What is a Transportation Management System (TMS)?

A transportation management system (TMS) is specialized software for planning, executing and optimizing the shipment of goods. Users perform three main tasks in a TMS: Find and compare the rates (prices) and services of carriers available to ship a customer’s order, book the shipment and then track its movement to delivery.

The broader goals of using a TMS are to improve shipping efficiency, reduce costs, gain real-time supply chain visibility and ensure customer satisfaction.

Shippers and carriers are the primary users of TMS software. Manufacturers, distributors, e-commerce organizations, wholesalers, retailers and third-party logistics providers (3PLs) are also major users of TMS software.

A TMS is one of the core technologies used in supply chain management (SCM), a discipline that encompasses supply chain execution (SCE) and supply chain planning (SCP). TMSes are available as standalone software or as modules within enterprise resource planning (ERP) and SCM suites.

While some TMSes focus on a single mode of transportation, most systems support multimodal and intermodal transportation. In multimodal, a single carrier uses at least two modes of transportation — truck, rail, air or sea — and is legally liable for meeting the terms of the contract, though it might hire subcarriers. Intermodal transportation refers to shipments that require more than one carrier and contract. Intermodal gives shippers more control over carriers, prices and modes of transportation but makes them more responsible for managing the process.

TMSes have gained traction over the past decade as enablers of global trade and logistics. Gartner, in its March 2020 Magic Quadrant report, reported that, starting in 2018, the global TMS market was growing at a five-year compound annual growth rate (CAGR) of 11.1%, would reach $1.94 billion by 2022 and account for nearly a third of the SCE market.

How transportation management systems work

Fundamentally, a TMS is a repository of detailed information about carriers, but it is also a transactional and communication system that enables users to plan, execute and track shipments. To do all of those things, it must have strong integration with carrier systems and data sources or some way to download carrier information. It must also facilitate entry of the customer orders that specify what is to be shipped.

Usually, orders come in automatically from ERP or order management systems that are integrated with the TMS. A TMS will sometimes be integrated with a warehouse management system (WMS) to enable better coordination of the tasks that occur at the interface of warehouses and freight shippers, such as palletization of goods, labor scheduling, yard management, load building and cross-docking.

The three main SCM systems — ERP, WMS and TMS — each have important but largely distinct roles to play in processing orders. Integration among the three enables them to share certain types of data and standard documents that are necessary for getting the right products to customers on time as efficiently as possible (see Figure 1).

Figure 1. Each of the three main SCM systems has a particular role in managing orders and sharing data with the other two. The TMS manages the data and processes relating to the transporting of goods.

Here is a brief summary of what ERP systems and WMSes do and how the ERP system relates to a TMS.

The ERP system handles the accounting and most of the invoicing, order management and inventory management. The WMS’ role is to help users manage the fulfillment, shipping and receiving tasks in the warehouse or distribution center, such as “picking” goods from shelves for shipment or putting received goods away. Its role in inventory is to track the inventory data that comes in from barcode readers and radio frequency identification (RFID) tags and update the inventory management module in the ERP system to ensure it has the latest information. An integration link synchronizes the inventory data in the ERP system and the WMS.

The ERP system outputs the order information the TMS needs to prepare and execute shipments. Besides basics like customer name and address, the data stream from the ERP system also includes detailed item information to ensure the right products are shipped. The TMS returns the shipment details that the ERP system needs for its accounting and order management functions, such as the tracking number, carrier name and costs. The shipment information might also go to a customer relationship management (CRM) module so the sales and customer service departments can update customers about the status of their orders.

Importance of a TMS

A TMS is a necessity for any company with direct responsibility for transporting a significant volume of goods or hiring service providers to do the job. The complexities of today’s supply chains, transport modes and regulations make the task nearly impossible without computerization.

Automation of these complex processes helps ensure that transportation services are secured as inexpensively as possible without a loss of quality or efficiency, according to ARC Advisory Group. Two-thirds of respondents to a survey conducted by the analyst firm reported saving money on freight, with a third saving 10% or more.

