The days when the transportation management system (TMS) was the latest killer app are long gone, yet demand has held surprisingly steady. TMS sales grew a respectable 4.4 percent last year, to about $950 million compared to $910 million in 2004, according to an early estimate from ARC Advisory Group. Projections for the remainder of the decade are still rosier. In a study released late last fall, ARC forecast sales would reach $1.2 billion by 2009, which translates to a cumulative annual growth rate of 6.4 percent.
Software makers owe much of their success to today's challenging business climate. The same market forces that have sent supply chain managers running for the Excedrin—rising rates, soaring fuel prices, demands to cut order cycles, pressure to provide better visibility—have presented vendors with an extraordinary marketing opportunity. It's not hard to understand why they're finding a receptive audience for software that analyzes gigabytes of data in seconds and spits out recommendations for the optimum mode, route and carrier, automatically sending an electronic manifest and auditing the freight bills later on. It doesn't hurt that many transportation management systems can generate forecasts for future freight capacity needs—a must for managers trying to cope with a crippling capacity shortage.
TMS sales have also gotten a boost from an unlikely source, Sarbanes Oxley. Adrian Gonzalez, a senior analyst with ARC Advisory Group, sees a direct link between the growing demand for transportation management systems and the scramble to comply with Sarbanes-Oxley's financial reporting requirements. "Chief financial officers are becoming better educated about the ... impact of logistics on financial performance, driven in part by the need to comply with the Sarbanes-Oxley Act," he says. "Many companies, however, do not have a clear ... understanding of their transportation costs. They're often bundled together with other costs and reported at an aggregated level, [making it impossible for companies to allocate] transportation costs to specific products, customers, or business units." But if a company has a TMS in place, he points out, it can call up that information at the tap of a key.
And though the software may seem ubiquitous, it appears that large segments of the potential market remain untapped. Gonzalez says that in the course of his research, he was surprised to learn how many large companies were not using a TMS, though he's persuaded that will soon change. The potential customers aren't limited to the heavyweights, either. As software prices drop, Gonzalez predicts that small and mid-sized companies will take the plunge as well.
Trading up
Those late adopters may be glad they waited. The TMS of tomorrow may well make today's versions look anemic by comparison. The next generation of software is likely to be more powerful. It's likely to be more versatile. And importantly, it's likely to be global.
At least that's what customers are starting to demand. Over the years, their needs have shifted. "They're getting more involved in intermodal, cross docking, and/or pooling to mitigate cost and time pressures," says Gonzalez. "They are saying, 'Here is what we want to do and how we want to change our processes and network.'"
Trouble is, many times they're finding that today's systems don't fill the bill. Gonzalez says he talked to one large manufacturer that had two TMS systems in place, neither of which was powerful enough to do the optimization the company considered essential.
The search for more power and control is leading some companies to consider on-demand solutions, which allow them to lease software as a service rather than purchase it outright. "I know of one ... company with many DCs and shipping sites [that felt it wasn't taking advantage of potential] economies of scale," Gonzalez says. "They faced a number of options—they could outsource or centralize internally." That company eventually chose to go with an on-demand system as a way to centralize the technology. "They will let the TMS vendor serve as a third-party logistics service provider, in a sense," he says. "The TMS vendor is providing a management layer."
Going global
But the development most likely to rock the industry is the explosion of global trade. As offshore sourcing grows, logistics professionals will need tools to help manage international shipping. And they're likely to want a single end-to-end solution, software that manages both domestic and international freight and offers the full gamut of global trade management (GTM) functions.
Gonzalez says he's already noticing that demand. "[W]e are seeing a need for a solution able to take a broader perspective, that can incorporate multiple modes, including ocean, air, and rail," he reports. Furthermore, he says, international businesses want systems with an "expanded footprint." That is, they want systems that include such functions as light inventory or order management and global trade management capabilities, like creating trade documents and screening for restricted parties.
Gonzalez says that most TMS vendors have not yet gone into much depth in developing that sort of functionality. "But they're beginning to get some inquiries about it," he says. "It's on customers' wish lists. The [vendors] are looking into how to provide it." Much of the demand, he adds, is coming from third-party logistics service providers, which are expanding their international service menus to include customs brokerage and freight forwarding.
Like Gonzalez, C. Dwight Klappich, a vice president of research at Gartner Group, believes demand for global trade management systems is certain to rise. In a December research report, Klappich predicted that within a year or two, GTM demand would outpace demand for other supply chain management applications.
Yet Klappich warns that no company has yet developed a holistic global trade management solution. And there's no telling how long the wait will be.
Some question whether it will ever happen at all. Greg Johnsen of GT Nexus says a big debate in the market is whether one company can provide both domestic and international solutions. Tackling the transportation portion alone would be no small feat, he says, given that international contracts, purchasing practices, and fees differ markedly from their domestic counterparts. Then there's the challenge of coordinating shipping with ocean liner schedules and the associated customs and security considerations. Furthermore, the large number of parties involved in most international moves would require visibility and communication capabilities far beyond those needed in domestic systems.
Still, no one's ready to abandon the vision of a single end-to-end system— software that seamlessly manages the entire global transaction. That's not to say customers will wait patiently, however. Klappich predicts that the more inventive companies will devise interim solutions, taking an array of specialized software and assembling their own global trade management systems piecemeal.
Gartner, Inc.