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Case Study: Value Proposition: Keep on Trackin'

Case Study: Value Proposition: Keep on Trackin'

VALUE METHODOLOGY

Schneider National has been evaluating the emerging technology of untethered trailer tracking for nearly a decade. In its search for a suitable system and a supplier that could provide it, the company set cost hurdles and established an ROI model. During a beta test, it measured four technical metrics and assessed the financial results.

With close to 15,000 tractors and 43,000 trailers, Schneider National, based in Green Bay, Wisconsin, is the largest truckload carrier in the United States. Its annual revenues are nearly $3 billion, which include a billion-dollar-a-year transportation logistics business.

In the past 12 years, Schneider has pioneered the use of technology to track rolling assets. In 1988, it was the first customer of Qualcomm to adopt the then-little-known startup's geostationary satellite-based communication system. Schneider now has 15,000 Qualcomm OmniTRACS units, which provide two-way alphanumeric communication and positioning information between drivers and the fleet management system.

Schneider also pioneered the use of radio frequency (RF) identification tags to locate trailers on railroad cars. Each of its trailers has an RF tag, which is read by devices positioned at key points along rail lines.

But Schneider wants even better information about its trailers. If a trailer is on a railcar, Schneider has a rough idea of its whereabouts from the RF tags, but not its cargo status--that is, whether it is empty or full. If a trailer is attached to a third-party carrier or sitting in a yard, Schneider has little or no information.

"The industry manages trailer pools inadequately," says Paul Mueller, vice president of communications technology services at Schneider.

Schneider's objective is to know--in near real-time--the location of each trailer in its fleet, including if the trailer is connected to a tractor or sitting on a railcar and whether it is loaded or empty. The application that would serve these needs is called untethered trailer tracking, and Schneider plans to use it on more than 25,000 trailers. In the low-margin trucking business, it expects untethered tracking to improve its revenue per trailer. "Ultimately," says Mueller, "revenue is the measurement of how well we load and move these trailers."

TARGETING COSTS

Schneider has studied emerging technologies for nearly a decade, waiting for them to mature and for costs to come down. "Very early on, we understood the value proposition," says Christopher Lofgren, the company's chief operating officer, who until recently was chief information and logistics officer. "The challenge was to find the technology and a capital and operating expense that was viable."

When the company initiated its investigation into the possibility of a tracking application in 1993, Mueller began to work with several potential suppliers to understand the technical issues and business opportunity. By early 1995, he formed a companywide cross-functional team. It included staff from IS; customer service, which is responsible for trailer management; line-haul services, which is responsible for equipment evaluation, engineering and maintenance; and finance.

By 1996, the team established an ROI model that included target costs to be met before the investment would make financial sense. Targets were set for capital equipment, messaging services, installation, maintenance and integration of the trailer tracking system with the existing fleet management system. Together, these comprised the total cost of ownership (TCO).

The targets were somewhat arbitrary, Mueller admits, based on the cost of components the system would need and what Schneider figured the industry would pay. Industry-wide adoption is important to Schneider because its transportation logistics business manages hundreds of thousands of shipments using more than 1,000 third parties. "We understood the prevailing costs, but that's about all the science that was involved," Mueller says. "We're dealing with emerging technologies, and it's not the same as a typical IT acquisition. If we were going to buy software it would be a much crisper procedure, going through the typical stuff--needs analysis, an RFP and so on."

The team decided that a system could gain industry-wide adoption when the price of the capital equipment for the trailer reaches less than $600 per unit, and messaging costs reach $15 or less per month per unit for one message a day. Mueller declined to disclose Schneider's actual costs or the TCO target. But these costs, applied to the 25,000 trailers Schneider plans to equip, makes just these two pieces of the solution a $20 million project.

REVENUE PER TRAILER

Schneider felt the benefit of untethered trailer tracking would be to improve revenue per trailer, which "is our ultimate measurement of ROI," says Mueller. Three factors figure in revenue per trailer: reduction in the number of trailers, reduction of unbilled miles per load and increase in tractor utilization. Since Schneider gets paid only when a trailer is loaded and moving, it believed untethered trailer tracking would improve all three by reducing the amount of time that trailers sit idle.