TMS and the supply chain

TMSes play a central role in supply chains. SCM is the process of planning, controlling and executing the flow of a product through the various stages of its lifecycle, from raw materials to production and distribution. Transportation is usually required in all of the major steps.

Raw materials, for example, need transporting from their original location — perhaps a mine or a farm — to the supplier’s processing plant. While the materials’ ultimate destination is likely to be a manufacturer, there may be intermediate locations along the way. The manufacturing process itself might require additional shipments if, for example, subassemblies need to be moved between the manufacturer’s facilities or to those of a subcontractor.

Distribution of the final product typically requires several steps that may involve more than one mode of transportation — say, when products made in China are shipped overseas, received in a port and placed on trucks. Even the final shipment to the retail store or the customer’s home isn’t the end of it. In reverse logistics, the product is returned to the distributor or manufacturer for servicing or refurbishment only to be shipped back to the customer or store for resale, or the product might be transported to a recycling facility or landfill.

TMS deployment options

Like most enterprise software systems, TMSes started as on-premises systems but have increasingly been deployed in the cloud either hosted or as software as a service (SaaS). There are also TMS managed services.

Running in the cloud has obvious advantages in easing connectivity between TMS users, carriers, customers and supply chain partners. Some TMS vendors try to differentiate themselves by offering single-instance, multi-tenant SaaS, which they say has cost and integration advantages over single-tenant SaaS and private cloud options.

In fact, according to Gartner, most of the growth in the TMS market comes from cloud offerings that companies bought to replace on-premises TMS, a trend that is likely to persist. Meanwhile, TMS vendors continue to migrate their products to SaaS, in large part to fend off competition from fast-growing “cloud-native” vendors who started with SaaS TMS. The analyst firm predicted the SaaS share of the TMS market will nearly double from 37% in 2017 to 65% in 2022.

Though many organizations nowadays prefer to run a TMS in the cloud because of the connectivity advantages and potential savings in IT labor and infrastructure, on-premises deployment is still preferred by some large manufacturing and distribution firms that have stringent security requirements and want day-to-day control of their TMS software.

Functions of TMS

The functions of a typical TMS (see Figure 2) can be loosely grouped into the following categories.

Freight management

A TMS acquires, stores and updates the rates that carriers charge for shipping, often over the internet in real time. Having current rates in one place makes comparisons easier than in the pre-TMS days, when freight managers would have to phone or fax carriers and record rates manually. Instead, relationships with carriers, the rates negotiated with them and delivery times can largely be managed online. The number of carriers in a TMS can reach the tens of thousands.

Other features handle the workflow and paperwork involved in freight management, such as contracts held with individual carriers, and load tendering, which provides the details that carriers need to decide whether to bid on a load and serves as a record of what was agreed to. Some TMSes also support order management, though that function is more commonly done in ERP or separate order management software.

Figure 2. The typical TMS provides a complete set of sophisticated tools for planning, executing and optimizing shipments and has a repository of up-to-date shipping rates for carriers that can number in the tens of thousands.

Execution

A TMS also enables users to execute the major actions of freight management, including booking of shipments with carriers. Real-time visibility into the movement of freight throughout the transportation network makes it possible to track the shipments and share that information with customers and suppliers. There are also communication mechanisms for contacting drivers in transit and GPS (Global Positioning System) features for measuring time and distance.

Planning

While most TMS features focus on execution, much of the power of the system comes from the tools it provides for planning and optimizing the shipping process. It provides data and analytics on critical factors, such as price, service level and transit time, to enable users to choose the carriers and routes most likely to transport goods the fastest and cheapest. These optimization capabilities can extend down to the order and load level. Users can, for example, size loads or redirect orders to maximize the use of carrier resources in less-than-truckload (LTL) shipments. They can also plan multileg trips to minimize fuel and labor costs by avoiding empty miles between stops.

A TMS usually has reporting and analytics features for analyzing carrier performance and other key metrics. It can also export data and reports to the ERP system or a business intelligence (BI) platform for analysis.

