Fork in the road

Deciding on which TMS is right is often about how much control a shipper wants and how much trust it has in its 3PL.

   On the road from turning manual processes into automated ones, shippers often see transportation management as a first logical step to address.
  
Yet according to industry estimates, fewer than one in three shippers has a transportation management system (TMS), whether installed and managed internally, used on a pay-per-use basis, or provided by a third party logistics provider. That’s despite overwhelming evidence that use of a TMS can reduce transportation spend, contract management, and inventory levels.
  
Why the slow trip towards TM automation?
  
One reason may be that it’s difficult for many shippers to decide on a path that will suit their needs. Shippers that have decided they need to invest in a TMS often face a tricky decision: use a 3PL to provide that platform, or go straight to a software vendor and manage it in-house.
  
Though there are many variables that can affect which route one chooses, the biggest determining factors are company size, how global its transportation network is, and its internal philosophy on outsourcing logistics functions.
  
The options are plentiful, and in many cases, overwhelming. An importer could choose a robust TMS with some global capability and manage the system itself. It could choose a 3PL with its own technology and essentially contract for the system and bundled managed services. It could choose a 3PL to act as a 4PL, operating on top of its self-managed system.
  
None of this is new — the concept of TMS is three decades old, after all. But these tools have evolved to such a stage that there likely is a solution for every shipper. A major global shipper may find itself best suited to a licensed TMS operated by its own staff, while a small, occasional domestic shipper may find its relatively simple TMS needs met by its 3PL.
  
But there are many shades of gray between those two extremes. Shippers of a reasonable size have true choices about how to acquire TMS capability, and none are wrong. It largely depends on whether a company sees logistics management as either a core competency, or so integral to the success of its business that it can ill afford to outsource all or most of that process.
  
The available choices for TMS fall along a clear spectrum of outsourced to self-managed:

• Shipper completely outsources to a 3PL or forwarder.
• Shipper contracts for TMS technology from a 3PL or forwarder, and that 3PL or forwarder manages the system.
• Shipper acquires TMS from a technology vendor, but has its 3PL or forwarder manage the system on its behalf.
• Shipper acquires TMS from technology vendor, and has vendor manage the system.
• Shipper acquires TMS from technology vendor, and manages the system in-house.

  
Which model fits a particular shipper largely depends not just on company philosophy, but on the ability of that shipper to take this process in-house.
  
“Staffing and competency at one end is the determiner of whether a company can make value out of an investment in a TMS,” said Greg Aimi, research director at Gartner. “At the highest end, it’s about not trusting a third party with the volume of delivery. It’s where that company has such a high investment in on-time delivery to their customer, their arrival to their customer is important enough that they’re not trusting that to 3PLs.”
  
At its core, TMS is about two things — planning and execution. Or, to be more precise, planning a transportation move and executing that plan. Viewed in that simplistic light, it’s easy to see how companies evolved to handle those functions manually. But when a company reaches a critical mass of freight volume, or network complexity, it gets harder to ignore the advantages that a TMS can provide.
  
Those same thresholds, however, can also be determiners for which path a shipper should take in terms of acquiring TMS capability.
  
“It comes down to people who are drawn to us likely don’t want to pay for a TMS,” said Robert Burdette, vice president of strategic development at the Baltimore-based forwarder Samuel Shapiro. “We roll in a TMS into our forwarding package, so it’s a bundled arrangement.”
  
Indeed, there is a size threshold after which integrating a TMS, rather than relying on a 3PL or forwarder to provide that, makes economic sense.
  
“If I have 100 shipments a year, it’s not going to work,” said Ty Bordner, vice president of product management and solutions at Amber Road, which provides TMS, visibility and compliance solutions. “That’s not enough volume to get payback from the system. But if I have 10,000 shipments, or 100,000 shipments, and I’m saving $5 or even $100 per shipment, the math starts to work.”
  
Aimi pegged the bar at $20 million in transportation spend. When the spend gets that high, it becomes about the level of control a shipper wants to directly exert over its supply chain.
  