Reduction in the number of trailers is something of a misnomer because Schneider does not expect to reduce the size of its fleet. The goals are to make better use of the trailers it has and slow the pace of buying new ones. In calculating the reduction, Schneider factors in annual depreciation and the average book value of a trailer. Reducing the number of trailers has two payoffs: the ability to avoid the cost of new trailers and the ability to invest the savings elsewhere.

The second and third elements of trailer revenue are linked. Unbilled miles per load is a measure of not having trailers in the right place at the right time. Improved tractor utilization is a measure of increasing the billable miles on tractors. They both arise from the same circumstance. "It is not uncommon to have to send drivers off-route to get trailers," says Mueller. "When they arrive, the trailer isn't there or it might be loaded." If the company reduces these occurrences, it can improve the billable miles on both tractors and trailers.

"The three key elements combined are measured by the single metric of revenue per trailer," explains Mueller. "We take the three factors and identify the total impact. We then come up with an annual financial impact that we are looking for over the life of the asset and measure that against the cost of ownership." Mueller declined to specify the revenue increase target. He does say if the target is hit, Schneider will reap "payback in significantly less than five years."

The team also identified several soft benefits, including customer and driver satisfaction. Customer satisfaction can be achieved through better on-time delivery and in-transit visibility of freight. Driver satisfaction can be accomplished by increased earnings via increased billable miles. The soft benefits would serve as tie breakers, Mueller says, if quantifiable returns weren't clear-cut.

NARROWING THE CHOICES

By 1997, Schneider had pared the list of possible suppliers from more than 15 to four--three for the immediate future and one with longer-range potential. Other technologies, including paging networks and specialized mobile radios, were considered but "it didn't take a lot to narrow down to a choice between satellite and cellular," says Mueller. Each of the four short-list providers offered one or the other.

Because of its long-term relationships with providers, Schneider did not need to issue an RFP or evaluate providers on a scoring system, Mueller says. Besides offering satellite or cell, he says, each shortlister was also capable of providing cargo status monitoring; hook-unhook sensoring; effective battery power management; and a message processing infrastructure.

Schneider then entered a period of intense work with the short-list candidates to define system requirements and other details. It eventually worked through all of these with two of the candidates, and made get-to-know-you visits to the manufacturing partners of each provider. Then it began implementation planning primarily with one provider and Schneider's trailer manufacturer. At this point, Mueller says, Schneider focused on a single provider because it believed its technology was the most mature and that the provider was best able to deliver that technology.

In the second quarter of 1998, Schneider decided the low Earth orbit satellite technology from the Vantage Tracking Solutions division of Orbcomm Global was mature enough to test. Planning began for a beta test that involved 10 trailers from a single customer assigned to one-day controlled routes and another 10 trailers assigned to normal, multiday routes. It took place in late summer 1998, providing the first opportunity to measure the value of the project.

THE TECHNICAL METRICS

Schneider measured four characteristics of the system:

Messaging latency, which is the lapsed time between the recorded event on the trailer and when the message is sent by the Orbcomm network to Schneider. The big variable is satellite visibility. Messages are time-stamped when the event occurs. Measuring latency is a matter of comparing the time stamp with the departure time from the Orbcomm network, as noted by Orbcomm.

Cargo status monitoring, which uses ultrasonic frequencies inside the trailer to determine whether it is empty. Schneider compared the readings with what it knew about the trailers' status from the drivers.

Connect sensoring, which tells when the trailer is connected or disconnected to a tractor, and when it is loaded onto or lifted from a railcar. When a trailer is hauled by a Schneider tractor, the driver sends a message when he picks up or drops a load. These data points were compared with the sensor data.

A reliability check to see if the global positioning system (GPS) location was included accurately in the body of the message. The company compared the data provided by the trailer tracking system with that provided by the Schneider driver.

