This past week I read an article entitled, “Not an Automatic Decision”, written by Eric Johnson that appears in the February issue of American Shipper. Since my company has been involved in numerous freight transportation e-procurement projects over the past seven years, I thought I would share my perspectives on this topic.
Mr. Johnson makes the point that e-procurement is widely used in certain modes (e.g. truckload transportation) but not as common in others (e.g. ocean freight and rail). He argues that “whether automated procurement is prevalent in a certain mode often boils down to a couple of key factors: the level of competition, and the strength of shippers versus their service providers. High levels of competition (re: fragmented markets with few key large players) and (buzzword alert) ‘substitute-ability’ are clear indicators that e-procurement acceptance levels will be high. Alternatively, in modes where a cadre of large players dictates how service contracts will be negotiated, e-procurement acceptance levels will be low.”
The term “automation” does not mean that the procurement process is managed without human intervention; Rather it means that a “company is using a substantial amount of technology to support its transportation buying process. . . Alternatively, ‘manual’ doesn’t mean the procurement process is managed without the use of computers, Internet access, or other fundamental business tools. It’s merely assumed that companies managing procurement manually employ spreadsheets and other tools”.
There are two levels of e-procurement. A shipper can use a variety of software based e-bidding tools (e.g. some designed for freight analysis and others of a more generic nature) to facilitate the process. The tools help standardize the information flow, perform the freight data analysis and provide a disciplined rate negotiation process. Large shippers with complex supply chains and significant inbound and outbound freight traffic may require a more sophisticated level of analysis that may involve optimizing rates for round trips, continuous moves, by mode and by region.
Neither LTL nor truckload transportation is not a pure commodity on any lane in North America. It is not a 2 inch by 4 inch by 6 inch widget that can be manufactured to the exact same specifications by a variety of suppliers. There are thousands of trucking companies in North America. Even in the transportation sector where e-procurement is most prevalent, truckload shipping, there are wide variances among the providers. These variances exist in multiple ways:
- Capacity
- Quality of fleet
- IT capabilities
- Customer service
- Insurance coverage
- Freight handling processes
- Attention to detail
- Safety
- Quality of management
- Head haul and backhaul requirements on individual lanes
Then there is the issue of modal options. For longer lengths of haul, intermodal service can become increasingly attractive from a rate perspective. But intermodal transit times are typically longer than road. Therefore, shippers comparing rates between road and rail options in an e-procurement environment are essentially comparing “apples” to “oranges”.
The question isn’t whether e-procurement can be used effectively for surface transportation, for other types of transportation or for other products and services. Mr. Johnson points out that in “the most recent American Shipper benchmark report on automated procurement, 2010 Transportation Procurement Benchmark Study: Leveraging Automation to Manage Market Volatility, manual procurement had dropped from 60 percent in 2009 to 40 percent as of July 2010. . . Thirty percent of shippers leverage a procurement application of some kind” . . . while “twenty-eight percent use a mix or hybrid model, which probably varies by mode or geography”.
The bottom line for me is that during every freight procurement or RFP exercise, you meet with the management team of the potential service providers. You have an opportunity to ask probing questions about their ability to service the shipper (e.g. trailer drops, satellite communication, weekend operation, holiday operation, EDI etc.). In some cases (e.g. LTL) a terminal tour is required to inspect the quality of their local personnel and their level of organization. This is when the “rubber hits the road”. The interviews and visits make it clear to me how companies that operate in the same sector of the industry can be and often are so different.
E-procurement is a tool that has been utilized by my company and others for years to successfully facilitate the freight services procurement process. These tools are extraordinarily helpful in leveraging volumes and producing cost savings. However, one should never forget that freight transportation is a people business, not an automated or assembly line process. As a result, the best decisions can only be made by blending the data analysis provided by e-procurement with face-to-face, eyeball to eyeball communication and observation.
