[From iSource Business, March 2001] It might seem contradictory that a segment of the economy centered around moving would be stationary when it comes to anything, but that's largely the case when it comes to the transportation industry and e-procurement. Maybe it's because of the solid nature of the underlying structure of transportation: Iron rails, great swaths of concrete and rebar, and oceangoing behemoths don't easily lend themselves to high-speed business evolution.
But the transportation industry is moving into e-procurement, however hesitantly. To get an idea of the state of e-procurement, transportation-wise, iSource spoke with analysts from Gartner Group and KPMG Consulting LLC, and a transportation executive and purchaser with Ryder. Here's what we found.
Larry Clopp, Research Director, Gartner
Clopp forecasts a change in the technological capabilities in transportation, particularly the inbound aspect: About three months ago at Gartner we started putting together a concept called SRM, or supplier relationship management. Much like CRM is directed to customers, this is actually the inbound side. And what we're suggesting is that a market is developing for more comprehensive solutions for procurement on the inbound side, which would be the e-procurement, the inbound logistics and transportation, the carrier compliance, the financing and payment settlement, and contracts and PO management. However, because so many people are covering it in different little slices, and then trying to put together the other pieces, it's not coming together well.
In the public marketplaces, we think we'll only drive some of the business, and, in fact, we think most of them will become what we're calling private communities' that will be able to plug and play different marketplaces in that private community.
I Seek the Grail
Clopp gives an example of this community concept: Volkswagen is building a private community to allow different marketplaces to plug and play with them. So they lay in the inter-enterprise' communication layer. And if they need bolts, they go out to this place, if they need paper, they go out to this place, if they need coffee they might go out to someplace else. So the procurement professionals have different marketplaces they can plug and play with and yet manage their contracts and their [purchase orders], their inbound logistics consistently, how they want the POs presented, how they want settlement to be presented. The rules of engagement will remain the same for the whole company, and I think that's kind of the holy grail toward which a lot of this is being driven.
Clopp points out that the focus in transportation is shifting from a U.S.-centered model, where ship date is the critical factor, to an international model, where shippers need to know both the delivery date and total delivered cost. If you actually had the capability to say Okay, these are the four different solutions from these four different locales, and this is what the total delivered cost is to me, then it becomes a relatively easy decision.
According to Clopp, some headway is being made toward providing those kinds of capabilities: There are some firms that are starting to link [the inbound equation] to their supply chain inventory visibility modules, their track and trace capabilities, and some are adding it to their rating and routing type of functionality. But we haven't really seen anybody deliver a comprehensive solution yet.
Not for Everybody
Clopp also addresses the needs of purchasers more directly: I think the purchasers are saying, Well, what about transportation exchanges and marketplaces?' And what we suggest is that most companies won't use transportation and logistics exchanges, because you don't want to manage every single shipment, post that load, match that load, and then tender that load. Most companies, and procurement's the classic place to do it, manage contracts and master purchase orders. Elaborating on the problems with exchanges, Clopp points out that modern supply chain tools such as automatic ordering to ensure safety stock levels are actually hampered due to having to post each load in an exchange. Exchanges actually end up complicating the procedure.
Spotty At Best
How does Clopp describe the amount of e-procurement going on in the transportation industry? Spotty at best. (He went on to say that transportation companies are a paragon of last-generation B2B.) In some situations, we're seeing procurement work well, because companies have done their homework already. Eighty percent of it is doing the homework, getting the processes in place and making that work. Most procurement solutions that have been successful so far, and have actually driven some of the hype, have been around white-collar MRO instead of direct materials procurement. Now we're seeing direct procurement solutions come up more. Commerce One, Ariba and those type players are scrambling to change their products and refresh their technology to be able to adapt to direct materials. Because, frankly, their product is not built for it.
Take Your Time, Do It Right
What are the characteristics of the e-procurement efforts that companies have launched? The implementations we've seen so far have been opportunistic. They'll go ahead and implement in one company, and then try to leverage that implementation with companies in the same sector, same industry. ... Most other industries lag behind the early adopters. They want to see it, they want to prove it works. And what we've found is that it's actually been beneficial for companies to have patience and wait for this next generation to come around, because now they don't have to re-architect; they can actually buy a solution that handles both direct materials and MRO, and has the ties or the alliances between those companies and transportation companies or marketplaces.
iSource asked Clopp to play fortuneteller. Here's what he sees on the horizon, broken into two areas: One is in some of the outbound tools we have today; for example, we can load a full truckload and have multiple drops on a particular route. Very few firms are developing multiple pick-up for a consolidated drop. And we see that some of those tools are being used on the outbound side for multi-drop will now be used for multi-pickup.
