How Do Shippers Know When They Need Sophisticated TMS Optimization?

TMS Optimization – A Short History

Tier 1 Transportation Management System (TMS) providers love to talk about optimization. Why wouldn’t they? They have spent a great deal of time and treasure in the development of transport planning engines that are capable of solving huge problem sets quickly and to a high degree of optimality.

Over the last 30 years, these TMS solutions have delivered significant value to shippers, with a great deal of that value attributed to better daily planning driven by the use of mathematical solvers.

To understand why optimization has been front and center for many TMS providers, you first need to appreciate the business problems of the early adopters of TMS technology. These were mega-shippers with extremely large freight spends and complex, multi-modal freight networks.

For these shippers, the business case for acquiring a TMS was first and foremost built upon optimization. Sure, they wanted to automate processes and get better visibility into their transport operations, but the fundamental driver was better load planning.

In fact, the earliest TMS systems didn’t have execution capabilities (e.g. load tendering, shipment tracking, freight bill settlement, claims). They were simply planning applications. Execution was somebody else’s problem.

 

How Times Have Changed!

In the 30 years since TMS technology was introduced, the profile of a typical shipper acquiring a TMS has changed considerably.

The mega-shippers have, for the most part, already acquired and implemented TMS technology, or outsourced this capability to a 3PL. While some of these shippers may look to replace obsolete or unsupported solutions, the majority of new buyers of TMS technology are smaller shippers.

These shippers (and 3PLs) are drawn to the technology for much different reasons than the early adopters. They are interested in process automation, trading partner connectivity and enhanced visibility into their freight operations.

Additionally, they place a great emphasis on the overall usability of the application and quick “time to value.” Optimization may be of interest, but it is not the primary driver for the typical first time TMS buyer in 2023. Solution providers such as Shipwell and Pando.ai recognize this and have built businesses focused on servicing the SMB shipper space.

So Who Needs Sophisticated Optimization?

To be clear, optimization remains absolutely critical for a subset of shippers. While virtually all TMS providers claim that they have optimization, extremely sophisticated solutions from Oracle, Blue Yonder, SAP and Manhattan are typically the top choices of the largest and most complex shippers.

These providers have highly skilled, PhD staffed operation research teams who relentlessly focus on refining their solvers based on the needs of their clients, advances in their science, up to and including the use of AI. They need to do this because their clients include those early adopters that truly benefit from optimization. However, the characteristics of the shippers and 3PLs that make up a large portion of these TMS providers’ clients are not representative of the typical new TMS buyer.

This leads us to ask a question. How can you tell if you need sophisticated optimization?

Four factors can be used to identify those shippers that will truly benefit from this capability. A shipper does not need to have all 4 attributes, but they do need to have both a minimum freight spend and at least one other characteristic to make optimization beneficial.

1. Freight spend that exceeds $100 million – Freight spend is not perfectly correlated to network complexity, but it oftentimes is a good proxy. A large freight spend implies that the network has sufficient density to enable the planning engine to identify consolidation opportunities which can be exploited to reduce costs.

2. Usage of private and/or dedicated fleets – Tier 1 solution providers have built out capabilities to deal with the nuanced requirements of dynamically routing private or dedicated fleets in networks that also leverage contract carriers.

   These providers have specific planning logic that supports empty mile minimization as well as the construction of shipments that contain large numbers of pickups and/or deliveries that would not be viable for traditional truckload (TL) carriers. These fleet capabilities provide fast, yet high quality solutions to the well-known Vehicle Routing Problem (VRP) and are widely used in grocery and big-box retail.

   Caveat: While the large TMS providers have advanced their fleet management capabilities, we still see significant gaps versus pure-play fleet management solutions.

3. Dynamic through-point determination – Freight networks that are reliant on cross-docks, pool distributors, trans-loads points, relay points or other way-points require sophisticated optimization, but only if the flow path decision on a given origin/ destination is dynamic. In other words, sophisticated optimization logic is required to evaluate all transportation options based on the current status of the network and choose the lowest cost, feasible solution. If through-point decisions are static, advanced optimization is not required.

4. Significant demand variability – Freight networks that have a high degree of variability in terms of overall day to day demand or highly variable individual node demand (i.e. customers, WiP and/or vendors order quantities vary greatly from day to day) are good candidates for optimization. Variability is naturally disruptive and optimization enables planners to implement the “best” plan based on the current state of the network.

Summary

The adoption of operations research techniques by logistics practitioners and solution providers has provided great value over the past 30 years, not just to individual shippers, but to the economy at large.

In 1981, the cost of logistics as a percentage of GDP in the US stood at just over 15%. Today, according to the 2023 CSCMP State of Logistics report, that number stands at 9.1%. While a good portion of that improvement can be tied to de-regulation, the use of sophisticated heuristics and optimization techniques in both freight contract procurement as well as daily planning also deserves a great deal of credit.

However, the freight characteristics of many SMB shippers implementing TMS technology today are fundamentally different from the early adopters. These shippers gain value from TMS through process automation, trading partner communications, enhanced visibility, analytics and auditing.

Certain well-known analysts highly prize optimization and reward those vendors with magical spots on 2×2 squares. However, each shipper needs to do the work to identify and quantify the value levers that will truly improve freight operations. This will lead to the selection of the best TMS for your business.

 

A version of this article was first published on Talking Logistics.