Not an Automatic decision
Transportation procurement has come a long way but still has far to go.
Online auction Web site eBay has been around for more than a decade, plenty long enough to engrain into society the idea of bidding in an electronic environment.
But the idea of auctioning freight transportation services in such an environment remains elusive in most modes.
While the concept of automated procurement ‘ which includes, but is not limited to, bidding and awarding transportation services via purely objective online auctions ‘ is pervasive in modes like domestic truckload, there isn’t a lot of similar activity in modes like ocean freight and rail.
Whether automated procurement is prevalent in a certain mode often boils down to a couple key factors: the level of competition, and the strength of shippers versus their service providers.
High levels of competition (re: fragmented markets with few key large players) and (buzzword alert) ‘substitute-ability’ are clear indicators that e-procurement acceptance levels will be high. Alternatively, in modes where a cadre of large players dictates how service contracts will be negotiated, e-procurement acceptance levels will be low.
A note of caution: It’s neither fair to say shippers alone are driving automated or e-procurement initiatives, nor that transportation service providers in any mode are hindering their development. But in speaking with supply chain consultants who see the process in a neutral way, American Shipper found it’s clear that e-procurement ‘ and procurement bidding auctions in particular ‘ is far more prevalent in certain modes.
senior vice president of advanced sourcing,
|‘The trend is going away from mode-specific applications.’|
‘Automation is certainly a term that could be defined in a range of ways,’ Chandler Hall, senior vice president of advanced sourcing for BravoSolution, told American Shipper. ‘It’s not automation in the way you’d think about in a warehouse or a plant. It’s more about making the procurement process more efficient.’
Hall said there are two levels of automation beyond ‘basically using phone, fax or nothing at all to go through the rate collection and negotiation process.’ One is using basic e-sourcing software to manage the data and ‘ideally enforce some integrity in the process.’
But the second, higher level of automation ‘would do something more tailored to the mode, the region, and the priorities of the shippers and carriers to get dramatically better results for both parties.
‘To me, there’s not much difference between using a generic e-sourcing tool and passing spreadsheets around. The more advanced companies across all modes are seeing the benefits of transportation-specific tools.’
Rachel Rutkoski, senior category manager for transportation and logistics for Accenture, said to American Shipper that employing e-technology can enhance the supply chain procurement process.
‘You can use a software program to take complexity out of the process,’ she said. ‘If I’m moving cargo from New York to London, I can run an event and collect pricing information via a forwarder, direct to steamship, or via air cargo. It will tell me what the best solution is.’
That includes incorporating specifications a shipper requires, like a time constraint.
|‘ Adoption levels of e-procurement vary depending on mode, and all but the largest shippers will likely find it difficult to sway transportation providers to use their preferred procurement platforms.
‘ Shippers should be cognizant that ocean carriers tend to dislike automated procurement processes that portray their offering as commoditized. .
‘ Automated procurement in truckload is pervasive due to fragmented market and high competition levels, which does not exist in other modes. .
‘ Trend is for shippers to increasingly bundle multimodal and domestic/international buying decisions.
‘It takes away the complexity of an overflow of worksheets,’ she said. ‘The software does it for you.’
One notable shift in the last 18 months is that overall adoption of automated procurement is on the rise. The most recent annual American Shipper benchmark report on automated procurement, 2010 Transportation Procurement Benchmark Study: Leveraging Automation to Manage Market Volatility, found that manual procurement had dropped from 60 percent in 2009 to 40 percent as of July 2010. The next procurement benchmark report will be released in June 2011. At the midpoint of those two reports, plenty is happening in the e-procurement arena.
‘Close to 40 percent of buyers manage procurement manually, while 30 percent leverage a procurement application of some kind,’ the report found. ‘Twenty-eight percent use a mix or hybrid model, which probably varies by mode or geography.’