We're also seeing that almost all optimization tools are what we call single-variant, linear algorithms. That means, basically, when you optimize, you've already hard-coded it to say, I want to always look at cost first, and then I want to look at time or route or some other variable, and then I want to look at carrier or allocation,' whatever that might be. And each algorithm chunks the data each time. So the first one for cost optimizes, and then the next one for quality or delivery time or whatever the case may be, so you end up with a suboptimized solution that people will have to pore over and then validate.
What we see being developed now are multivariant algorithms. And that is tied to the workflow, so if you say, These are the constraints and the rules for this procurement contract,' the optimization engine runs once, and takes account of the rules of that particular situation. It gives you a very fast result. That's been part of the problem running optimizations across the Web; they're really slow, because they have to run them in linear fashion, several times through a server somewhere. With multivariant, they can take data and pass that back very quickly, because it's a one-time chunk.
The KPMG Team
To get another firm's view of e-procurement, iSource also spoke with Mike Fath, e-purchasing feature and solutions leader, and Jay Hamilton, procurement director transportation, both with KPMG. Here's what they had to say.
Hamilton sees the development of some marketplaces in the transportation industry. He says, There's obviously a couple of emerging large marketplaces, for example, within the airline space. They're in the development mode right now. In that particular space, we've started to see a little bit of consolidation. We know there's a major effort afoot now to develop a marketplace for the rail industry, and that's really just in the development phase right now. You have six Class I railways, and they're all participating in this development, but it really hasn't taken off just yet.
Why the slow movement? Hamilton says, I think it's logistics, and so many people being involved. I think the rail industry is relatively cautious in the way they go forward. They've been planning to do indirect material and do some of their direct spend. They have lots of rail equipment, etc., and that's a pretty hefty chunk to bite off. I think it's going to be interesting, too, as the rails go along. There's a lot of competition between them, and obviously a lot of cooperation has to go on, because they share track and have to switch loads. It's going to be interesting to see how they wind up cooperating.
As far as consolidation of marketplaces related to transportation, Hamilton and Fath agree that it has already begun and will only become more common. Hamilton puts it this way: I think we've seen a lot of consolidation already. In my opinion, it began six months ago, and I think you'll see it accelerate over the next 12 months.
Fath agrees. I think the concept of one or two exchanges per industry is bearing out. That's the model Commerce One and Ariba and a lot of the venture capitalists are thinking about, and I think we're definitely seeing that.
All in the Family
What do Fath and Hamilton advise for procurers in transportation? Fath says, We're coaching our clients that for every family or commodity family they buy, it's more critical that you have a strategy for acquiring that family of goods or services. And that strategy now has to consider exchanges and marketplaces and even electronic content from a supplier. All those things are additional considerations in terms of developing a strategy for a particular commodity. The ones that concern me are the guys who are sort of saying Well, we're holding off connecting to any exchange.' If I'm a rail company, I'm going to wait until the railroad exchange comes up and I'm going to pour all my spend into that. Well, that may not be the right strategy. There may be certain things that you ought to be thinking about leveraging in other exchanges. And which exchange you go to is a function of the strategy for that particular family of goods.
Fath anticipates that implementing this strategy will becoming easier to accomplish in the future: I think at some point, from the technology perspective, you're going to have dial-tone access' into exchanges. You're going to be able to plug and play where you want to play, when you want to play ... A lot of the exchanges are developing capabilities that are much more than simply a site to come buy and sell, but where there are so many more value-added services like planning and scheduling and sharing of product information and doing collaborative design and collaborative planning.