“Some of its structural or perhaps philosophical,” Bordner said. “A company always has to make a bet about where to put their investment. Do I want more control or less control? That’s a philosophical question about the type of company you are. Which fork you’re going to take might be dependent on that. More and more, people are seeing the value creation by managing logistics yourself.”
  

Feature/Function Comparison. There’s one more question to consider: are the features and functions of a TMS provided by a 3PL on a par with those provided by pure technology vendors? Ask a 3PL and you’ll likely get a different answer than you would from a software company.
  
But in conversations with several technology providers and 3PLs that provide their own TMS, this much is clear: few are the 3PLs that can consistently invest sizable portions of their profits back into technology research and development.
  
So if a shipper is looking for a best-of-breed TMS solution to keep pace with its fast-evolving requirements, it might be wise to compare the ability of its chosen vendor, whether software or 3PL, to continually innovate. The logistics technology company Descartes, for instance, says it turns 40 percent of its profits back to R&D.
  
The issue is further clouded by the fact that many, if not most, developers of TMS white label their solution to 3PLs. That means the TMS provided by your 3PL may very well have been built by a technology vendor.
  
But, to make things more complicated, there are forwarders and 3PLs that do systematically invest in technology, and sell that aspect of their business aggressively. Major 3PLs like C.H. Robinson, Transplace, and Odyssey Logistics believe technology is a differentiator for them, and offer robust TMS solutions, along with the managed services aimed at enabling their customers to get the most out of those systems.

  
“The value proposition from those vendors is that for the companies that do this themselves, there’s a high likelihood they won’t take full advantage of their system,” Aimi said. “They can go in and say ‘We are full-time experts in running this system. We can go to optimal in a short period of time.’ And since they’re interested in your renewal, it’s in their interest to perform well.”
  
However, it’s not just major 3PLs that see technology as a differentiator. There are mid-market providers that develop their own IT in-house and believe their niche is providing strong technology, logistics expertise, and customizable services. The implication is that technology providers looking for scale can’t customize to the same degree.
  
“Going the 3PL route allows you to be more flexible with your economies,” Burdette said. “The volume of shipments is how you pay, so the cost shrinks and rises with your success. We saw investment in technology as a way to show we’re not fly by night. Without that trust, it’s impossible to go the 3PL route for TMS or technology.
  
“Our belief is that from a TM and (purchase order) control point of view, our system punches as well as a TMS,” he added. “Where a TMS is better, it integrates into other systems and feeds reporting systems. Now our IT person gets red in the face saying we can provide that back to you in the same way, but we suffer from the feeling that TMS is instantly integrated.”
  

Sophistication Level. Aimi, who is tasked with comparing different systems, said a novice TMS user might not be able to see much feature/function difference between a system from a 3PL and that from a software vendor.
  
“But a sophisticated user would know the difference,” he said. “When you get to be a second or third generation user of TMS, then you’ll notice a difference.”
  
It goes back to how much expertise resides internally. A company eager to tackle the complexities of a robust system may find itself gravitating toward a software developer’s TMS.
  
“If you could have a sophistication index, that would be a help,” Burdette said. “If they are not sophisticated, they should be leaning on a 3PL-style solution. Another crossroads is whether they’re controlled by a parent company. That tends to be a negative signal for us. For those customers, it’s difficult to convince them to use our TMS or (purchase order) system.”
  
Technology vendors will argue that their business is based on investing in innovation, and what is sacrificed for the customer on the customization end is offset by scalability, robustness, and the opportunities provided by multi-tenant, network-based software, as Aimi put it.
  
“This is what we do for a living,” Bordner said. “Perhaps more than a forwarder might be capable of doing. Sometimes the capital needed to build a platform just isn’t there. There are good forwarders out there that are doing good things from a technology perspective, but it stops.”
  
Bordner also noted using a tool from a 3PL might lock a customer into using that provider.
  
“When companies lock into a provider it’s hard to rip themselves out,” he said. “With vendors, you still have to integrate, but you have to have flexibility to say this forwarder is not as great as I want it to be.”
  
