Collaborative logistics: overcoming its challenges can lower transportation and inventory costs and reduce stockouts – In depth report: logistics
Peter Strozniak
Jeff Ramras, vice president of marketing and supply chain solutions at Applied Industrial Technologies (AIT) in Cleveland, is the first to admit that operating a collaborative logistics network is difficult. Even after five years of building a national infrastructure, he says, it’s still difficult. But the payoff is substantial as far as reducing transportation costs, cutting inventories and improving customer service.
Collaborative logistics is achieved when two or more companies form partnerships, or work with existing supply chain partners (customers, suppliers and carriers) to optimize transportation operations by sharing truck capacity to cut the high costs of less-than-truckload shipments and empty back hauls. Collaborative logistics efforts also can lower inventories, which reduces costs, and eliminates stockouts that impact customer service.
Today’s collaborative logistics models are powered by advanced software systems and the Internet, which allow companies to expand collaborative logistic networks on a large scale. In effect, manufacturers are forming Web-based, as well as more traditional partnerships, to reduce the costs of transportation and inventory while also raising the bar on customer service.
Only a handful of companies have moved in that direction. Among them: Applied Industrial Technologies, General Mills, Georgia-Pacific, Seneca Foods, Land O’ Lakes, Kroger, Safeway and DuPont.
But analysts and executives believe this model will be adopted by more companies over time because of the increasing costs of transportation and the evolution of the supply chain from the conventional push system (in which manufacturers push products to the marketplace), to a pull model system where the entire supply chain is reacting to marketplace demands.
AIT, for example, has become one of the leading distributors of industrial products in North America. It operates a chain of 450 service centers that sell maintenance, repair and operational industrial products to large and small manufacturers. These service centers are supported by an extensive logistics and distribution network. Because of its growth during the last 10 years, AIT has repositioned and automated its distribution centers.
More than five years ago, however, AIT saw a need to reduce its logistics costs and decided to form partnerships with other distributors or manufacturers to fill up truck capacity on dedicated routes that would reduce logistics costs. “We didn’t know if it could work or not,” says Ramras. “After talking to our transportation providers, they agreed to try it because we were pressuring them to bring their costs down. So we both started looking for partners.”
Ramras says it was a difficult task because for the collaborative logistics model to work, AIT had to find companies that delivered goods regularly to service centers or stores. In addition, AIT had to identify companies that had distribution centers in the same locale.
“It was just a question, quite frankly, of who we could find,” says Ramras. “Westco was our first partner. When they came on board, we started small and tried it to see if it would work. It did, so we started to expand it.” Currently, about 70% of AIT’s service locations are connected to the collaborative logistics network, and AIT has formed partnerships with companies such as John Deere, Lucent Technologies, Westco and Graybar.
By sharing truck space with its partners, AIT has seen its dedicated freight charges drop by nearly 30%. In addition, Ramras says customer service has improved and the need for the company’s service centers to hold safety stock inventory has declined by 15% to 20%.
“Because these trucks are delivering products throughout the night, we have customers actually picking up merchandise at our service centers at 11 p.m. or midnight because they know the truck is coming,” says Ramras. “Before, our customers would have to wait until the next day.” Another benefit is that service centers don’t have to pay for premium freight if they need products delivered the next day. Service center managers can order product as late as 5 p.m. because the trucks don’t leave the distribution centers until much later. “It allows us to provide better service to our service centers, which allows them to service our customers better.”
Moreover, because merchandise is delivered every day, the service centers don’t have to carry as much safety stock. “We’re not cutting the amount of product coverage. [But] we don’t need as much [product] depth because we are replenishing our inventory on a daily basis versus on a weekly basis.”
When a company ships a truckload of product to a customer, it is usually the carrier’s responsibility to find product to haul back on the return trip. Carriers travel about 110 billion miles annually, according to the Alexandria, Va.-based American Trucking Association. About 15% to 17% of those 110 billion miles are empty miles, or trucks that are rolling on the nation’s freeways with no freight. The ATA has estimated that those empty miles translate into a $21 billion inefficiency.
