The overall business model for most logistics service providers (LSPs) is not that complex. The LSP provides services to their clients that, in turn, generate revenue for the LSP. A key challenge for most LSPs is that the difference between the revenue and expense (their margin) is so small, it must be relentlessly scrutinized. Additionally, given that many customers view LSP services as a commodity, LSPs are constantly challenged to differentiate their offerings against the competition. Fortunately, cloud computing is emerging as a viable solution for helping LSPs battle these challenges.
Solving the Cost Conundrum: Aligning IT Expense with Revenue
There are variety of expenses like facilities, transportation assets, fuel, personnel and technology required to deliver the service that generates the revenue. If an LSP has clear visibility to all their expenses associated with providing a particular service to a particular client, it becomes much easier to manage the margin and increase profitability.
There are many tools available to help LSPs gain this visibility. Transportation management systems (TMS) have sophisticated algorithms for allocating transportation costs across multiple clients. Similarly, warehouse management systems (WMS) have logic to allocate the cost of labor, space and value-added services to clients.
One area that remains difficult to allocate is technology infrastructure (hardware, networking and software). This is because traditional enterprise technology requires significant upfront investment and generally requires purchasing enough capacity to handle volumes at peak times (which may only occur one or two times per year).
New advances in both hardware and software can address this challenge. The emergence of cloud computing infrastructure and software applications delivered via cloud computing can help LSPs buy only what they need and more closely align the cost of the technology infrastructure with the use of the technology.
The fees for cloud services are extremely granular. For example, an LSP using a cloud based WMS would be able to see the specific charges for all technology required to service a particular customer. This would allow the LSP to develop cost-to-service models that included technology. Alternatively, the LSP could use these granular technology fees in a cost-plus model to ensure their profit margin on technology services.
Cloud technology also provides additional flexibility as the LSP’s use of technology expands. The cloud is elastic. This means that as the LSP adds more clients, processes more transactions, and expands services, the technology (and corresponding cost) scales nearly linearly. This is in sharp contrast to the traditional approach to computing infrastructure which requires large capital purchases and the use of depreciation to reduce impact on the income statement (sometimes not successfully).
Onboard New Customers and Processes Quickly
Another benefit of the cloud model is the time required to add computing infrastructure or instances of software applications. In a cloud environment new systems can be created in minutes instead of days or weeks with historical approaches. This is critical for LSPs that often cite the time to onboard new clients as a large challenge.
Similarly, as existing customers bring new requirements to the table, LSPs will also benefit from the flexibility that these systems can offer when deployed in the cloud.
Many TMS and WMS providers deploy “cloud” solutions using a multi-tenant model in which all customers share a single instance of the software. While this model has been very effective in the TMS world, it is too constraining for warehouse environments. Warehouse processes and customer requirements are too varied to succeed using a “one-size-fits-all” model.
There are solutions available today that are single tenant allowing LSPs to personalize the applications to quickly meet each individual customer’s process requirements while retaining the benefits of scalability and cost efficiencies of the cloud model. This is critical to taking full advantage of the benefits of a best-of-breed WMS.
Enable IT Resources to Focus on Differentiating Activities
Too often you hear stories of LSP IT teams spending 60-70 percent of their time on non-value-adding tasks such as system administration. This leaves precious little time to focus on strategic initiatives that will differentiate their service offerings. Cloud computing can solve this problem for LSPs. By turning over the day-to-day management of their IT infrastructure and applications to a third party, IT teams can refocus their time on expanding their service offerings and finding creative ways to address their client’s challenges.
When IT becomes a differentiator for an LSP, their services will no longer be viewed as a commodity by potential customers. This will enable them to increase their revenue and profitability. LSPs understand better than most companies the value of outsourcing tasks that are not your core competency. Cloud computing provides them with a mechanism for leveraging this concept.
Summing it Up
I strongly believe the use of cloud technology (both computing infrastructure and software applications) will continue to grow. Because of the scalability of this model, short lead time on expanding infrastructure, visibility to costs, and the ability to quickly onboard new customers without expanding IT bandwidth, this model is ideally suited for LSPs.
Chad Collins is Vice President of Marketing and Strategy at HighJump Software. He joined the company in 2002 and has more than 12 years of experience using technology to deliver innovative supply chain solutions. Prior to HighJump Software, he was in the supply chain practice of Cap Gemini Ernst and Young Consulting, where he managed supply chain technology projects for the world’s leading manufacturers. Mr. Collins holds a Bachelor of Science degree in electrical and computer engineering from Marquette University and an MBA in supply chain management from the University of Minnesota’s Carlson School of Management.