Why IT has become central to logistics and supply chain strategy
Four top industry analysts offer shippers straight-forward insight into the future of the technology that’s become central to driving out transportation costs and indispensable in establishing global logistics plans.
By Michael Levans, Chief Editor -- Logistics Management, 5/1/2007
- TMS: Enhanced capabilities on the horizon
- GTM: Rapid-fire development
- Audit/Payment: The time is now
- RFID: Is the buzz back?
If there was ever a question as to the roles supply chain software and technology are playing in the planning and execution of logistics strategy, any uncertainty was cleared up by Logistics Management's 2007 Software Users Survey. The survey found that a whopping 60 percent of shippers plan to purchase or upgrade their supply chain software in 2007, up from 41 percent in 2006.
Our report reveals that logistics and supply chain technology has never been more "top of mind" for our readers--and we're not surprised. While freight rates have eased in some segments and capacity has "opened up" a bit, shippers are continuing to turn to technology to squeeze new efficiencies out of their current domestic processes, and are wisely applying software investments to get a better handle on new global logistics concerns.
In light of this heightened awareness, the 2007 Technology Roundtable aims to give shippers straight-forward insight into technologies and web services that may have recently popped up on their radar screens now that their supply chains have stretched around the globe--and their CFOs have taken a keen interest in their strategic decisions.
We'll dive into new TMS capabilities with ARC Advisory Group's Adrian Gonzalez; explore the evolution of global trade management (GTM) with AMR's John Fontanella; Aberdeen Group's Beth Enslow will explain why freight audit and payment software is getting more attention than ever; and Manufacturing Insights' Kimberly Knickle looks into how RFID is being applied in supply chains around globe.
TMS: Enhanced capabilities on the horizon
Logistics Management: Is there a "hot" TMS capability that shippers may not be aware of that can make an immediate impact on their operations?
Adrian Gonzalez: I'm not sure if I would classify freight payment as a "hot" or sexy process, but it's certainly an area that many companies are focusing on to reduce costs. Many companies are looking to implement a self-invoicing process, whereby the shipper pays the carrier the rate in the TMS--including known surcharges and accessorials--upon receiving the proof of delivery.
This shifts the audit process to the carrier--a trade-off many carriers are happy to accept in return for getting paid thirty or more days faster. It improves their cash flow, and the shipper eliminates all of the overhead involved in auditing and processing freight invoices.
For a while we were doing a TMS consolidation news story every other week. What should shippers expect to see in terms of M&A activity in the next year?
There will be more M&A activity, but there are obviously fewer vendors to acquire these days. The driving force behind TMS M&A activity will continue to be the same: Expand functional footprint and extend geographic reach. Therefore, I expect the big TMS vendors to look for acquisition opportunities in Europe and Asia, and I expect to see them add fleet management and global trade capabilities via acquisitions as well.
Our recent LM Software User's survey found that 43 percent of the respondents are considering some type of on-demand solution. What advice would you give to shippers moving in this direction for TMS?
Several years ago, when on-demand solutions first came to market, some companies were reluctant to consider them because of security or integration concerns. These concerns are no longer an issue as the deployment model has proven itself with customers of all sizes, across many industries. I'm a big proponent of on-demand TMS because of the connectivity benefits these solutions provide.
In other words, you don't only get a software application; you also get electronically linked to all of your carriers and other trading partners through a single connection to the on-demand TMS provider.
How do you see TMS evolving over the next five to 10 years?
Software vendors are transforming TMS from a fragmented collection of applications to a unified platform where users across the enterprise and value chain can execute role-specific processes via configurable user interfaces, workflows, and web services.
The core of TMS is still focused on transportation procurement, planning, and execution processes. But this core is now enhanced with workflows, enabled by Web services, which extend across other applications, business processes, and users--both within the enterprise and across the value chain. Visibility, event management, and performance management capabilities serve as a platform for real-time process control and continuous improvement.
GTM: Rapid-fire development
Logistics Management: The Global Trade Management (GTM) market has become rather active with Oracle's recent announcement on the heels of SAP's earlier moves. What does it mean to shippers now that the big ERPs are in the market?
John Fontanella: It is a pretty interesting turn of events. ERP companies don't invest in building new technology unless they see a big market opportunity. This is an indication that GTM is top of mind for their customers. And let's not forget that other ERP vendors have also added GTM functionality. QAD recently bought Precision Software, and Infor gained GTM capabilities with its acquisition of SSA Global.
How will shippers need to go about their decision-making process now that the ERPs are competing against the best-of-breeds?
Assuming functionality is roughly equivalent, it all comes down to who can provide your company with the trade content you need to manage a global supply chain. If you have a very complex network of trade routes, you would be best off working with a GTM technology provider that also maintains a database of trade content and practices, including taxes, duties, compliance requirements, and documentation. ERP vendors aren't, and never will be, in the content business. They will generally recommend third party services to provide it. Before making the software decision, find out how comprehensive and current their recommended content providers are.