In March 2000, Nistevo Corp., Eden Prairie, Minn., launched the first major Web-based collaborative logistics network with a handful of companies such as food manufacturer General Mills and paper products maker Georgia Pacific. These companies used Nistevo’s proprietary technology to develop round trips or dedicated tours (routes). After the details were established, companies set ground rules such as who pays for what on the different legs as well as which carriers to use.
Georgia-Pacific has developed 575 tours with other manufacturers in the Nistevo network, as well as with other divisions of Georgia-Pacific. According to a Nistevo case study, Georgia-Pacific’s empty back haul miles were running about 18%. After forming collaborative tours, the empty back haul miles have plummeted to just 3%, says Rick Parker, Nistevo’s executive vice president. That’s considerable because for every 1% reduction in empty miles, the company saves $750,000. Through a guaranteed revenue stream from Georgia-Pacific’s collaborative tours, the carriers increase their earnings per truck and share that gain through rate reductions for Georgia-Pacific and its transportation partners.
Parker admits that when the collaborative logistics model came on line, there was a lot of skepticism in the marketplace. “There still is skepticism because there may have been too much enthusiasm about how far it could possibly go when it was initially introduced. But at this point it is so proven,” says Parker. “The same companies that began using it in 2000 are still doing it and loving it. Where skepticism could remain is how big can it really get, and if you sit where we do, it would be very obvious that it could be much, much bigger than it is.”
Skepticism aside, there are cultural and competitive barriers. Food manufacturer Kellogg’s, and its direct competitor, General Mills, actually entertained the idea of sharing truckloads because many of their products go to the same stores. But the talks didn’t go anywhere in the end, says Parker, because of cultural roadblocks.
Adrian Gonzalez, a senior analyst for ARC Advisory Group, Dedham, Mass., says Nistevo has done a good job of bringing companies together to form collaborative logistic networks. But there are roadblocks to forming these types of networks.
“Nistevo has some of the best case studies on companies that are doing it, but, by and large, it is a relatively difficult thing to pull off for a number of different reasons, technology being the least of it,” says Gonzalez. “The initial hurdle is whether you can get two vice presidents of logistics to sit down and feel each other out and ask themselves [whether] it is a company we can work with, are the cultures similar and are the personalities the same? A lot of that needs to take place before these relationships get moving.”
About half of Nistevo’s customers have formed partnerships to collaborate on shipments. The other half use its transportation management system optimization tools to improve transportation systems internally. “A lot of companies look at that first,” says Gonzalez. “And once they feel comfortable that they have their house in order in terms of leveraging as much as they can within their own operations, then the next phase will be extending that out and to work with other shippers.”
Web-based transportation management solutions that can provide transparency to information and power business processes among shippers, carriers, vendors and customers is another from of collaboration.
“Traditional transportation is inherently collaborative because shippers have to collaborate with carriers that have to collaborate with customers and vendors,” says Gonzalez.
To that end, Elogex Inc. of Charlotte, N.C., a collaborative logistics solutions service provider, takes a holistic approach in helping companies achieve high performance metrics through supply chain collaboration.
“Transportation professionals need to realize they are part of something much bigger at play here, and that big thing that they are a part of is that the supply chain is converting from the push model, where manufacturers push products to consumption, toward a pull model, where the entire supply chain is reacting to consumption,” says Travis Parsons, president and CEO of Elogex.
While Parsons says savings can be squeezed out of transportation, the major cost reductions can be found in lower inventory levels, accelerating lead times and eliminating stock outs at customer sites. These things can be accomplished when companies collaborate with their existing supply chain partners–suppliers, carriers and receivers.
“The next level of opportunity is for companies to collaborate with their supply chain partners because their transportation management system probably just focused on the inventory that they controlled,” says Parsons.
Companies need to collaborate with all of their supply chain partners to get a total view of inventory throughout the supply chain regardless of who is managing the inbound and outbound freight movement, he says. Once companies collect that data, they can better determine which partner is most effective in managing that inventory in the supply chain.
When companies take this type of approach to managing the supply chain, Parsons says that inventory can drop by as much as 40%, stock outs can be slashed by as much as 50%, and transportation costs can be cut by as much as 20%.
