Michael Hampel was frustrated with his error-prone shipper-carrier communication system. The corporate logistics manager for Atlanta-based PM Global Foods, which ships beef products around the globe, found the system of faxes and phone calls he was using to be slow and unwieldy.

"With our manual system, phone calls weren't returned, people didn't get their faxes, and the bills of lading were full of errors," says Hampel. Three years ago, he decided to address those problems by using the "GTN" Internet-based communications network managed by GT Nexus of Alameda, Calif.

GTN links ocean shippers and carriers, but it's much more than a glorified Yellow Pages. The site also offers shipment tracking, freight consolidation, logistics management services, and trade compliance and documentation capabilities. Hampel uses GTN's templates, already populated with information supplied by both the carriers and PM Global Foods. The carriers pick up the transaction fees, so it costs Hampel nothing to use the site.

The switch from manual to automated communications resulted in a 30- to 50-percent improvement in efficiency that delivered annual savings of $150,000. Although that might not sound like much, it's a big gain for a smaller shipper like PM Global Foods. "The efficiency knocked five days off our 30-day invoice. That's good money to the CFO of the company," Hampel says.

Welcome to the new world of logistics exchanges functioning as collaborative networks.

Not long ago, shippers began using special Web sites, known as "exchanges," to select carriers and assign loads, often through an auction-style bidding arrangement. But they soon became uncomfortable with tendering loads to carriers that weren't well known to them, especially as their need for high-quality service and their concerns about security increased. For their part, carriers did not like to participate in online auctions, where their rates could be undercut by the lowest bidder.

Hence the advent of private exchanges, which offered shippers the ability to connect with a selected group of carriers that they trusted. The main benefits of private exchanges were that they automated the process of assigning loads to preferred carriers, then tracked those carriers' delivery performance.

Logistics networks represent the latest stage of development for this online technology. These days, many shippers are showing more interest in automating their communications with service providers and their information management processes than they are in finding inexpensive spot-market opportunities for shipping cargo. As a result, many (but not all) exchanges have recast themselves as more sophisticated networks that deliver a collection of dollar-saving services, such as automated advance shipment notification, cargo tracking, digitized documents, and machine-to-machine order information.

Although they basically function as a central data depository, networks are more complex, allowing users the flexibility to manage that data and to determine who gets access to particular information. They can deliver "hosted" software applications, such as transportation management systems, online. And they are better than the early versions of exchanges at integrating data between multiple computer systems.

For some network providers, the word "exchange" conjures up negative connotations from the dot-com bubble days, when the industry overflowed with MBA dropouts touting vaporware. With today's emphasis on business services that provide tangible, quantifiable results, most executives and analysts prefer the term "network."

"When you talk about logistics exchanges, it brings people back to the late 1990s and 2000, back to the dot-coms. What you're seeing now is logistics networks," says Adrian Gonzalez, director, Logistics Executive Council with ARC Advisory Group in Dedham, Mass.

" 'Network' is the fashionable word now," agrees James K. Davidson, chief executive officer of NTE Inc., a ground transportation network in Oakbrook Terrace, Ill. But it's more than just a fashionable buzzword, he believes. With its wide range of services, NTE is far from what used to be called an exchange, he says. "We created a network between shippers and carriers, vendors, and suppliers. The network includes purchase orders and the negotiations for those purchase orders," he explains. It also can facilitate EDI or Internet transactions, and data from the network is integrated into users' TMS or ERP systems, he adds.

Gonzalez notes that some exchanges evolved into networks that behaved more like transportation management services, offering hosted software applications. The hosted TMS model includes companies like LeanLogistics, Elogex (now One Network), and Nistevo.

Not everyone prefers "network" to "exchange," though. "I'm a holdout on the term 'exchange,'" says John Fontanella, vice president of research in the Supply Chain Practice at AMR Research in Boston. "Everybody else saw exchanges as auctions and spot markets, but the trend toward private exchanges was obvious three or four years ago."