Another technology vendor executive sounded a similar word of caution.
  
“Do I think you might get superior functionality from the individual vendor?” Phil Marlowe, president and founder of global TMS provider Acuitive Solutions, said. “Yeah, probably. Are there some significant costs to achieve that? Definitely. To me, it’s the size of the organization, their resources, and their domain expertise. From what I see, companies don’t have all three. In that scenario, I’d say they’re crazy not to go with the providers if they don’t lose price leverage. But anything that will lock you into a provider and makes you lose price leverage, stay away.”
  
Marlowe added the picture is a bit different for international shippers.
  
“On the global side, there’s such a competitive balance with providers, depending on your flavor and how much hand-holding you want,” he said. “If you’re not using them as an NVO, they have no leverage over you. If they tick you off, you can walk away from them and it doesn’t impact how your freight moves. It’s much easier to find and build a good international relationship where your company is reliant on their systems. But if they are your service provider and systems provider, that’d give me the willies.”
  
Jason Nurmi, director of client services at TMS provider LeanLogistics, said that ability to be a neutral source of technology is a key selling point. LeanLogistics, aside from providing the system, also offers managed services. About 12 to 15 percent of customers use the company for managed services, but those same customers account for more than a quarter of the spend managed through LeanLogistics’ tool.
  
“We’re there to be an extension, not to hand it off and say ‘there you go,’” Nurmi said. “We’re there to be participative. You still control your carriers. You maintain control of how your transportation network runs.”
  

Global Difference. How global a company’s transportation network is will have an indelible bearing on how it views TMS. While there are options galore on the domestic side, the choices narrow on the international side.
  
There are the major enterprise-level software companies, the powerhouse TMS vendors, and then those vendors that have ridden the crest of the software-as-a-service/cloud deployment model and tend to focus on the network benefits of their tool. There are also a handful of global 3PLs that have either built their own system or white label a system from a technology vendor.
  
Shippers looking to automate the planning and execution functions on a global basis will inevitably find more complexity than on the domestic front. For one, domestic shippers don’t have to account for the regulatory burdens placed on imports and exports. Second, there are more transport modes to manage for an international shipment. And third, expertise in foreign markets tends to not be as embedded in systems as it is on the domestic side.
  
All of this has led importers and exporters to either handle domestic and global TMS with different systems, or avoid using a TMS for their global legs and focus on the clear efficiencies provided on the domestic side.
  
In reality, most global shippers rely to some extent on 3PLs. According to Aimi, 87 percent of companies currently outsource some part of their supply chains, while 65 percent want to outsource more. Only 20 percent have brought things back in-house in the past year, he added.
  
But Bordner said shippers with truly diversified global supply chains ought to think about whether their 3PLs can truly manage their vast networks.
  
“If you’re relatively domestic, there’s more opportunity to use an outsourced provider,” he said. “The more global you are the issue is there aren’t global 3PLs that handle every region. A smaller company that’s less global, with less volume, it might make sense to go with an outsourced provider. There’s a cost for software. Most transaction-based vendors try to match the cost with the value, but there’s a start-up cost. With the 3PL, that cost might not be all that large.”
  
Burdette said much the same.
  
“If the customer operates in five or more countries —I don’t know what the exact line in the sand is — they’re likely to have their own TMS,” he said.
  
It’s part of a great dichotomy that can create confusion when a global shipper thinks about its investment in TMS: the bigger you are, the more you’re likely to want to control critical elements of your logistics processes; yet the bigger you are, the more global you’re likely to be, and thus more likely to rely on 3PLs to some extent.
  
Whether you lean on a 3PL to provide TMS capability is dependent on so many factors: your company’s attitude to outsourcing; your desire to keep your technology and transportation providers separate; and your drive to house and manage all the data created by the TMS within your four walls.
  
The decision on whether to acquire TMS capability through a software vendor or through a 3PL is not one to be taken lightly, but it need not be a crippling decision either. There’s likely more than one right answer for every company. The only wrong one, particularly for large, globally-minded shippers, is not making a decision at all.