A Rosy View
Fath has a fairly rosy view of the future for transportation purchasers who can wisely implement procurement strategies: I'm not sure there's any part of an organization that's more dynamic than this whole buy-side e-strategy. A lot of the purchasing executives are at various degrees of being technology- and Internet-savvy. I had a chief sourcing officer of a Fortune 50 company basically say, When my competitors committed to an industry exchange, and I hadn't, I went from being the leading supply chain organization in the industry to basically a bunch of dummies, because we didn't have a plan.' So this is very exciting right now. You've got the whole pressure to fund it and strategically jump into a marketplace, and then you've got the more tactical point of view from the sourcing organization of How do I fit this into my sourcing strategies?' And then purchasing, which has really been on the outside of a lot of the IT initiatives through the last decade, all of a sudden is front and center in terms of investing for IT dollars around the e-business, all of which creates a tremendous opportunity.
Memphis-Blues, Barbecue and Buys
To get a frontline view of e-procurement in transportation, iSource spoke with Steve Mattman, managing director of supply chain and support at Memphis-based FedEx Express. Mattman has been with the company 19 years, and oversees an annual spend of $6 billion.
Mattman says Ariba is the main e-procurement software package his company uses. We were one of the first 10 customers with Ariba a couple of years ago. That was our first big decision to jump into the e-procurement arena, and we're busily adding services and commodities this year. Our goal at the end of 2000 was to have 166 different services or commodities on Ariba.
To get such a huge and farflung organization started on the B2B road, Mattman's company started out relatively small. We started using it on PCs. PCs and office supplies were our two big ones. We have a national account with Staples, and we've got the whole Staples catalog loaded on Ariba, and it allows anybody who wants a pen or a pencil, whether they're in Memphis or Spokane to just log on. It really saves us a lot of transaction time.
While proceeding with the Ariba approach, FedEx Express isn't ignoring the exchange and reverse auction fronts. Mattman explains, A way we're edging into the future is that we're a member of the Aeroxchange, which is a vertical airline exchange that is just forming and coming into play. It's headquartered in Dallas, and ourselves and 10 other airlines worldwide have an equity stake in it. We think that's going to be a large e-procurement tool in the future, particularly with our airline parts, as far as gaining synergies in the marketplace.
We're looking at reverse auctions as an e-procurement tool. Our main goal there is not so much lowering costs as it is shortening cycle times on some of the major things that we do. Many times, we'll get into major sourcing initiatives and they take us six months to complete; and a lot of that time is spent in negotiating with suppliers, having them travel in here, sitting around tables and working out lengthy negotiations. And this idea of having an RFP or an RFQ go online and then having an auction that's basically over in an hour has real appeal to us as far as reducing cycle time and kicking in our savings earlier.
While Ryder might be known for its yellow rental trucks you see on interstate trips, there's a lot more to the company than shipping Junior off to college. As Bill Jones, director of Ryder's new 42,000-square-foot Transportation Management Center, explains, Ryder is a major player in the transportation industry, and they're also moving heavily into e-procurement. Our mission and purpose is to take all the operations we have in the transportation management center and maximize the value, to give the service required for shipment. That's where we accomplish the $1.7 billion worth of Ryder procurement that we have.
Jones says that while the primary e-procurement software at the TMC is i2, there is also an e-procurement installation that was developed inhouse. We have a software package that's called SCAT (Supply Chain Active Tracking). It's a Ryder system, and it's a customized derivative of Global Village. That is also tied in with the facility. The first operation that we tie in to the location with SCAT will be Northrop Grumman, the aerospace contractor, and we will begin operations with that company the first week of November.
Jones explains that one of the things Ryder was able to do for the aerospace giant was improve tracking ability. Due to Northrop Grumman's size, shipments were often lost, in that no one knew exactly when it arrived or where exactly it was. We set up a barcode application in SCAT so that once we determined what carrier was going to be assigned the shipment it's put into the system; and then we can generate barcode labels based on the shipment count, and send them back to the supplier. That barcode cross-references the Northup-Grumman PO number, and the shipper applies that to all the cartons, skids, etc. When the shipment is received at the appropriate NG facility, they can scan it and that is tied back into our system. So not only do they know from a tracking standpoint what time it's picked up en route, but once it's delivered, they know exactly where in the plant it's been received.
With the increased capacity and technology, it's obvious that, while moving kids off to academia might remain a company mainstay, high-tech e-procurement is something that Ryder is implementing in a big way. No matter what the color of the truck.