TMS in the Context of the Financial Supply-Chain

The Transportation Management Systems (TMS) market has grown from $468 million in 1998 to a forecasted $956 million in 2005. Over the past seven years, the goals of TMS end users have remained relatively the same (reduce costs, improve service levels, etc.), but the technology / vendor landscape has changed significantly. Companies that plan to invest in a TMS, as well as existing users, need to understand these changes in order to make a well-informed investment decision.

ARC has adopted the following definition of transportation management systems to accurately describe today's market:

Transportation management systems are solutions that facilitate the procurement of transportation services, the short-term planning and optimisation of transportation activities, and the execution of transportation plans. They address all modes of transportation, including ocean, air, rail, full truckload, less-than-truckload, parcel, and private fleet. In addition to managing the physical flow of goods, they also manage the flow of transportation-related information, documents, and money. TMS also include performance management and collaboration capabilities.

This definition is purposefully broad because there is no single solution on the market that adequately addresses every aspect of transportation management.

As supply chains become more fragmented and dispersed, logistics (and transportation in particular) serves as the 'glue' that links multiple parties and business processes together. Therefore, it's not surprising that TMS solutions are expanding beyond transportation and providing capabilities and value to users in other functional groups, such as inventory management, purchasing, merchandising, customer service, and C-level executives.

Simply stated, transportation can no longer be viewed as a standalone function. Instead, it should be viewed from a more holistic perspective: as a critical component of the procure-to-pay and order-to-cash processes.

This reality is part of the reason why traditional standalone TMS vendors are disappearing or getting acquired by vendors with broader solution footprints. SSA Global acquiring Arzoon, Manhattan Associates buying Logistics.com, and Oracle's recent acquisition of G-Log are good examples. Private equity firms are also getting involved in this market, as evidenced by Francisco Partners' acquisition of RedPrairie in April 2005, as they attempt to 'roll up' providers of complementary solutions in order to accelerate scale and growth.

The consolidation trend will certainly continue in 2006, and it won't always be the 'usual suspects' involved in the deals. For example, ARC expects logistics service providers and financial institutions to make some TMS-related acquisitions next year.

INCREASED FOCUS ON FINANCIAL SUPPLY CHAIN

Logistics has historically been focused on the movement of goods, information, and documents. But the flow of money and the role of finance are playing a greater role in logistics and supply chain management, especially in global trade. The ability to finance inventory, for example, can have significant implications on cash flow, taxes, and other balance sheet entries which ultimately grab the attention of chief financial officers and Wall Street.

CFOs are becoming better educated about the role and impact of logistics on financial performance, driven in part by the need to comply with the Sarbanes-Oxley Act (SOA). Rising transportation costs are also attracting the attention of logistics executives and CFOs. Transportation costs have increased 23% since 2002, averaging $1.69 per mile. But many companies do not have a clear and accurate understanding of their transportation costs. They're often bundled together with other costs or reported at an aggregated level, thus preventing companies from allocating transportation costs to specific products, customers, origin/destination pairs, or business units.

TMS vendors are addressing this problem by enhancing their financial settlement capabilities, providing visibility to costs as they're accrued and adding business analytics capabilities. ARC expects TMS vendors to introduce more powerful real-time performance management portals ('dashboards) that link operational metrics with financial metrics.

C-LEVEL EXECUTIVES WILL FINALLY ACT TO IMPROVE DATA QUALITY

Or so we hope. Poor data quality (late, incomplete, or inaccurate) is the Achilles heel of supply chain management. Long recognized as a problem but often ignored, data quality will likely decline next year as companies add/change trading partners, enter geographies with poor IT capabilities, and are flooded with new streams of information and data requirements from vendors, customers, carriers, customs, and other parties.

This will be a great opportunity for providers of connectivity services and networks, including On Demand TMS providers, but data quality management has so far failed to grab the attention of CEOs and CFOs. However, linking the value of data quality management with Sarbanes-Oxley compliance and financial metrics might just do the trick.