What new services/capabilities will GTM vendors add to bring improved benefits to shippers?
There are a few things happening that are worth watching. We are witnessing the inevitable integration of Global Transportation Management with ERP. Oracle announced that they will be building out their offering on the transportation platform it received with the G-Log acquisition. Management Dynamics offers GTM along with a sophisticated event management product that can track down to carton level.
The transition companies are making from the letters of credit to buying through an open account process is driving integration of the trade financing process with GTM and Global Transportation Management. TradeBeam was one of the first companies to recognize the close relationship physical and financial supply chains share.
GT Nexus just announced GT Nexus Trade, which allows shippers and financial institutions to track the flow and status of purchase orders, inventory, and shipments globally. This opens up a whole world of opportunity in terms of improving working capital position with creative new financing strategies. To further speed the flow of cash in the supply chain, GXS has just introduced invoice delivery services that ensure compliance with individual company regulations. So a lot is happening, and I expect that the pace of development in this area will become even more rapid.
Over the past year we've reported that some version of a GTM system has become, or will become, a necessity to businesses doing international trade. Any advice for shippers ready to make that move?
If your company is consolidating around a common ERP system, your first move is to look at what that vendor has to offer in terms of GTM. As I said before, functionality as well as availability of trade content quality should top the selection criteria. For those companies willing to evaluate best of breed software right away, don't forget that some of the ERP vendors do sell their GTM offerings as standalone. Evaluate them, though, through a head-to-head comparison with the independent vendors.
How are on-demand vendors viewing the GTM segment?
On-demand is a model that makes sense for GTM, and we will be seeing more in the future, particularly as integration with transportation systems becomes tighter. It is easy to envision that most vendors will offer GTM services either on demand or as an application installed behind a company's firewall.
Down the road, what do you see as the key value proposition of an on-demand GTM?
Reducing cost of ownership and eliminating much of the expense of integrating with partners are two of the main considerations. Plus, on-demand applications generally are much faster to implement. Over time, almost any company with a supply and distribution network of any size will be using on-demand services. The providers of GTM technology recognize this and are, or should be, working to develop this on-demand capability.
It's important to realize that on-demand can be defined in several different ways. While commonly thought of as a single application that services many customers at once, corporations can and do provide on-demand services as a shared service to their own operating units and trading community.
How do you see GTM evolving over then next five to 10 years? Where do you see the capabilities and subsequent benefits heading?
I think we'll see much more integration of GTM with transportation, sourcing and procurement, and financial management systems--with functionality designed to take advantage of and complement each other. Functionality will almost certainly be network based, with the appropriate information available to all parties concerned. We'll see GTM as much more than a tool to meet compliance requirements. Instead, it will become a central part of the strategy to build differentiated and competitive supply chains.
Audit/Payment: The time is now
Logistics Management: Improving transportation procurement, freight audit, and payment practices have become hot-button topics in the past year. Your recent research shows us that a majority of companies believe that this is the year to improve transportation procurement, as well as their payment practices and systems. What are the key drivers pushing shippers to re-focus on this area?
Beth Enslow: Rising freight costs are clearly the top pressure driving companies' renewed focus on transportation procurement and payment. In 2007, with freight rates starting to soften for some transportation modes, the majority of companies believe this is a great time to review their procurement and freight audit and payment practices and technology. Companies believe they can save an average of 8.8 percent on their overall freight budget with more sophistication, and this is backed up by Best-in-Class results.
With that in mind, what steps are shippers taking in terms of applying software/technology to improve procurement processes?
In the last few years, transportation carriers have upgraded their internal technology to better identify profitable and unprofitable customers and raise rates accordingly. Now we're seeing shippers make similar investments so that they can maximize rate competition and encourage carriers to make more innovative bids. Transportation spend analytics, bid optimization tools, and online RFQ systems are helping shippers drive down their costs even when overall industry rates are rising.
What do shippers need to keep "top of mind" when they're using technology to improve their procurement efforts?
Use technology that makes it easy for carriers to better match your freight with their network capabilities, thus enabling them to provide a lower price on the freight that fits best. For instance, companies that have been able to reduce their freight rates since 2005 are 1.6 times as likely to let carriers re-bid and 1.7 times as likely to use multiple bidding rounds with carriers. Look for technology that supports these methods and that also helps you do apples-to-apples comparisons of responses--the results that drive the best savings can often be surprising.
What kind of savings are shippers hoping to achieve by becoming more aggressive in their use of freight audit/payment technology?