The report covered all modes, using survey results from 200 transportation buyers and sellers about their practices, processes and technologies used. Crucially, 70 percent of the report’s so-called ‘winners’ ‘ that is, the top 15 percent of respondents who successfully kept rate increases in check and effectively measured the price, service and risk associated with transportation providers bids ‘ automate their transportation procurement function.
Though Hall pointed out that automation can be defined many ways, American Shipper, in its benchmark report, clarified that ‘automated’ does not mean a task is managed without human interaction, but rather that a company is employing a substantial amount of technology to support its transportation buying process, allowing staff to interact where necessary to solve problems and optimize the process. Alternatively, ‘manual’ doesn’t mean the procurement process is managed without the use of computers, Internet access, or other fundamental business tools. It’s merely assumed that companies managing procurement manually employ spreadsheets and other support tools.
Acceptance Levels. That different stakeholders are keen to employ technology to smooth out supply chains is undoubted. But again, when it comes to automated procurement, the difference in acceptance levels is notable among the different modes.
Rutkoski said the composition of the ocean carrier industry, for instance, means that carriers can exert their will over most shippers when it comes to the use of e-procurement.
‘When you do have a few carriers that make up a large part of the market, they can be influential over shippers,’ Rutkoski said. ‘They can dictate some of the processes (as in the parcel industry). When there’s not a viable substitute available, shippers have to play by their rules.
‘In the forwarder market and truckload market, there are viable options and if one provider throws up a roadblock, you can go to another,’ she said. ‘That’s why ocean freight and parcel have been the anomalies and they have their own distinct rules. They can say, ‘these are our rules and we play by them.’ If you don’t use ocean freight, you have to use air freight, which is not an apples-to-apples comparison. It’s a higher cost.’
The truckload industry provides a marked contrast.
Rutkoski said it’s easier there for shippers to switch providers, so individual carriers aren’t as engrained within shippers’ organizations as in other modes.
‘In truckload, a lane is a lane, with the same equipment type,’ she said. ‘With truckload carriers, we’ve seen the highest usage of e-platforms. Truckload and then LTL (less than truckload), though some LTL carriers have a policy against procurement auctions. There are 20 or so major players in the LTL market in North America, so it’s not as fragmented as truckload.’
Meanwhile, Rutkoski said rail is ‘its own unique arena. There are regional monopolies, and typically negotiations are handled face-to-face and change with market conditions,’ she said.
As a comparison, Rutkoski said roughly two-thirds of truckload negotiations (where Accenture is involved with the shipper) are managed via e-procurement auction systems, while e-procurement auction usage in ocean carrier negotiations is virtually non-existent.
‘The difference in ocean freight is auctions,’ she said. ‘Ocean carriers will use e-technology, but where there’s an aversion is with online dynamic events (like an auction) ‘ anywhere there’s real-time feedback where other carriers are also getting real-time information.’
Hall, however, does not necessarily endorse procurement auctions, saying ‘it tends to accelerate those violent up-and-down swings in price and destroy service levels. In terms of auctions, I think there’s a very, very limited opportunity in transportation. There should instead be a focus on smoothing the peaks and valleys and a focus on service and value.’
And he added that adoption levels for service providers can vary by the geography of the shipper.
‘Ocean freight providers are reticent to automate relative to truckload, but it also depends on where you are,’ Hall said. ‘In North America, the truckload industry will make the ocean industry look bad (in terms of e-procurement adoption), but if you look globally, ocean would make the truckload industry look bad in say, South America.’
Spotlight On Ocean. Hall said he sees a couple of paths shippers are taking in ocean procurement.
‘There are some shippers who have taken that automation step, but they’re doing it using ocean-specific platforms,’ he said. ‘There are a couple applications that are ocean and ocean only, but I’m seeing companies saying ‘we don’t want to have this tool for this mode, and that tool for that mode.’ The trend is going away from mode-specific applications.’
By integrating tools that are not mode-specific, shippers can then see more options available to them.
