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I honestly never thought that one day I would be trying to make sense of the tech transformation taking place in the supply chain.
What I have tried to do this week is picture how some the major forces and risks could affect or benefit traditional freight forwarders, as well as other asset-light T&L players.
Make no mistake, it is a delicate balancing to develop a truly unified enterprise resources planning (ERP) software environment where tech and business, together, thrive. If it is possible at all.
Too many moving parts? You are projected into the future.
The chart above doesn’t include port operators, but given the latest news concerning Felixstowe, you could easily throw them into the mix somewhere between the carriers and the freight forwarders.
Here is what’s going on in tech-land: e-commerce dominates the last-mile game, but not necessarily the tech-led decisions that affect all the other players in the supply chain. The strategy of Amazon has led Wal-Mart, Google/JD.com and Alibaba to also look for scale and tie-ups, in different verticals, and to invest in tech solutions that improve their customers’ experience, both B2C and B2B.
Meanwhile, there are also considerations involving long-standing back-end relationships between key stakeholders in supply chain affairs – shippers, carriers and freight forwarders – where the software that allows them to access shared data, and vital freight information is of paramount importance, but often might be out of their control or simply lack the required transparency.
Given the competitive landscape and its fast-changing dynamics (who does what), the obvious question for me is whether companies operating in the transport management systems (TMS) environment might consolidate among themselves, perhaps gaining pricing power – it could be the opposite, my IT sources argue, depending on the packages they offer – and adding more breadth and depth to the solutions they market to the freight forwarders.
On top of that, will freight forwarders themselves ever come to terms with the idea of leaving software developments to software developers, essentially continuing to be price-takers… which is not necessarily a bad idea.
This matters a lot in a market where managing and reducing the risk posed by shrinking margins is a tall order for the middleman, and where only a few smaller, highly valued companies (Wisetech) and tech behemoths (SAP) are at the forefront of competition in ERP.
This is a world which also forces TMS companies to try and buy inorganic growth (M&A) in the freight forwarding space, while freight forwarders have yet to target M&A in the TMS space.
In all this, the carriers might be set to benefit as disintermediation of freight forwarding occurs, and asset owners gain from obvious tech benefits in the trade.
It’s a kind of magic, so TMS considerations top the list. According to Gartner, only 13 companies in the world can make its magic quadrant for TMS, which is shown below.
Why is this important? As they grow and expand, TMS should be seen in the context of relative benefits that, in terms of ROI, are often promised and may not always be delivered.
According to research from MercuryGate, one of Gartner’s challengers, “modernising your supply chain begins with the right TMS”. In its own words, its clients need to narrow their search for a TMS that aligns the business with the strategic direction of the firm in a market where a growing percentage of companies go with SaaS (ergo, the cloud, in most cases) “because of the reduced requirement on the IT group and on the IT hardware budget,” according to Geoff Milsom of enVista.
Gartner recently argued that failure to show how a transportation management system supports the business strategy and corporate goals could cause funding to be directed to other initiatives. “Supply chain leaders should use this research to build stakeholder support by determining and linking the ROI to the business strategy,” its analyst added. I should add that this research really is excellent stuff.
The cloud environment is easily exploitable, and likely provides a competitive advantage to booking platforms versus traditional players, but I doubt the former are a serious threat for freight forwarders, unless the services they offer are fully integrated and effective and offer scope for value-add.
Is the Kuehe+Nagel (K+N)/Zebraxx partnership a threat to K+N?
Could Kontainers’ booking platform be a game-changer for the forwarders?
One veteran freight forwarder told me that there were opportunities for those willing to embrace the tech changes, with TMS being a hot area in terms of outsourced budgeting allocation.
(There is an overlap between TMS and booking platforms, of course.)
Agility’s TMS solutions are a bridge between 3PLs and 4PLs, and the same applies to DSV’s road business and to its other units, as well as to CH Robinson’s TMC, but in the bigger scheme of things they do not move the needle.
Think of it as a body – critical information is stored in the TMS, which regulates the circulation of blood cells (freight/assets) monitored by the IT system in the supply chain body, but if the freight forwarding heart doesn’t pump and the data is incorrect, the likelihood of a heart attack increases. That is to say, if their TMS strategy doesn’t match execution.
“TMS: buy or build? is one question. And then, what kind of TMS?” I asked a source who is closely looking at the 3PL/4PL debate.
He replied with a question of his own: “What makes forwarders believe they are capable of writing software in a market where risks are visible and data is scarce?”
Take DP-DHL, which last week in Asia gave another update on its roll-out, after a couple of very painful years.
More broadly, as far as technological innovation is concerned, CEVA Logistics summed it up pretty well in its latest annual results.
As ever, a key bellwether of freight forwarding is Expeditors, which says that “internally developing, maintaining and enhancing technology capabilities is in keeping with Expeditors’ long-held belief that it not outsource core functions, with information systems being one of those core functions”.
Its board appears focused on the changes that are occurring in the IT landscape. “Technology is at the foundation of everything we do. Our single, global technology platform enables greater speed, visibility, and analytics across our network, and allows seamless introduction of new capabilities throughout our worldwide organization. Our constant focus on people, processes, and technology is a key differentiator that drives our success.”
But it comes with the following caveat: “boots on the ground means more than having the best technology and systems to move freight from origin to destination. Sometimes technology and systems aren’t enough, which is when we get a chance to show the strength of our company at its best.”
However, supporting material from public companies is scarce.
Take DP-DHL GF, DSV, K+N and Panalpina: where and how can their vision be quantified?
In a Capital Markets Day event two years ago, DSV said that slightly below 2% of its revenues were penned in for “IT spending”, which is not broken down.
Based on its own consolidated numbers (road and contract logistics are included), that equates to $220m a year, but when I apply that percentage of sales/capex to the top 20 freight forwarders by revenue, $1.5-$1.7bn is the aggregate annual budget for IT investment, which really doesn’t seem to be very much at all given how much importance people are placing on it.
Consider that, at a time when forwarders’ trading multiples are detached from reality, in a bad way, Wisetech alone is now worth almost twice the top end of that range, and there is a reason why its stock trades at 20x sales and 60x ebitda.
What I am trying to illustrate here is that it is not beyond the bounds of possibility that a tech provider may decide to make a move on a freight forwarder – they certainly have the funds, so the question revolves around whether it makes sense strategically.
(Gian Mario Contessa, CTO of Hedging Beta, contributed to this analysis)