February 2002 | Commentary | Viewpoint

Navigating the Virtual Marketplace

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Within the logistics online marketplace operates an aggregation of companies acting on behalf of shippers that purchase transportation from a diverse group of logistics services providers. These providers include trading exchanges; logistics solutions providers; trucking, rail, ocean, and air carriers; and companies specializing in ancillary logistics services such as supply chain event management.

Over the past year, many companies have tried to participate in this virtual marketplace by developing Internet transportation management solutions. Most have not been successful. They did not understand the complexities involved, did not have sufficient logistics management experience, and did not relate to what this market was demanding. Many sites were simply stand-alone auction models that attempted to match shippers' freight with carriers' capacity.

From Dust to Dust...

Many believed this approach would yield competitive transportation rates for shippers. But developers failed to realize that consistent service reliability could not be delivered this way. Beyond deficient service, these sites did not integrate the critical transportation function with other supply chain applications. Many of these companies no longer exist, some are for sale, and others were forced into consolidation. But this alone does not signify the end of an era.

As the dust of the first-generation logistics providers settles, Internet research shows that companies still view the Internet as vital, even indispensable, to improving their supply chain efficiency—the complete cost to plan, buy, make, move, and sell their company's goods. In most physical distribution systems, transportation is the largest cost component of total logistics, thus the most important element of supply chain management.

The internal transportation department of many companies functions in a fragmented manner, however. For example, it is not unusual for a multi-billion-dollar organization that spends several hundred million dollars on its transportation to use a few thousand trucking companies to move its goods. Using so many trucking companies usually indicates transportation purchasing fragmentation.

Other transportation modes are also often purchased ineffectively. Companies do not always consolidate their purchases on a corporate-wide basis, often forfeiting purchasing leverage. Their failure to consolidate frequently can be traced more often to archaic and disconnected internal information systems than ignorance.

For many companies, large and small alike:

  • Transportation costs are too high and service levels unacceptably low.
  • Transportation management is misunderstood.
  • Information companies need to manage and improve the logistics process is unavailable.
  • Upper management is aware that transportation logistics is critically important to their business.

It is estimated that even today, approximately half the companies that could benefit from a transportation management system do not have one. Transportation coordination is limited within many companies. In trucking, for example, the average vehicle is just 38 percent full on backhaul journeys. It is clear that companies need help managing transportation logistics.

Filling the Cracks

The fragmented aggregation of logistics providers, coupled with disorganization within the shippers’ company, presents an opportunity for nimble transportation solutions providers. The opportunity is not about changing the way this industry does business, but rather about making how it transacts business work better.

For a provider to be successful long term, it needs to be much more than just another online catalog or web site matching transportation buyers with sellers. The auction sites that proliferated in 2000 provide valuable lessons. Those sites failed to understand that shippers view transportation service as importantly, if not more so, than price and are not willing to abandon long-term contractual relationships in favor of spot movements.

When shippers look to purchase transportation online, they expect:

  • Competitive prices.
  • Multi-modal carrier resources availability.
  • Freight visibility.
  • One point of contact across the entire range of suppliers.
  • Consolidated reporting and accounting across multiple corporate entities.
  • Single point of payment.

Additionally, the back-end of the transactions—including invoicing, accounting, customer service, and other functions—must not be the customers' problem. The provider should handle them as part of the total package.

Successful providers negotiate and manage relationships with a diverse collection of Internet-based logistics buyers and sellers. Before transacting business with these companies, providers need to assess the long-term viability of the entities they are doing business with. This includes evaluating business models, capitalization, and financial stability.

While it may seem obvious, providers need to acquire an understanding of trading exchanges and key distinctions among them. Some are owned and operated by a single, dominant company. Others are operated by groups of companies in the same industry. Others still are run by independent companies that have no affiliation with participating buyers or sellers.

Finally, a successful developer of transportation logistics services must possess a deep understanding of all financial operations and technology elements and have a legitimate understanding of how they fit together. The best way to accomplish this, and to understand the issues confronted by companies, is to have access to logistics experts who have faced the many difficulties and who understand the intricacies of the industry.

Provider Priorities

For their part in the transaction process, providers need to achieve:

  • Broad reach of prices and terms of different transportation logistics sellers.
  • Greater negotiation power than individual companies have on their own.Providers need to deliver:
  • Lower transportation logistics costs achievable through proprietary services and networks.
  • Reduced vulnerability to transportation service disruption.

Optimizing freight aggregation, locating the most suitable carrier, purchasing transportation services competitively, and providing value-added logistics services are cornerstones of a successful business model.

Internet transportation management will continue to inexorably force changes throughout the industry. Companies that fail to keep pace may jeopardize their very survival.

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