‘Depending on what they’re shipping and from where they’re shipping it, modes are more substitutable than they might have thought,’ he said. ‘Where ocean is a little more unique is in the fact it’s a global mode. That, in and of itself, has driven adoption of technology faster than in other modes. If you’re just sourcing truckload, it’s quite a bit simpler than ocean. U.S. truckload is very straightforward. There are a lot of suppliers, but it’s simpler to address.’
Ocean carrier adoption of e-procurement is a fascinating topic, particularly as the liner industry has in recent years taken a shine to technologies that eradicate administrative costs. But carriers are also reluctant to adopt processes that might be seen to commoditize their industry.
In addition, ocean carriers enjoy a large degree of clout over all but the largest retailer and manufacturer shippers, meaning they can essentially refuse to play ball on e-procurement initiatives that run counter to their own strategic aims, even if that’s the preferred way for their customers to negotiate contracts.
‘The use of an auction is not always driven by carrier behavior,’ Rutkoski said. ‘It can be affected by market conditions, or a shipper’s relationship with its incumbent carrier. There are a lot of reasons that can drive use of procurement auctions.’
Carriers in all modes often decry auctions for providing the appearance of a level playing field when one doesn’t actually exist.
‘We hear from the carriers that it’s commoditizing their service ability,’ she said. ‘There is some hesitation that the price might be disclosed to the marketplace. But 90 percent is ‘you’re commoditizing my service offering.’ ‘
But Rutkoski argued there are distinct advantages for both sides in moving to an auction-based transportation negotiation process.
‘From the shippers’ perspective, it brings fairness and equality,’ she said. ‘You’re judging all carriers the same. It eliminates subjectivity in an award process. For the carrier, it shows flexibility. It shows the new client ‘I’m willing to play by your rules.’ ‘
But automating procurement doesn’t necessarily just mean using electronic procurement auctions. It’s more about taking a holistic view of supply chains and making buying decisions based on what’s best for the total journey, not an individual piece of that journey. So saying that automated procurement levels are lower in ocean freight is not to say that shippers and ocean carriers are not using information technology to inform their decisions.
One aspect affecting these interactions is whether shippers deal directly with their transportation service providers or whether they use forwarders, and how best to integrate e-procurement.
‘International ocean freight is a good example of where companies will work with freight forwarders, ocean carriers or some hybrid,’ Hall said. ‘Does it make sense to pick one or two forwarders to manage end-to-end? Or do I manage it myself, or does a hybrid where there are some trade lanes where I’m a big enough player in some port pairs to manage things myself? With optimization, you can look at those options, and whether a change makes sense, rather than just going at it blindly.’
Threat To Forwarders? Hall doesn’t think e-procurement platforms represented a threat to forwarders or 3PLs ‘ who ostensibly strive to provide some of the same services that e-procurement and optimization software provides.
‘There could be some threat to forwarders who aren’t well positioned,’ he said. ‘But if you look at ocean, capacity is hard to come by. While technology and the ability to automate the operational part of the process is useful from an efficiency aspect, it can still come down to relationships in terms of getting that container on a ship. That’s not something technology will solve. Technology doesn’t necessarily deal with the exceptions as well, and it doesn’t give the shipper the experience to deal with those issues.’
Hall also said the expected technological sophistication of some transportation providers may well be overstated by shippers.
‘In terms of being able to respond, there’s a perception that some of these suppliers are more sophisticated than they really are in terms of determining their costs and knowing their capacity,’ he said. ‘A lot of the focus is on the shipper side, and it’s done with the expectation that suppliers are able to respond to these RFPs (requests for proposal), but it’s not necessarily the case. I see more and more attention being paid to the supplier side in terms of where automation and procurement go from here.’
As for other modes, Hall said bulk rail technology adoption is ‘negligible to none, especially in terms of that secondary tier of automation that’s more sophisticated.’ Automated procurement in multimodal rail ‘is on a par with truckload, because they are substitutable for each other. Shippers will look at their service needs versus price and optimize accordingly.’
