Logistics providers, cost visibility push TMS growth
By David Hannon -- Purchasing, 10/19/2006 2:00:00 AM
The transportation management systems (TMS) market is expected to report continued growth in the next five years, fueled by increasing interest among third-party logistics providers, and the growing need for companies to gain visibility into logistics costs.
According to a recent report from ARC Advisory Group in Dedham, Mass., the TMS market grew to $989 million in 2005 and will hit $1.3 billion by 2010, fueled increasingly by demand from logistics service providers and third-party logistics providers (3PLs). TMS sales to logistics companies grew 11% in 2005, far outpacing sales growth to manufacturers and retailers.
Adrian Gonzalez of ARC says a few trends have merged to account for this growth among 3PLs. “The 3PL market has always been a focus area for TMS providers, but as manufacturers and retailers continue to outsource more of their logistics to 3PLs, the technology needs are pushed to the 3PL,” Gonzalez points out.
For example, recently chemical distributor Univar announced it was hiring 3PL Odyssey Logistics and Technology to handle all of its inbound bulk and package transportation management including carrier selection, contracting, management and payment. Odyssey said it plans to “deploy its transportation management technology in order to improve efficiencies and provide the functionality necessary to manage this very complex network. The information will be available to Univar in real-time with visibility and sophisticated data management.”
Gonzalez points out that “the 3PLs are discovering that in order to grow their business and provide scalability to their offerings, they need to enhance their IT infrastructure, so a lot of the 3PLs are upgrading their TMS offerings with more Web-based capabilities.”
And “Web-based capabilities” means on-demand software, which has been exactly what 3PLs have been looking for—a technology that can help them move into a customer and deploy more quickly. From a 3PL’s perspective, the sooner they can get up and running at a customer producing visible data and results, the better. On-demand TMS suites are most appealing to the midmarket 3PLs, while larger more global 3PLs are still leveraging investments in larger installed technology.
And the lines between 3PLs and TMS providers are continuing to blur. The business models of both 3PLs and TMS providers are interweaving. Gonzalez points to LeanLogistics as an example of a technology provider that developed such strong intellectual property in-house that it began managing some logistics processes at its customers. “That’s the next evolution of on-demand—the merging of technology and services, but led by technology instead of the other way around when consultants led the way and brought technology with them.”
For example, while most 3PL providers moved into the freight audit and payment business, some are now looking at purchase order and invoices for inbound goods. “These industries are overlapping and new business models are coming out of that blending,” Gonzalez says.
There has been some consolidation in the TMS market of late, which some market watchers cite as a sign of increased importance. Sterling Commerce’s recent acquisition of Nistevo and QAD’s buying Precision Software (see sidebar) are most notable. And it might not be over yet.
“We’re seeing private equity firms interested in this market,” says Gonzalez. “Today there are three major types of TMS providers—ERP players like Oracle coming at it via their G-Log acquisition; there are supply chain execution players like Manhattan Associates, Red Prairie and Infor/SSA; and third, there are the on-demand players like Sterling and LeanLogistics.”
From a functionality perspective, traditionally shippers use TMS most for tracking shipments, measuring carrier performance and sourcing logistics services. But transportation cost visibility is the benefit seeing most interest these days among manufacturers and retailers. The ARC report says, “Many companies have a poor understanding of their transportation costs because they are often bundled together or reported at an aggregate level. This problem is prompting TMS vendors to add cost visibility and spend management workflows to their solutions, with particular emphasis on global trade and parcel shipping.”
“It goes beyond reporting on cost,” says Gonzalez. “We’re not talking about visibility to inventory or orders—now the focus is on visibility of assets and visibility to cost. Where is the cost hiding in the logistics process? Most companies don’t have a granular visibility into their overall logistics costs or the factors that contribute to that cost, so there’s a big need in that area.”
Fuel surcharges and small parcel surcharges are an example of an area where visibility can become extremely valuable towards calculating total cost. Having real-time visibility into fuel and parcel surcharges and being able to count that up-front was something a lot of users have been asking TMS providers for, according the Gonzalez. “Some parcel carriers have 60 different surcharges they can hit you with and a lot of companies don’t realize they’re spending $10,000 a month on address corrections.”
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