When companies want to reduce their transportation costs, while maintaining or even improving customer service, they have two main choices: implement a transportation management system (TMS) or outsource transportation to a managed services firm.
Managed Trans Explained
The managed transportation services (MTS) – also called managed trans – providers have planners in a control tower using TMS technology, who plan and execute loads on behalf of their customers. In winning deals, the MTS provider often examines a client’s existing business processes, develops a preliminary freight management plan, and then targets a percentage cost savings achievable for the client over the life of the contract. David Commiskey, the Vice President of Customer Solutions at GlobalTranz, points out that once a customer’s “freight spend reaches $25 million, the potential for savings from optimization goes way up.”
I’m doing a market study and a supplier selection guide on the MTS industry, so I’ve had conversations with executives across the industry. And of course, I wanted to know how COVID-19 was affecting the industry.
Freight transportation is very sensitive to economic volatility. BluJay Solutions, a provider of both TMS and MTS, is now offering their Freight Market Index for free. This report benchmarks key performance indicators derived from the over $18 billion in annualized freight under management transacting within BluJay’s Global Trade Network. In the commentary section of this report, Mike Mulqueen from JBF Consulting, this sensitivity is described nicely. “Carriers carefully tune their networks and allocate their assets based on historical and forecasted lane demand. This tuning is quite sensitive and unpredicted variability can have an extremely negative impact on the efficacy of the system.” COVID-19 certainly brought variability.
For example, manufacturers providing food products to groceries have transportation volumes that have surged in parallel with their sales, while food distributors who sell to restaurants have had their volumes plummet. And further adding to complexity, there are conglomerates that have some health-related product lines surging, while other product lines have plummeted. MTS suppliers need to deal with this volatility.
Managed Trans Providers Use a Variety of Tools to Secure Capacity
Typically, a large part of the value provided by a managed trans relationship is that the MTS supplier provides help and expertise surrounding strategic procurement. In this exercise, often conducted once a year, but sometimes less frequently, a shipper shares their projected lane volumes with potential carriers and the carriers bid on those lanes. A lane is a move from a point of origin to a destination, for example, from central California to Chicago. Carriers are generally selected by lane –- for both price and service.
But for customers whose volume has surged, the MTS provider will also need to secure capacity outside of the strategic procurement relationships.
Some managed trans providers are asset-based logistics service providers (LSPs). Shippers who select MTS providers who can dedicate trucks to their account may put a higher value on service excellence than other shippers. Or they may have lanes with big, important, and demanding customers where they want to use dedicated. Despite strategic procurement agreements, BluJay’s Freight Index shows that the average tender acceptance rates from primary truckload carriers has run between 70 and 90 percent since 2017. Companies that have dedicated transportation can expect to do much better on this key metric. Ryder System is this kind of managed trans provider. Steve Sensing, the President of Global Supply Chain Solutions at Ryder System, told me “we have 95% primary carrier acceptance rate, on average. For some customers, it’s as high as 98%. We also have greater than a 95% on-time rate.” At the end of the first quarter, Ryder’s average fleet count for their dedicated clients stood at 9,400.
Mr. Sensing further explained that their dedicated customers commit to a certain number of trucks in contracts that extend three to five years. With COVID-19, Mr. Sensing said, “We are in a unique situation. Less than a handful of customers are telling us they are impacted in the long-term.” Most of their customers think this a a 4-8 week cycle, after which things will begin bouncing back. “But in the last six weeks out Business Intelligence team has worked to redeploy some drivers and tractors that were idled in one industry and build up pop-up fleets for the food & beverage side of our business.”
Some MTS providers are also freight brokers. GlobalTranz, Transplace, XPO, Echo Global Logistics, and Coyote Logistics all have brokerage operations. In many cases the brokerage business is far larger than their MTS business. Thus, they have preexisting relationships with tens of thousands of carriers. But Mr. Commiskey of GlobalTranz points out that that they do allow other brokers to bid on freight that they can’t cover.
In conclusion, while we are in a global recession, and many companies have seen sales plummet, there are many companies in industries with surging sales. These lucky companies need to secure reliable transportation to meet surging demand. Managed trans providers have different tools to deal with this situation.