Less-than-containerload procurement is more complex than full containerload procurement, he said, leading some companies to ignore the benefits of automated LCL procurement because they might see the gains as financially insignificant.
‘If a company spends $100 million on FCL and $10 million on LCL, it might be missing a 1 or 2 percent opportunity,’ he said. ‘That may just not be a big enough deal for a company this size to worry about.’
In general, Hall said, the bigger the company, the more it will tend to be amenable to automation.
Getting back to the idea that automated procurement need not only mean e-bid auctions, the American Shipper benchmark report on procurement found that ‘automated buyers demonstrate a more balanced approach to considering all aspects of a carrier’s bid. Forty-seven percent of automated buyers rank price as their largest concern, while service levels register a close second with 42 percent of the population. The spread is far larger for manual buyers, with 40 percent more favoring price.’
That speaks to Hall’s notion that e-procurement is about more than merely finding the lowest price among bidders.
Yet, ‘baseline pricing (83 percent) remains the most widely available and utilized tool that automated buyers have at their disposal,’ the report said. ‘Volume coverage/commitment (74 percent) functionality has surpassed historic cost visibility (72 percent) and bid optimization (66 percent), which may not be all that surprising. Price is still king and baseline pricing is clearly a price negotiation tool. But service, whether it’s the capacity or the reliability or speed at which it moves, has become a burning issue and a close second priority for many.’
At the eyefortransport European 3PL Summit in Brussels in November, John Manners-Bell, chief executive of Transport Intelligence, asked whether shippers’ management consultants were responsible for hindering innovation among logistics suppliers via their procurement practices.
Consultants are often assigned to devise supply chain structures, he said, and only bring in the logistics supply-side at the end of the process.
‘By the time a request for quotation had been received by the logistics provider, the opportunity for them to add value has gone,’ Manners-Bell said. ‘Instead it comes down to competing on a ‘cents per kilo’ basis, with the lowest bidder winning. For the logistics industry, real value can only be achieved if the logistics provider can get to the client early in the sales cycle and demonstrate that it has the necessary knowledge capital to create an optimal solution. This is a far cry from the reactive (request for quote) factory approach and needs a high caliber of talent few companies can deploy.’
Next Step. What may be the next step is using e-procurement to influence end-to-end buying patterns ‘ that is, rather than navigating different negotiating cultures in each mode, shippers may seek to homogenize their entire buying structure using technology.
‘Another trend in procurement is linking it with other aspects of the supply chain,’ Hall said. ‘It’s certainly a trend we see some of the bigger companies wanting to do. But that’s a big challenge to some of the e-sourcing technologies out there. The basic ones aren’t integrating with TMS (transportation management system) or WMS (warehouse management system) or ERP (enterprise resource planning) systems in any way. Their goal is to link with audit and accounts payable systems, making sure things get paid for.
‘Companies are looking to take that step ‘ it’s a challenge right now. E-sourcing platforms might not link to these other systems and e-sourcing platforms built into TMSs and ERPs might not be best in class.’
As far as integrating international and domestic procurement, Hall said that too is a mixed bag.
‘We certainly see companies who aren’t doing that, but we also see companies that have been doing this all along,’ he said. ‘It goes back to whether a company uses a forwarder versus an ocean line. Companies working with ocean lines directly are much more likely to be separating international versus domestic. I’d argue they should be looking end-to-end either way.’
He said e-procurement allows shippers who want to deal directly with ocean carriers to compare their port-to-port rates and service to those in a more bundled end-to-end service.
‘Dwell times in ports, transshipment implications. These are things that go way beyond that first tier of automation,’ he said. ‘It takes way too much manpower if you’re not using that second-tier tool. And the advantage in looking end-to-end is you have options. If there’s a problem with one port, you can look at other routes, and then you’re starting to address risk and how that affects procurement.’