Change comes quick in an ASP environment

David Hannon, Associate Editor -- Purchasing, 5/20/2004

Perhaps nowhere is the pressure to reduce costs and prove return on investment (ROI) more intense than in the area of software spending. Supply chain and logistics managers need to see a near-immediate impact and ROI from any software tools they select or implement, especially smaller companies selecting from the growing list of logistics-specific solutions.

This trend plays into the hands of the application service provider (ASP) model software tools, which can quickly improve existing processes or drive an organization to more efficient processes. In a 2003 research report on ASP-based logistics software, AMR Research analyst John Fontanella said, “Many companies feel that sharing an application with others severely limits the distinction that can be gained from implementing innovative business processes. If you aspire to revolutionize rather than evolve, hosted services are not the answer. But for most companies, particularly in logistics, the actions performed are relatively standard. Companies can distinguish business processes, within limits, using hosted services... The hosted services pricing model allows for expense and benefit to be realized simultaneously.”

Four Seasons Automotive of Louisville, Texas is a good example of how logistics managers are using ASP-based tools to drive the right change into their logistics and supply chain organizations. Ben Carbo, corporate logistics director at the climate control products manufacturer, says the company had been using published routing guides for inbound freight from suppliers and returns from customers. Four Seasons pays the freight in both scenarios, but with various carrier contracts changing throughout the year, the process of updating the routing guides and getting them to suppliers and customers was getting difficult, not to mention very costly.

“And even when you get the routing guides current and send them out to suppliers and customers, there is no guarantee they will use the updated versions,” says Carbo. “The suppliers might use the routing guide taped on the wall or under the glass on their desk that is 10 years old. We had too much non-compliance from suppliers using less-than-current routing guides or ignoring our guides altogether and using their own carriers who we had no pricing with, which cost us dearly.”

Out with the old 
Four Seasons wanted to find a solution that not only updated the routing guide information, but was also user-friendly enough to drive a smooth transition from existing processes to more automated ones in the logistics organization. Carbo had been watching the transportation management system (TMS) market closely for several years, but the TMS systems available were simply too expensive for a supplier in the cost-conscious automotive industry. When the ASP model came to the TMS industry with its subscription-based pricing, it was exactly what the doctor ordered. It would let Four Seasons get up and running quickly, provide the process improvements Carbo was seeking, and require minimal up-front investment. As he points out, proving ROI for one month’s subscription fees is much easier than proving ROI for a hefty software implementation and license fee, especially a logistics module on a broader system.

Four Seasons zeroed in on an ASP-based TMS to pilot and gave the provider a month’s worth of its inbound shipping data and asked how much could be saved with a TMS.

“The first TMS provider fired back an astronomical savings figure, which I then cut in half. Even that amount was a good savings compared to the cost of the subscription,” says Carbo. “But we came across a problem during piloting that system with our trucking contracts. In addition to tonnage, our contract pricing is based on linear feet. If we exceed so many linear feet, a rule kicks in and the rates change. And the first TMS we piloted could not be customized to include that rule so we would lose a significant amount of discounts.”

With a clearer set of specifications in mind, Carbo came across Richmond, Va.-based Shippers Commonwealth, which provides a TMS from Red Prairie Software through an ASP model. Shippers Commonwealth also customized the system to accommodate Four Seasons’ linear foot rule. Carbo provided the company’s shipping data to Shippers Commonwealth for a pilot and watched the company run it through its TMS system.

“You have to actually see them run your data through the system before you sign off on it,” says Carbo. “Software providers will sell you the moon and tell you their tool can do anything.”

Four Seasons is now using the TMS for its inbound LTL, truckload and multi-stop shipments and has nearly all of its suppliers on the system (it has 100% of customers on the system for returns). Suppliers access the tool through an online portal and enter line-item detail including part number, purchase order, and quantity. With the shipment in the system, Four Seasons then uses a load builder to stage the loads and select the best combination of carriers. A bill of lading is sent direct to the supplier, who can call the carrier to schedule a pickup with the bill of lading in hand.

“We give the supplier the bill of lading and it can’t be any easier than that,” says Carbo. “We’ve gone from 40-50% non-compliance to almost zero. Eventually, we’ll move to EDI with the carriers and the suppliers won’t even have to call them.”