Schneider took all four of these metrics, weighted them equally (in subsequent analyses, Schneider used unequal weighting of the metrics) and used them to calculate a statistical figure of merit, a way of looking at multicomponent attributes and merging them into one metric. "This gave us an overall perspective of the operational delivery of the system," says Mueller. He declines to specify the target figure of merit.

THE FINANCIAL RESULTS

Schneider also calculated the revenue per trailer in the test group and compared it with the fleet average. The data for this comparison--billed miles, unbilled miles and so on--exists in the fleet management system. It was just a matter of mining it, assembling it and analyzing it. "The revenue per trailer for the control group was high enough that we may have exceeded expectations," says Mueller. "But the control group may have gotten more attention, causing more rapid decision making than would be the norm. The question is, do the financial results scale?" The four technical metrics above suggested the system worked well enough to improve fleet management, so in fall 1999, Schneider began to outfit more trailers; it now has hundreds in use and continues to measure performance on the four metrics and to assess financial results. "The sample is larger, and we're still seeing strong financial results," says Mueller.

While the beta test was in progress, Schneider began its financial due diligence on Orbcomm and hired a consultant to do technology due diligence on the Orbcomm hardware and network infrastructure. The process was complete by March 1999. In April 1999, Schneider entered into a formal agreement with Orbcomm.

What if the beta test had failed? Schneider would have decided whether another provider was ready to move ahead, says Mueller. "We have not terminated all of our discussions or said the decision is cast in granite. We will never deviate from that."

CRITICAL ANALYSIS BY DOUGLAS HUBBARD

TRY SIMULATION

Schneider identifies some excellent metrics, and it also makes use of scientific observation by conducting a controlled experiment with a control group and a test group. This alone puts Schneider in a small group of best-in-class IT investment analysts. The company even uses some excellent decision-theory methods that are far too rare in IT. Nevertheless, there is still room for improvement.

First, I'll address an issue that is a source of great philosophical battle between accountants and economists. Accountants treat depreciation and book value as "real" dollars. Economists, along with management scientists, financial analysts and virtually everyone else, do not. I'm in the latter camp. Book value is not the same as the cash received if a trailer is sold or the cash spent if a new one is purchased. If one of the benefits of Schneider's proposed investment is a reduction in the number of trailers (or avoiding the purchase of new ones), then they should measure that.

The "technical metrics" identified are good, observable quantities. Methods like what Schneider used for multivariate comparisons have a good foundation in decision theory and, in many cases, have been shown to improve decisions. But these methods are only necessary if the investment is too small to merit development of a more realistic economic model. A $20 million-plus investment does not usually fall into this category. Each of the four comparative metrics could, instead, have been used in a computer simulation of transportation operations. For a fraction of 1 per cent of the cost of the investment, Schneider could simulate thousands of shipments on hundreds of routes and tally the effects on profit of latency and the other measures. Profit is the most relevant single "statistical figure of merit" that could have been devised.

Readers of CIO may already know my position on intangibles--namely, I believe there are none. The same simulation created to assess the effect of latency and other characteristics could model the occurrence of late and lost shipments. Then Schneider could analyse historical shipment and customer data to find statistical correlations of late and lost shipments on repeat business from a customer. The same analysis might be used to correlate driver turnover to billable trailer miles. Drivers and customers have real, observable (and probably already recorded) effects on profit that are no "softer" than revenue per trailer.

Finally, a five-year payback for a large and risky technology investment is really not that good. Once risk is accounted for, many leading-edge investments require paybacks of two years or less. But I suspect that a more complete ROI that includes increased customer and driver satisfaction might achieve the required payback.

Douglas Hubbard is founding partner of Hubbard Ross in Glen Ellyn, Illinois. Hubbard Ross uses the scientific and mathematical principles of applied information economics to systematically analyse the economic value of any IT investment. Hubbard is the inventor of applied information economics and has more than 12 years' experience in IT management consulting. He can be reached at dhubbard@hubbardross.com

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