Rising Energy Prices (and Profits) 

ExxonMobil reported its annual earnings last week - $40.61 billion!  Exxon’s profit is the largest in US corporate history beating its own record 2006 earnings of $39.5 billion.  To illustrate the magnitude of Exxon’s achievement consider that

·         Exxon’s profits alone would be nearly enough to buy Yahoo! assuming they would accept the valuation ($44.6B) Microsoft placed in their offer last week.

·         Exxon’s profits are larger than the GDP of over 120 countries.  If Exxon’s 2006 profits were a country it would rank #67 in terms of GDP on on the World Bank’s list. 

·         If Exxon’s profits were revenues, they would rank #58 in the 2006 version of the Fortune 500.

Exxon is not the only energy company enjoying robust profits.  Chevron posted $18.69 billion for its 2007 earnings.  BP posted $20.8 billion for full year 2007.  Royal Dutch Shell, ConocoPhillips and other the energy titans are also benefiting from the high price of oil. 

Energy’s Impact on the Economy 

As consumers we are well aware of the rising energy costs in today’s markets.  The pain is felt every time you go to the gas pump or your heating bill arrives in the mail.  But how are rising energy prices are affecting corporate spending?  Businesses focused on transportation services have the most obvious impact.  In the past few weeks several major US airline operators such as Delta have reported significant losses.  Rising costs of jet fuel were cited as the primary cost.  Higher energy costs impact profit margins not just for transportation providers, but for any company in the business of transporting physical goods.  Manufacturers of raw materials and parts or finished goods such as automobiles, food, apparel, electronics, pharmaceuticals and medical-surgical products, are being significantly impacted by rising transportation costs.

TMS Applications 

Rising transportation costs are one key factor leading many retailers and manufacturers to purchase specialized software to optimize logistics processes.  These applications called Transportation Management Systems (TMS) offer support for logistics sourcing, planning, execution, settlement and optimization.  A recent Gartner Group report on Transportation Management Systems stated:

“Exploding freight costs, increasing supply chain complexity and rising globalization combine to create a lucrative TMS market, with 10% annual growth projected during the next five years.” 

Rising fuel costs are not the only factors driving manufacturers to focus more closely on logistics processes.  As more and more manufacturing is being relocated to Asia, goods are traveling further to reach their final destinations in the US and Europe.  The result is that transportation represents a higher percentage of the overall costs of goods sold.  Inventory levels are also rising to hedge against the uncertainty associated with international shipments.  Port congestion and potential labor strikes represent growing risks, particularly for the West Cost of the US.  Many US importers are employing diversification strategies to route goods through East Coast or Gulf State ports.   Growing driver shortages and roadway congestion also pose on-going risks to logistics performance.

The ROI of TMS 

Using a TMS, logistics professionals can tackle a number of the complex issues related to long-distance supply chains, global trade management and freight spend management.   A TMS enables transportation managers to assess total landed costs per shipment; to identify opportunities for load consolidation; to measure carrier performance; and to audit invoices for contract compliance.  Successful TMS implementations can yield annual logistics cost reductions of 5-25%.  TMS users have also improved customer service by improving delivery schedule reliability.  More and more customers are requiring shipments to arrive within relatively narrow delivery windows.  Being able to plan exact timeframes for deliveries is becoming critical to support sophisticated cross docking or vendor managed inventory processes.

A Complete View of Logistics Activity 

A key pre-requisite to achieving the benefits of a TMS application is digitizing the information flows between carriers or 3PLs and their customers.  Retailers and manufacturers implementing TMS applications need to centralize all logistics related data into one master repository.  The TMS application then functions as a single window for all transportation activities across the enterprise, regardless of the third party provider; the mode of transportation; and the point of origin.  Without 100% of the logistics data, a TMS application may not provide accurate recommendations on route optimization, carrier performance or shipment visibility.

Carrier On-Boarding 

One of the greatest challenges for buyers of TMS applications is integrating with their diverse community of transportation vendors around the world.  To gain a complete picture of logistics activities, TMS owners must ensure 100% integration with all of their marine, air, rail, TL and LTL carriers as well as other logistics providers such as 3PL, 4PL, consolidator, freight forwarders, customs brokers and postponement specialists.  All of the larger carriers and 3PLs offer Electronic Data Interchange (EDI) with their customers.  However, an individual connection must be established and tested independently with each different carrier.  The process to on-board transportation vendors using EDI can take many months, if not a full year.  As a result, the expected return on investment from TMS projects is not realized as quickly as promised in the original business case. 

Transportation vendors struggle with B2B integration as well.  They have to integrate to each customer independently, resulting in a spaghetti-like maze of connections using a myriad of e-commerce standards.  Not only due transportation vendors have to support the wide variety of Internet communications protocols (AS2, S/FTP, HTTP/S, etc.) in use today, but they also have to support the wide variety of document formats  such as EDI (ANSI X12 and EDIFACT), XML and  RosettaNet.  Increasingly, customers are requesting that logistics providers provide data in the native file formats of their TMS application.  Each of the 10+ popular TMS vendors (i2, Oracle, Red Prairie, SAP, JDA, etc.) has their own internal data structure.   

Poor Data Quality 

As retailers and manufacturers on-board transportation vendors onto their TMS applications they are often discover another challenge.  The data being provided via EDI is inaccurate, out-of-date or incomplete.  Logistics providers are notorious for providing low levels of data quality in their electronic transmissions.   Simple examples include:

·         Codes – Most transportation vendors have a unique system for referencing locations, time zones, activities and units of measure using 2 or 4 letter codes.  While these codes are meaningful to the carriers, they are unintelligible to a retailer or manufacturer.

·         Time Zones – Shipment status messages often contain a date and time for a specific activity such as port departure.  However, an accurate time zone is not provided.  As a result, the retailer or manufacturer is not sure if the time refers to GMT, US EST or local time at the port of origin.

·         Quantity –Often the quantity fields in shipment documentation have a numeric value, but no unit of measure.  So a shipment may contain a quantity of 5000, but the retailer or manufacturer receiving the goods does not know if 5000 refers to the number of units or the weight in kilograms.

Poor data quality degrades the value of TMS applications by lowering the confidence level associated with the reports and analysis provided.  Prior to making decisions, transportation managers must cross-reference the data in TMS applications with phone calls to the supplier and carrier.

A Better Model 

So the point of all this is that without high quality, up-to-date feeds from third party logistics providers, a TMS application offers little value to the customer.  Buyers should factor these challenges into ROI and deployment models for new transportation projects.  But there is a new paradigm emerging – one that helps retailers and manufacturers minimize the challenges with carrier on-boarding and data quality.  I will discuss the new models in a future post.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.