Companies are focusing on reducing manual payment processes and enhancing online collaboration with carriers for invoice exception handling. The savings comes both from avoiding overpayment on shipments as well as creating freight spend reports that can be used by procurement for spend analysis and bid preparation activity. This can help the company negotiate better rates and more favorable accessorial charges.
A vital but often overlooked benefit is that accurate cost allocation information from a freight payment system can prevent a ripple effect of improper decisions in pricing, product investment strategies, distribution network design, and sourcing strategies. As transportation expenses have become a greater percentage of the cost of goods, accurate costing is crucial.
In terms of improving freight audit/payment, any advice for shippers who are trying to decided if they should outsource or move it in-house?
Companies currently outsourcing or considering outsourcing are doing so because (1) they lack internal expertise in auditing the complexity of freight bills, including all the accessorial charges, and (2) they view the activity as draining staff productivity. However, slightly less than half of current outsourcers say their objectives have been effectively met in their outsourcing relationship. Companies want better quality information and more flexible reporting from their outsourcing providers. This tells us that if you're considering outsourcing, you should pay close attention to whether the provider has a technology backbone that supports online status and flexible, real-time reporting.
Can you give us a snapshot of what "best-in-class" shippers have done with software/technology implementation to improve procurement, payment, and freight audit?
The most important action for companies to take is to centralize transportation procurement--companies overwhelmingly cite centralization as having the greatest impact on their ability to reduce transportation costs. Technology helps arm you with better data and analysis so you gain that next level of savings. In the next twenty-four months, fully 81 percent of companies with freight spend over $25 million plan to implement new transportation procurement or payment technology, as well as 44 percent of companies with spend under $25 million. Best in Class companies have successfully reduced their freight rates an average of 8 percent, and they are more likely than their peers to be using procurement and payment technology already.
RFID: Is the buzz back?
Logistics Management: Last year we proclaimed that the RFID buzz was dying down because the mandate news had "softened" as many companies failed to justify ROI. A year later, where do you see RFID project implementation on the "Buzz Meter"?
Kim Knickle: I would say "high" only because I'm looking at the amount of interest there is in understanding exactly how companies are using RFID. Companies are now looking to get down to the details of how to make RFID work to solve a business problem. On the downside, there are still a relatively small percentage of companies using RFID today, though we continue to see increasing adoption of the technology.
You recently completed a survey of RFID implementation in Western Europe, Asia, and the U.S. Did you find that objectives for RFID vary by region?
Yes, we did find the three regions are behaving differently when it comes to the amount of spending on RFID, project objectives, and benefits (achieved or anticipated).
The U.S. overall is spending the most on RFID today, but that's deceptive. It's important to realize there are big spenders on RFID around the world. More than 10 percent of our responses indicate spending of more than $500K in 2007.
Which vertical industries are adopting the most quickly?
We're seeing a few industry segments moving forward with RFID, and I'd group them into three basic categories. First, we have the mandate-driven group, primarily consumer products manufacturers and retailers. Second, we have the companies who can pass on their RFID costs, use it as a selling point, or satisfy customer requests like the 3PLs. And finally, we have companies with high-value items, primarily consumer electronics at this stage.
What are the primary benefits companies are realizing?
Our research showed us that the top three benefits companies are achieving today with RFID are compliance with customer mandates, reduction in labor costs, and a reduction in inventory. In the future, the expected benefits are reducing inventory, improving customer service, and reducing labor costs.
Based on your findings, what insight can you share with logistics and supply chain managers who are working on an RFID implementation projects in their supply chain?
We can gain tremendous insights from learning the RFID project objectives companies set up at the outset. While they don't provide a measurement of success, they do help us understand how companies are justifying the investment in the first place.
Our work showed us that the top objectives are improving asset management, track and trace, and supply chain visibility. Our results for the top three objectives make sense when you go back to the three groups adopting RFID the quickest--the mandate-driven, RFID costs-sharing, and high value item-producers.
Is there a snapshot of what a "best in class" company has done in terms of setting up an RFID enabled global supply chain?
We've seen some very advanced uses of RFID in the supply chain, so I think there are definitely companies out there that are "best-in-class," or very near that mark. They have a few things in common, including using RFID to rethink how they do things, not just for incremental improvements. They also are willing to keep their options open, trying RFID in multiple processes and multiple projects. And lastly, they recognize success may be very small in some projects, more visible and quantifiable in others--but that they are definitely achieving positive benefits in the long run.
Where do you see global RFID implementation and spending over the next five years?
I'm very skeptical of predictions in such a new market, so I will give you the quick answer: In the next five years the number of implementations and the amount companies are spending on RFID is going up--slowly, but steadily up.
Companies will gain more familiarity with the technology and how to apply it over the next few years, and more maturity on the standards and technology front will also help quicken the pace of adoption.
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