A primer on the mainstay software of freight transportation
Considering that supply chain accounts for 8% of US GDP, I’ve found few, if any objective primers on the mainstay software of freight transportation, the Transportation Management System (TMS). The TMS was first developed in the 1980s and today is a mature product category with a variety of players, including MercuryGate, Decartes, JDA, SAP, Oracle, IBM Sterling, TMW, and McLeod. The TMS exists to enable the transportation of goods between trading partners, namely shippers, carriers, and brokers, in a more reliable, cost-efficient, and service-centric manner.
Breaking It Down
A TMS is not subjected to just one type of freight and can be used for full truckload (FTL), less than truckload (LTL), intermodal, international, ocean, and air cargo. By consolidating all work streams associated with moving freight into one digital interface, users are given a holistic view into their entire operations workflow. To note, I’m focused on surface transportation-oriented TMS systems but their cousin, the Global TMS, helps coordinate ocean and air freight movements as well.
In surface transportation, there are three key parties who leverage a TMS - the carrier (like Knight-Swift), the shipper (for example, Dollar General), and the broker (think Coyote Logistics). The broker might not be party to every transaction but over one-third of spot loads are brokered in North America.
As Eric Rempel, CIO of Redwood Logistics outlined on Episode #20 of the Future of Supply Chain podcast, the core functions of a TMS fall into five key areas:
Planning starts with determining a budget for transportation spend and involves developing a strategy to move the goods at cost effective rates. At this point, a shipper solicits bids from transportation providers (carriers and brokers), also known as load tendering. The TMS helps categorize the results and creates a specific routing guide for each lane. Higher volume lanes are typically agreed upon at a contract rate, whereas lower volume and volatile lanes (seasonal) are assigned as spot rates. A spot rate is the price a carrier offers a shipper to move a load from point A to point B at a particular point in time and is based on current market conditions. Contract rates vary in that a carrier will move freight for a shipper over an agreed upon time frame, typically a one year period.
Operational Execution focuses on visibility, both internal and external, especially as a shipper or 3PL with decentralized operations. The TMS enables the determination of API and EDI connectivities between marketplaces, and getting the load ready for transport. A TMS will display tasks which require completion such as filling a load and updating the CRM, amongst other things. Operational data is stored within the TMS and can be used to improve inefficiencies.
Performance Management focuses on the key KPI’s across the broker, shipper, carrier internal and external operations. This includes but isn’t limited to performance metrics for employee management and development. The KPIs also serve as a primary way to assess financial performance across a given period of time.
Settlement comprises reconciliations around expected rates and invoiced rates, closing out of a load, and verifying payments. TMS settlement capabilities remove the need for manual accounting and transaction processing, creating an automated and expedited closed circuit from shipment to settlement.
Reporting is the last step and stores the information in the TMS for analytical reports or settlement disputes. Primary TMS reports center around trend analysis for costs and service, metrics by carrier, shipper, supplier, product, and cost savings across various modes.
The Needs of Key TMS Users
As mentioned previously, there are three groups who leverage a TMS, the shipper, carrier, and broker. Depending on the vendor, their software can address the needs of one or more of these parties.
A Shipper TMS will usually:
- Automate freight payments to carriers, helping reduce the aspect of human error
- Automate carrier assignment, eliminating the time spent manually sifting through carriers who fit the load profile
- Integrate with the ERP and ordering systems to provide full understanding of the landed cost of goods and ensure 100% order accuracy while also empowering an easy and fast transmission of data
- Monitor carrier compliance to mitigate risk and ensure end customer satisfaction
- Enable real time shipment data and in depth analytics for identifying trends across freight activity
A Carrier TMS will usually:
- Ensure drivers are paid while verifying the accuracy of contents for a particular load through settlement capabilities
- Unlock new delivery abilities by finding backhaul opportunities, optimizing capacity and reducing empty miles
- Enable driver payroll functions across various payment structures (per mile, per pallet, etc.)
- Allow for real time management of assets
- Enable automatic bill of lading and managing of claims, helping to reduce overcharges and provide shippers with accurate invoices.
- Expedite and automate document management/ reporting by scanning and storing all documents like insurance paperwork and broker/shipper documents. It’ll also generate automatic reports helping carriers understand freight costs, volume, and inefficiencies across the supply chain
- Provide real time location tracking to quickly locate shipments and eliminate the need for driver calls
- Quickly create spot quotes for shippers with a last minute transport need
A Broker TMS will usually:
- Assess incoming procurement and outbound shipments and optimize for the most efficient routing options
- Schedule load pickups, plan dispatch to carriers, and provide end-to-end load tracking
- Allow for an understanding of carrier performance to ensure the carrier chosen is reliable and reputable
- Provide vendor/shipper compliance solutions to hold vendors accountable and ensure the brokers reputation as a good steward of business
- Host an operating platform for internal users to manage customer/carrier transactions
Putting it All Together
Freight management is a hard business- margins tend to be slim and operations have their own unique complexities as one navigates the physicality of moving freight across different locations, with different parties, and with requirements that stress both time and cost. The TMS has digitized a workflow across small and robust operations that has historically been reliant on phone, email, and spreadsheets. Now, there’s a push to optimize work streams across a network regardless of who you are or what platform you use. Some examples include:
- Having an understanding of spot freight rates across the market
- Aligning the shipper and carrier on service level guarantees and providing real time visibility on performance of contract freight
- Minimizing deadhead among dedicated fleets and private fleets to ensure high return on assets
- Increasing margin per employee by removing unnecessary manually process like double data entry or calling a trucker for their location
- Proactively managing delays at warehouses, crossdocks, and transload facilities
Across the board, there exists off the shelf and proprietary systems, causing a TMS to vary in cost from free to millions of dollars per year depending upon complexity. Those using a TMS increased cost savings on average of 8.5% on freight costs and a study executed by Supply Chain Digest estimated an annual cost savings on freight of 5-15%. A study from Gartner found companies with a $100M freight spend have a 50% TMS adoption, those spending $25M-$100M have a 25% TMS adoption, and those spending less than $25M on freight have roughly a 10% TMS adoption. We suspect that TMS penetration will increase and the long tail will lead adoption as they see the leverage it provides in a competitive environment that values price transparency, speed, and superior service.
Thanks to Mark Ford, Peter Rentschler, Anshu Prasad, and Barry Large for their feedback.
September 8, 2020