By Marco Cristini, Business Analyst
Shippers often find themselves at a crossroads: outsource transportation activities due to a lack of internal knowledge and resources, or acquire Transportation Management System (TMS) technology to confront transportation challenges?
In cases where shippers have outsourced their transportation activities, we often find the classic set-up: a Third-Party Logistics Provider (3PL) is in charge of the shipper’s transport operations, and achieves freight savings by:
- Consolidating orders (from one or more shippers to one or more receivers); and
- Selecting the lowest-cost carrier and service for each particular load.
This may seem paradoxical, and rightfully so. After all, one of the core competencies of a TMS is consolidating orders and selecting the lowest-cost carrier. In fact, most 3PL companies use a TMS to achieve their business objectives.
So how do you know whether it is more beneficial to adopt TMS technology or hire a 3PL?
A 3PL’s strength is its ability to manage capacity constraints. In most cases, this is due to the fact that 3PLs are exposed to a large network of shippers and carriers, and therefore have access to a wider range of options for consolidation and delivery (keep in mind, a 3PL company is not optimizing shipments for one single shipper but for the entire community of shippers with which it is working). 3PLs also provide value when it comes to warehousing and dispatch activities.
A TMS solution normally provides a full set of features that allows shippers to cover end-to-end logistics: order management and consolidation, shipment planning and execution, cost settlement, and reporting. Shippers maintain a direct relationship with carriers and all logistics parties. In addition, shippers have direct insight into operational KPIs, scorecards, and business performance.
As you can see, it isn’t easy to conclude which option is a better fit!
Let’s go through a simple exercise to get to the heart of the matter:
Does your organization have the resources and the knowledge to manage transport activities?
If so, you probably do not need external help unless you are having issues with capacity constraints. As mentioned before, 3PLs have considerable experience in distribution management. However, difficulties in finding and selecting carriers can always be alleviated by external software with the functionality to identify available carriers and average rates per lane.
Is it important to maintain direct relationships with carriers?
If a direct business relationship with carriers results in higher negotiation power and increased levels of customer service, it is probably better to invest in improving carrier management through the performance feedback a TMS application generates.
Acquiring TMS technology makes sense when shippers want to ensure visibility across the entire transportation network through a Control Tower, maintain strong business relationships with carriers, and have direct insight into real-time logistics operations.
If a shipper is incapable of maintaining high-level efficiency across the supply chain and faces challenges finding carriers, 3PLs can help scale, solve capacity constraints, and create a value added service.
Either way, you can always opt for a hybrid solution and decide to select a TMS based on collaboration between the shipper and 3PL.