Administration

Transportation and logistics management are inherently complex endeavors that require substantial paperwork for business-to-business (B2B) transactions, regulatory compliance and auditing. Accordingly, a TMS must have sufficient administrative features to support the documentation and financial reporting requirements. Typical features include billing, payment and tools for ensuring accuracy by comparing a carrier’s published rates with the amounts in an invoice, for example. There may be an automatic payment system to minimize handling of invoices. A TMS can also generate a bill of lading, a type of receipt that a shipper or carrier can issue to specify the items in a shipment and the terms of the contract. Bills of lading are also used in customs and insurance.

A TMS must also handle settlement, a more complex process that requires documenting certain freight milestones and metrics before payment can be made, such as proof of delivery, pickup and time in transit. Data collected during the settlement process is fodder for the TMS’ performance management and optimization processes. TMS users can search settlement data for clues to customer demand and capacity utilization and to negotiate special pricing for factors such as loading speed and time of day.

Benefits of TMS

Transportation management software can benefit companies in numerous ways, including the following:

• reduced distribution and warehouse costs through better fleet management, labor and space use, and coordination between the transportation and fulfillment functions;
• higher customer satisfaction from a more responsive shipping process;
• supply chain visibility from the ability to track and monitor the lifecycle of orders and shipments in real time;
• improved inventory management and forecasting, thanks to better visibility and accountability in the supply chain network; and
• reduced administrative costs and invoicing errors from automating freight payment and auditing processes.

TMS software providers

Vendors of TMS software fall into the following four product categories:

• ERP suites. Microsoft, Oracle and SAP are prominent ERP vendors that offer substantial TMS modules as options in their suites. Most other ERP vendors rely on third-party TMSes that are integrated with their ERP offerings. Smaller ERP vendors also have distribution modules that handle some TMS tasks but aren’t true TMSes.
• SCM suites. Makers of SCM suites typically provide everything but the ERP component. Major players include Blue Yonder (formerly JDA) and Manhattan Associates — the two largest SCM vendors, according to Gartner — E2open (Cloud Logistics) and BluJay.
• Niche TMS. MercuryGate, Kuebix and Alpega Group (with its Inet and Transwide brands) are among the leading niche vendors, competing with 3Gtms, 3T Logistics, C.H. Robinson (Navisphere), Nexus (owned by ERP vendor Infor) and many others.
• TMS services. Several vendors of TMS software offer managed service versions, among them BluJay, C.H. Robinson, Kuebix and Transplace.

Future of TMS

The rise of omnichannel commerce has boosted demand for TMSes, as companies look for ways to service a growing number of distribution channels. To meet these needs, a TMS must have good integration with e-commerce sites and the ability to handle single-parcel delivery, as more consumers choose to forego shopping at stores. The trend to home delivery was accelerated by the COVID-19 pandemic, with more people working from home and reducing their trips to stores.

Emerging technologies, such as internet of things (IoT) and 5G cellular networks, are having a significant impact on SCM by improving visibility into the supply chain — the ability to get timely data on goods at critical junctures along the chain. IoT makes network connectivity and sensors less expensive, which means more data can be collected, increasingly in real time, and from smaller items, such as individual parcels. These advances in networking are also making TMSes available on smartphones and other mobile devices.

Meanwhile, artificial intelligence (AI) and machine learning bolster the advanced analytics that bring new diagnostic and predictive capabilities to TMSes, such as optimized carrier selection and preventive maintenance, all with an eye toward continuous improvement of shipping operations. 3D graphics are becoming more common in visualization tools that help, for example, with designing loads. These new capabilities are most often delivered via SaaS, according to Gartner.

The distributed ledger technology blockchain is likely to impact the design and use of TMSes. Some observers consider SCM to be the most promising practical application of blockchain, which is designed to provide an efficient and secure way for large numbers of participants to execute transactions and share digital information. In transportation management and logistics, blockchain is expected to make it easier to share trustworthy, detailed data on a wide variety of goods. It could also improve the efficiency of the essential documents used in logistics, from orders to invoices to contracts.

Despite the disruptions and temporary breaks in global supply chains caused by the pandemic, long-term trends still point to increasing globalization. The move toward SaaS deployment and ubiquitous internet-based devices should leave TMS technology poised to take an even bigger role in SCM.