If there's one standout characteristic that distinguishes networks from simple exchanges, it's their ability to provide greater security and privacy. "It's not that they're just private exchanges. It's that they can let customers view some of the data, and they can keep sensitive data behind their firewalls," says Art Mesher, executive vice president of corporate strategy for Descartes Systems Group Inc., a network provider in Waterloo, Ont. "Every company has private, semi-private, and public information, and this system accommodates the differences."

Shippers' concerns about both data and cargo security, in fact, are a major reason why more companies are implementing networks these days. Some networks, such as the one developed by Descartes, can be configured to follow the users' own business rules and security requirements. "Our customers have their business rules and their own security, and their customers and suppliers also have their own systems," says Mesher. "Our role is to provide a clean and elegant connection to their systems and to the systems of their suppliers, freight forwarders, and customers."

The federal government's push for enhanced cargo security, including last year's introduction of the 24-hour manifest rule, has also prodded a number of global shippers into automating data and communications, say vendors. That rule, which requires carriers to inform the Bureau of Customs and Border Protection about the contents of every shipment 24 hours prior to loading a container on board a U.S.-bound ship, has moved up shippers' deadlines and made accuracy more important than ever. "The 24-hour rule compressed what needed to be done and made automation more important," says John Urban, president of GT Nexus. "Suddenly mistakes became intolerable."

Still, some shippers remain uncomfortable with a model that leaves certain data in a system that's controlled by an outside vendor. Industry experts, however, say such worries are exaggerated. "After looking at hosted providers, I can make a strong argument that a hosted service has better security and backup than most internal corporate services," says Fontanella. He notes, however, that trust is still a critical factor, even if hosted technology is safe. "There has to be fundamental trust" in the technology provider, he says.

Security concerns notwithstanding, logistics networks are attractive to many shippers for other reasons. For one thing, they make collaboration with external partners easier. "You could argue that by leveraging a hosted environment, you are better situated to facilitate collaboration with an existing carrier group," says Gonzalez. "Transportation management and logistics involve so many parties that you have to connect many entities. So it helps to plug into a network."

Networks can make it possible for shippers of all sizes to collaborate more effectively with their carriers. Cindy Stoddard, chief information officer for ocean carrier APL, says the GTN network has made it easier to do business with smaller companies. "Now we can reach customers who do not have EDI (electronic data interchange)," she says. "The customer can make one connection and reach a number of carriers."

Most companies, moreover, still implement networks as a way to essentially outsource transportation management. "Transportation does not get a lot of spending, so it's an ideal model for outsourcing," says Fontanella. Not every shipper, though, has the inclination to outsource. "Companies that don't like to outsource don't like the [logistics network] model," he observes.

Networks have yet another advantage: They are easier on a shipper's pocketbook than buying, installing, and maintaining multiple applications. Not only can shippers book their transportation IT costs as an expense instead of a capital investment, they also can pay as they go, avoiding long waits for a return on their investment.

Network providers say their pricing systems aren't complicated. "Pricing is easier than you would think," says NTE's Davidson. "We have two prices, one for integration and one for implementation. One is a cost to connect to your system; the other is a transaction fee."

In other words, shippers typically pay a subscription fee as well as a fee for each transaction. An important aspect of network pricing is that when times are good and activity is up, users pay more. "We created a variable cost structure," says Mesher. "We align our pricing with units of work [users] are doing, whether it's moving trucks or paying license fees."

Although transaction-based pricing is making logistics networks very attractive in these economically tough times, the main reason shippers are turning to these systems is to improve their productivity and reduce operating costs.

Shippers are finding that networks can help them do that in several ways. They make connections to carriers and trading partners faster and more efficient. They allow trading partners to share information quickly and easily while still protecting proprietary and confidential information. They can integrate external information into internal systems like an enterprise resource planning (ERP) program. They cut transportation costs and make shipment monitoring simpler. And they provide the benefits of sophisticated transportation management applications at a reasonable price—and with relatively little effort on the shipper's part.

In short, logistics networks can make it a lot easier for shippers of all sizes to cost-effectively manage their businesses in today's complex world.