There was a time when the transportation spend was considered too complicated for e-sourcing. Technology providers and e-sourcing users were touting big price reductions gained by the e-sourcing of products and materials, but few were talking about e-sourcing services like freight, with its numerous lanes and countless combinations of packaged bids. But e-sourcing functionality has grown rapidly and become more freight-friendly, while transportation buyers under increased cost pressures have taken a closer look at how new and existing tools can apply to their spend areas.

In the words of Pierre Mitchell, vice president of research at Boston-based AMR Research, "Supply chain leaders apply logistics know-how, strategic sourcing principles, and specialized optimization tools to drop freight costs by 10% and rightsize their carrier base," in strategic transportation sourcing, which "combines the best techniques and tools from the strategic sourcing and transportation worlds to unlock value not previously attainable."

Two paths to e-sourcing in logistics are emerging. One involves seeking out a transportation-specific tool and the other uses a broader e-sourcing tool that may already be in use elsewhere in the organization. High-tech giant Hewlett-Packard of Palo Alto, Calif. has been using e-sourcing technology from B2E Markets in various spend areas since its merger with Compaq back in 2000. John Frasca, director of worldwide logistics procurement at HP, admits that, "Most people do not think of e-sourcing and logistics in the same sentence because there are complexities that make it different from buying a material." But that thinking did not stop HP from targeting its $1.7 billion freight spend with e-sourcing.

HP's logistics organization has five major strategies in place: reducing the number of logistics service providers, leveraging its logistics spend globally, reducing the number of logistics hubs worldwide, increasing the use of visibility e-business tools for improved visibility and predictability of movement of goods and lastly, collapsing its freight cost management systems from 27 to one.

"Our e-sourcing initiative really hits two of those areas," says Frasca. "The leveraging of the spend globally and the reduction of our carrier base."

In 2002, HP used e-sourcing to bid its North American and European less-than-truckload and truckload spend, both of which included the use of online reverse auctions. The North American bid took four months and consisted of 200 major lanes for full truckload and 900 major lanes for LTL. HP reduced its truckload carriers from 24 to six and LTL carriers from 17 to six.

HP also used an e-auction in its less-than-containerload ocean spend, holding an open bid for a 23% reduction in rates.

But not all e-sourcing ends in an auction for HP. Frasca says buyers are learning to weigh the benefits of a cost-focused e-auction versus using the tool as an information and data gathering solution for analysis of best value. As an example, he says using e-sourcing for a third-party logistics (3PL) services bid was not even considered as recently as a year ago because it is not a "cost play." But buyers are learning that today, e-sourcing is about more than price. In a recent bid for 3PL services in China, HP used the B2E Markets tool more as a communication tool and data repository.

"We reduced our 12 global 3PL partners to eight and it shaved off about four to five weeks of process time, especially in this bid because of the time zone and language issues inherent in bidding something this complex overseas," Frasca says.

HP only invites existing suppliers to online bidding events. In general, the carriers and freight service providers that are most used to the e-sourcing process shine through as the first into an auction to bid and the last to respond, knowing precisely where their price point is. Not surprisingly, Frasca says the winning bidders like the e-sourcing process best because it can dramatically increase the amount of business they get from HP. Reducing its overall supplier base by 68% means that HP's $1.7 billion logistics spend is spread across fewer logistics providers.

As capacity tightens in the market, HP is looking at e-sourcing (and e-auctioning) areas such as chartered air freight, which is usually extremely expensive. "Putting that on an open bid would help us drive down the cost to see what the market will really bear for a chartered plane or one-off shipment, rather than calling one forwarder for a quote and not knowing if that is what the market price is," Frasca says, adding that there are still some areas of HP's spend that are not well suited for e-sourcing. Ocean full container and air freight simply have too many lanes to work into the B2E Markets tool, he says.

