructure providers such as Amazon.com and Google have made it possible for smaller vendors and their clients to launch software at a much lower cost than before. They don’t have the expense of maintaining applications on site, or the hassle of dealing with upgrades.
Eyefreight, for one, relies on the servers of Amazon. “I only have to pay for what I use, when I use it,” says Fleming. “I’m not carrying any extra overhead.”
Today, some 60 percent of Eyefreight’s costs are going directly back into research and development. That’s about the same amount the vendor would have spent on its own infrastructure in a world without the cloud.
Shippers, too, reap the advantages of lower maintenance costs. But the real benefit lies in the streamlining of processes, combined with improvements in visibility, that come with cloud-based execution applications. Maybe the technology will finally convince the laggards that a manually generated spreadsheet is no longer adequate for addressing the complexities of transportation management.
Next: New technology in the vehicle.