Transportation costs are a competitive factor
The ROI of a TMS. In our economy, transportation costs have become an important competitive factor in almost every industry. For this reason, more and more companies have decided to invest in tools such as Transport Management Systems (TMS). Not only large enterprises, but also small and medium-sized companies, are starting to see the advantages to be gained in optimising the physical and financial flows of goods.
Important to see a return on investment
According to Arc Advisory Group’s brief, Return on Investment (ROI) is driving next generation TMS adoption, “…a transportation management system helps companies efficiently, reliably, and cost effectively move freight from origin to destination. Failure to transfer goods to and from a destination on time can lead to significant losses in revenues, as well as customers.” However, as TMS is an important investment for the company, both from a financial and organisational point of view, the follow-up question “What is the ROI of a TMS?” is a natural one.
Quantifiable and non-quantifiable elements
It is a question that is not easy to answer, because the ROI of a TMS is composed of both quantifiable and non-quantifiable elements. With a TMS, you can not only achieve a reduction in costs and higher revenues, but you can also improve the service level to your customers, with better visibility.
According to Gartner clients’ feedback, the average savings an end-user can expect from a TMS amount to between 5 and 15 % of the yearly freight spend.
What to consider when calculating ROI?
To calculate the ROI, two main factors must be taken into consideration: the scope and the cost of the TMS. In this way, we are sure to consider both the productivity generated by using the TMS and the investment in the solution. The analysis of the scope and the cost of the TMS will result in the benefits we can achieve: higher revenues and lower costs.
The scope of the TMS
A well-defined scope for the TMS is essential for the success of the investment. To achieve this, it is important to answer some questions:
- What modes of transport should be included? Each mode of transport (air, sea, land) has different dynamics, procedures and cost drivers that the TMS solution must be capable of supporting;
- What flows (inbound, outbound, intercompany) should be included? Import and export have needs and requirements that in some cases cannot be combined. A good understanding of the processes can help to identify eventual gaps in the TMS;
- How complex is the transportation network? A company can have linear transports from A to B or a more intricate design which demands a solution that can support multi-mode and multi-leg routings;
- How can the loads be optimised? Good load planning helps to avoid empty trucks and unnecessary travel;
- How can the procurement and the rate selection be improved? According to Primelog’s white paper “Purchasing guide”, it is important to take control of transport contracts and invoices in order to achieve a significant reduction in freight spend;
- How can the procedures be standardised to reduce manual work? Very often, most activities linked to transports are still undertaken manually, which leads to major personnel costs.
The answers to these questions can assist in choosing the right solution. Aspects which must not be forgotten include evaluating how the TMS solution can integrate with the systems already in place in the company (ERP, WMS, CRM, etc.), how it can grow with the business and how scalable it is. Reporting capability, flexibility, time of implementation, ease of use are keywords to think about.
The cost of the TMS
The second factor in determining the ROI of a TMS is the cost: it is important to choose a vendor with a clear and transparent cost structure. Moreover, we need to bear in mind that non-user friendly solutions may generate extra and unexpected consultancy costs (and a delay in the implementation).
Reasons not to achieve ROI
But what could be the causes of an ROI not being achieved? I have listed some important reasons below:
- First of all, the project may not meet with success if the transportation processes are not well analysed or understood. To create the base of a good technological tool, the processes must, in fact, be improved. All the key figures (finance, logistics, operations) must be considered to ensure sound preparation for the project and avoid the risk of new costs and delays in production.
- There must be a good range of benchmark data: defining standards pre-TMS will help to ensure that the project moves in the right direction.
- Last but not least, the organisation must be ready for the change. One of the main obstacles can be resistance from employees who have been working with the same processes for many years.