A lot of e-sourcing in logistics comes as part of a larger corporate initiative to reduce costs through greater use of e-commerce. The logistics procurement group at Honeywell in Morristown, N.J. follows the same practices that its corporate procurement group does for other commodities. In fact, the director of the corporate logistics group sits on the corporate strategic procurement council to help facilitate communication and share best practices. The major difference is that the logistics group uses a transportation-specific tool for e-sourcing.

"If you compare [transportation-specific] e-sourcing tools to generic e-sourcing tools, the transportation-specific tools have more variables and flexibility in the areas that are needed for transportation," says Kevin Catallo, manager of transportation systems at Honeywell, which has been using technology from Atlanta-based Manhattan Associates since early 2002. "In any one transportation sourcing event, we may have what would translate into more than 1,000 SKUs. This tool has functionality to handle the breadth of lanes and regions common in transportation networks and allows for the collection of accessorial information, while letting the carrier sort and shift by geography to match their service areas."

Honeywell has completed online sourcing events in truckload, ocean container, heavyweight air and LTL, the latter of which was held just after a major market consolidation when LTL carriers Yellow and Roadway merged and Consolidated Freightways had closed.

"Capacity was tightening at that time and rates were predicted to increase," Catallo says. As a result of the online bidding, some Honeywell businesses with aggressive rates that expected to see rate increases maintained their position while other divisions saw rate improvements during a time of tightening capacity. "An e-sourcing tool allows you to invite more participants to the table," Catallo says. "The tool allows for very thorough but fast analysis after the bid responses are received. We were able to expand the number of carriers and receive bids from carriers that needed our freight to balance their networks. They responded by offering attractive pricing and service."

Honeywell uses a variety of 3PLs which are selected at the business unit level. And many of the individual business units have their own transportation management systems (TMS) in place. As a result, one requirement for Honeywell's logistics e-sourcing tool was the ability to download bid results into several formats so they could be loaded into the different TMS systems.

And like HP, Honeywell sees certain areas of its logistics spend that are simply not suited for e-sourcing, including rail and small parcel. Catallo says in small parcel, there are a few dominant carriers which reduces the opportunity for active auctioning because, "Each carrier has a unique rate structure as well as their own competencies—one is good at ground, another strong in air. That mode didn't lend itself to approaching carriers with one common template. If the shipper can approach the marketplace with a standard template and receive information back into that template, that mode lends itself to e-sourcing. But if the carrier drives the contract and rate structure, e-sourcing should be approached cautiously."

As more supply comes from international sources, logistics services take on a more important role to ensure product is shipped and received from far off places in a timely manner. Eastman Kodak Co.'s logistics organization in Rochester, N.Y. approached the sourcing of its ocean freight with more than just price in mind.

"In addition to price, transit time is a key factor for us, as were inventory carrying costs," says Leo Nussenbaum, worldwide logistics commodity manager for ocean, warehousing and 3PL spend in Kodak's Global Purchasing organization. "One carrier may quote us $1,000 but if it takes them a month to ship it, it costs us more, while another carrier might charge $1,300 but will get it there in ten days so that saves 20 days of inventory cost."

To measure the tradeoffs in such a scenario, Kodak developed its own formula to calculate the total cost. Pittsburgh-based sourcing software provider CombineNet agreed to include Kodak's calculator into its decision-guidance sourcing software to measure the total cost in a variety of scenarios. Kodak tested the CombineNet tool on its extremely complicated global ocean bid in 2003, which included 800 different lanes, five continents, 54 origin cities, 107 destination cities, and more than $40 million in spend. Using the online tool helped simplify the bidding process by keeping all bids and proposals standardized and communication flowing. Each Kodak team in various regions ran regional optimizations based on the constraints for that area and reported back. In the end, Kodak both improved productivity and saw close to double-digit direct savings for the full bid.

More than 95% of Kodak's RFQs for its $450 million transportation spend are electronic today.

"Using the tools online forces bidders to put the data where we want it," says Nussenbaum. "Also, CombineNet's optimization capability lets us enter thousands of different combinations and tells us what is the best package based on the input constraints."

