Crude oil reached over $100 a barrel this week prompting further discussion about energy prices effect on the economy. As I was driving into work on Thursday, I was listening to CNBC on the radio. The Squawk Box crew interviewed T. Boone Pickens on his thoughts about rising oil prices and the need for alternative energy sources. He was introduced to the theme song from the 1980s TV series – Dallas –a clever set up to the entertaining interview. The discussion inspired me to revisit the topic of transportation management suites that I commented on in my last blog entry (http://www.gxsblogs.com/keifers/2008/02/06/is-your-tms-implementation-costing-you-an-arm-and-a-leg/ ). Many retailers and manufacturers are implementing TMS applications to optimize their increasingly complex global supply chains. Rising energy costs are just one of the many drivers for these applications. However, the ROI from these TMS deployments is often delayed or reduced due to challenges with carrier on-boarding and data quality. I believe that the emerging SaaS (Software as a Service) model offers a number of advantages for transportation applications that can help to accelerate ROI. But before we discuss the SaaS model for TMS, allow me to offer some background information to support my argument…
Shared Vendor Communities
As industries continue to consolidate through
mergers and acquisitions there becomes a greater degree of sharing of
common vendors among large buyers. Within a niche industry it is common
for many large buyers to share common direct materials suppliers. The
grocery sector offers a good example. Large food retailers such as
Metro, Tesco, Carrefour, LianHua and Woolworths all source from a
common set of global brands such as Kraft, Nestle, Unilever, Henkel,
P&G and Coca-Cola.
Vendor overlap is not limited to large
suppliers. Overlap exists even in niche product categories. Consider
locally grown organic vegetables or patio furniture manufactured
offshore. For these types of products there is usually a small
community of vendors who supply all of the major retailers.
Supplier overlap occurs more frequently with
providers of indirect materials and services. For example, many of the
world’s largest manufacturers, whether they produce automotive,
electronics, aerospace, furniture and apparel products, are likely to
share a common set of financial institutions for their banking and
insurance services (e.g. Citigroup, HSBC, Allianz, AXA). Similarly,
this same group of manufacturers will all source their logistics
services from a small community of transportation providers.
The Network Effect of SaaS
The growing overlap of vendors amongst large
buyers offers an opportunity for SaaS application models to offer a
tremendous competitive advantage over traditional software. The
advantages stem from a concept called “the network effect.” Here is
how it works. In the traditional software model, each buying
organization must establish a separate connection to each individual
trading partner in their value chain. The result is a spaghetti-like
maze of connections between buyers and suppliers. As a result, the
process of trading partner on-boarding often takes years due to the
need to connect each community member one-by-one.
By contrast, when a buyer subscribes to a
supply chain application using the SaaS model, they gain immediate
access to the existing community of trading partners already using the
service. As more buyers and more suppliers join the community
significant economies of scale are generated. On-boarding times can be
significantly reduced using the SaaS model. Suppose a large buyer
decides to subscribe to a SaaS application. Instead of on-boarding the
entire supply chain community, only a subset of the trading partners
will need to be ramped. This is because many suppliers are already
utilizing the application with another buyer. Therefore only the net
new vendors must be enrolled.
SaaS for Transportation and Logistics Applications
In the case of transportation and logistics
applications, the SaaS model offers a compelling “network effect” to
all participants. Once a carrier connects to the hosted transportation
management application they can exchange data with all the buyers on
the system. As the community of buyers (and carriers) continues to
grow, the value for all participants begins to multiply. Rather than
connecting to each of the hundreds of transportation vendors utilized
throughout the world, corporate buyers can connect to the SaaS vendor
once. As new relationships between carriers and customers are formed,
technical integration efforts are minimized.
The chart above illustrates how carrier on-boarding can be accelerated via a SaaS model.
SaaS is an emerging model that can accelerate
the ROI and lower the TCO of many B2B integration initiatives. TMS is
not the only supply chain application that can benefit from a SaaS
approach. In future posts, I will discuss other applications of SaaS
such as Vendor Managed Inventory and Supply Chain Finance. In the
meantime, there is a wealth of information the GXS Insights portal (www.gxs.com/insights) about SaaS including a video with AMR analyst, John Fontanella.
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