Carbo expects savings in the $100,000 range when the system is fully implemented for inbound shipments from suppliers and customers. The system is also used on the outbound side and for return shipments. Four Seasons pays the freight for warranty returns and uses the system for savings there. But for overstock returns, the customer pays the freight. As a value-add to its customers, Four Seasons offered to put return shipments into the TMS system and pay the lower freight rates based on its contracts and then gets a credit from the customer.

“So instead of it costing our customer $800 to ship a return item to us, it might cost them only $300,” says Carbo. “It saves them money, it increases our volumes and it helps us negotiate better rates. And the best part is, it doesn’t cost us anything.”

Another advantage to the TMS over routing guides is that in addition to selecting carriers based strictly on price and lane, the TMS can factor in shipment minimums. If two carriers overlap and cover the same area, the system evaluates both the rate and the shipment size before quoting a final price.

“We had some suppliers that refused to use the TMS and we told them ‘we can refuse to order from you’ and they changed their tune,” Carbo says. “Once they got on the system they loved it. Buyers and internal users can see exactly when the shipment is sent and when it is coming in. And our receiving department can view the shipments in advance and prioritize deliveries as needed.”

Four Seasons is a division of Standard Motor Products, which is still using routing guides in its other divisions. In June, Carbo is scheduled to meet with the president of Standard Motor and present the benefits seen since using the TMS. The smart money says the TMS will be moving beyond the Four Seasons division shortly after that presentation.

“Right now there are two people really excited about the TMS,” says Carbo. “That’s me and my boss. But within a few months, I am sure the whole company will be excited. Everyone wants to save money and raise profits and transportation costs come right off the bottom line.”

Gaining control, ASP style
One of the highest priorities within purchasing and logistics is to gain more control over inbound freight to optimize the carrier selection, pricing and routing processes. Gaining that control from suppliers requires some negotiation, but often introducing a new technology can help drive such a process change.

Agriliance (St. Paul, Minn.) is a group of farming cooperatives that manufactures and distributes crop nutrients and protection products. In the past, much of its inbound materials were bought with the freight cost included in the price. But in the past three years Agriliance has made an effort to break that cost out and negotiate it separately from the product cost and move away from its overseas supply base to a mostly domestic one to reduce freight costs and increase control.

But the new supply base necessitated a new infrastructure to better track the growing number of rail shipments in the U.S. and, secondly, a system for rating and routing shipments domestically. After putting out a request for proposal to the known suppliers of these kind of systems, Tracy Mack, director of logistics at Agriliance, found that the systems with the required rail tracking capabilities did not have the desired rating and routing tools. Agriliance decided, instead, to go with an ASP-based tool from ShipXpress, which offered strong car-tracking capabilities and agreed to custom-develop the routing and rating functions Agriliance needed.

“The pricing and change dynamics of the ASP model were much more attractive to us versus installed software,” says Mack.

In its manufacturing business, Agriliance is currently putting about 20% of its inbound shipments into the ShipXpress tool for rating and routing. On the distributor side of its business, Agriliance does a lot of shipment and railcar tracking for its customers and the new tool allows the customers to access all of the tracking information in one place. Agriliance gathers waybill data from the railroads directly and receives feeds from its order system to generate reports on waybills without orders or orders without waybills, which Mack says is useful both internally and in its distribution business.

“The two reports pinpoint where we’re missing data and allow us to improve accuracy. The feedback so far tells us this tracking system is much more accurate and user-friendly than our old tracking processes. We might be buying from six different companies but our customer can track all of their inbound shipments through ShipXpress.”

You should know...

Ben Carbo of Four Seasons Automotive says there are two things that logistics professionals should know before they implement a transportation management system:

1. “First, you will be amazed at the inaccuracies in the addresses in your customer masters. Over the years, our carriers have figured out where to go despite the fact that the zip code or street address may be wrong. But the TMS will not accept bad addresses and when we started inputting them, I had to call our suppliers and tell them the TMS would not accept their address.”

2. “Secondly, for a TMS to function effectively, a tremendous amount of data must be entered and it takes time to be done accurately. Our TMS provider helped us with it, but the information has to be input correctly because if it is wrong and you start staging orders, they will come out wrong. Garbage in, garbage out. It can be frustrating until you understand it. These packages have their own terminology and way of thinking. You have to understand it and have a good grasp of it to master it.”