While Nussenbaum has recommended Kodak expand its use of CombineNet in its logistics organization, there are other e-sourcing tools in use for certain bids. He says the most important aspect of e-sourcing in logistics is to select the technology before starting the process. "The earlier you can get technology involved in the process, the better," he says. "You don't want to start a bidding project and then bring in a technology partner."

Commercial vehicle maker Freightliner of Portland, Ore. has maintained a relationship with third-party logistics provider Schneider Logistics for a number of years, so when the 3PL began offering an e-sourcing tool geared specifically towards logistics, Sumit CVA, it made sense to take a look at it.

Freightliner, a division of DaimlerChrysler, had been using other e-sourcing tools in its materials procurement business, according to John Bratton, transportation operations manager, but those tools did not have the features required to handle the sourcing of logistics. Bratton says the ability to let carriers bundle transportation lanes and submit packaged bids made the Sumit CVA tool more effective in sourcing transportation.

Freightliner decided to use the tool for its full truckload bid last fall. The company conducted a multi-round online bidding program over six weeks until it felt it got the best combined value from the bids.

"The e-sourcing tool allows carriers to provide the best possible pricing by taking two or more freight lanes and submitting a bundled bid for all of those lanes in combination," says Bratton. "It also allows them to optimize their network and recognizes those lanes are packaged during the evaluation process. We found that to be a significant benefit compared to having the lanes bid on individually."

Service levels from carriers are especially important to Freightliner because it operates a just-in-time inventory model, so tools that focus too much on prices may drive carriers to bid on business they cannot handle and eventually cause disruptions in the supply chain. To that end, Bratton also liked the software's ability to allow carriers to submit conditional bids. If a carrier is interested in several lanes, they can bid on those lanes conditional upon a certain level of volume to ensure that they do not overcommit. They can also provide best pricing on the lanes they can be efficient on. "We've had a very high success rate on service with the carriers that won lanes in the bid, due in large part to the fact that the software considers carrier capacity, constraints in the model and assists you in not awarding business to carriers beyond their capabilities. We've also had very few lanes turned back to us by carriers who were unable to perform on those lanes because they included capacity commitments when they made their bids."

Invensys of Foxboro, Mass. had been using the FreeMarkets reverse auction tools in indirect spend areas such as utilities, trash removal and engineering projects before eyeing it for transportation under a corporate initiative to use the tool whenever possible. While some freight buyers say a traditional e-auction tool like FreeMarkets cannot handle the complicated spend areas such as logistics, Gary Lozowski, global commodity manager for logistics at Invensys, says the tool's applicability "depends on the freight mode, the bid strategy and data availability."

"As with any bid, the buyer decides how and what gets bid out. The bid format, terms and conditions, and accessorial fees can be defined ahead of time," says Lozowski.

To date, Invensys has used FreeMarkets to hold online reverse auctions for several multi-divisional spend areas including global ocean and air, less than truckload ($12 million in spend), truckload ($10 million) and household relocation ($1 million).

Invensys typically starts with its own list of approved carriers for an auction event and FreeMarkets brings in other carriers as well. The global ocean and air bid took three months, with $27 million in spend negotiated as 20 separate bid lots and produced a 20% savings. Lozowski says bidding it out manually would have taken six months or more. The relocation bid produced 30% savings, truckload 20% and LTL 7% savings in a market that saw prices climbing for most buyers.

Lozowski's goal is to integrate reverse auctions into the daily work routine in the logistics organization at Invensys. "For example, we are considering using the tool for truckload spot bids," he says. "Given that truckload pricing is driven by supply and demand, we can further maximize competition and pricing with a reverse auction."

Invensys keeps a file on its intranet for buyers with standard terms and conditions, sample bid templates, standard cover letters, company information and best practices to streamline auction events. While pleased with the e-auction tools from FreeMarkets, Lozowski says integrating it with the Invensys ERP system would be a big help in reducing data entry and allowing better use of the spend data and event results.