Elogex offers Web-based solutions that connect the shipper, carrier and receiver to a common network of real-time inventory movement information which facilitates a more dynamic and automated execution process. This allows companies to fully utilize truck capacity by consolidating shipments, make multiple pick-ups and deliveries, and take advantage of filling up trucks on back haul routes.
“What is a frequent challenge for companies is that they build up buffer stock because they don’t necessarily trust their transportation operations,” says Parsons. “Providing the visibility as far as the execution of logistics can reduce inventory because there is an increased trust among trading partners.”
Publix Super Markets Inc., the largest employee-owned supermarket chain in the U.S., uses Elogex to manage its logistics operations.
“In order to be competitive in retail, transportation efficiency is a must,” says Publix. “This requires us to shorten lead times, increase service levels and reduce stockouts. We expect Elogex to help us reach increasing levels of supply chain performance and cost competitiveness.”
RELATED ARTICLE: Nistevo’s network.
Nistevo operates a truck transportation network that handles more than three million shipments a year. Its application architecture handles the industry-standard Java 2 Enterprise Edition (J2EE) architecture, and the integration of the industry-leading RDBMS technology, LTL rating engine, optimization engine and B2B integration platform. Nistevo’s technology uses open standards that enable both shippers and carriers to send and receive messages in the file format they are currently using. Its integration platform automates the connection to most applications and integrates traditional EDI transactions as well as XML-based data exchange. Currently, the network handles up to 600,000 transactions per hour and it is designed to support a 500% annual growth rate based on transaction and user login volumes. With over 99% uptime, reliability is guarded through redundant servers, intelligent load balancing, multiple tier 1 bandwidth and N+1 environment redundancy.
The Nistevo Web-based network allows companies and carriers to review contracts and negotiate rates over the Internet because the conditions and terms of all agreements are plugged into Nistevo’s centralized computer system that is secured through multiple firewall layers, encryption, certificate-based authentication, role-based user IDs and passwords. After shippers agree to a dedicated tour, they negotiate rates separately with carriers to prevent any violation of state and federal laws.
RELATED ARTICLE: Unilever’s leverage.
For Chuck Irwin, director of transportation for Unilever Home and Personal Care in Clinton, Conn., a new collaborative system in place since April has opened doors to new efficiencies and greater accuracy. Why? All mission-critical information that its 30 contract carriers–who deliver 250,000 truckloads of shipments annually–need to make pickups, shipments and deliveries is now available electronically 24/7.
Unilever’s Web-based database, the Transportation Business Center (TBC), provides carriers with site specification requirements when they pick up a shipment at a manufacturing or distribution center, or deliver goods to retailers. Developed by Tigris Consulting, a New York-based firm that specializes in strategic sourcing and supply chain management, TBC gives carriers all the vital information they need such as contact names and phone numbers, operating hours, the number of dock doors at a location, the height of the dock doors, how to make an appointment to deliver or pick up shipments, pallet configuration and other special requirements for specific dedicated lanes.
TBC also helps Unilever organize and automate its carrier selection processes based on contract provisions and commitments. When a primary carrier is unable to accept a shipment, TBC automatically recommends alternative carriers.
To connect to TBC, carriers pay a tiered licensing fee based on size. The funds are being used to create a sense of buy-in from the carriers and to help expand TBC’s capabilities to include key performance indicator score carding of carriers, provide transportation providers with three week forecasts of shipment volumes and allow carriers to update site specification information.
“Carriers are thrilled about it because they are sick and tired of getting beat up by shippers for not getting it right because of something they didn’t know, or something special that had to happen,” says Irwin.
The TBC also provides much more efficient contract management services. “Historically, paper copies (of the contracts) were sent to all (parties) and nobody had any confidence that what they were actually looking at the current (contracts),” says Irwin, because even after rates would be negotiated it could be weeks if not months before that information was plugged into the contracts.
With TBC, as soon as rates or other elements of the contract are negotiated, the contract is updated instantly. What’s more, TBC has eliminated any concerns that someone might inadvertently change something in the contracts. The reason? Any time one party touches the contract on the Web, the other party gets that information to be approved, and nothing is formally in the contract until both sides have looked at it and agreed on it.
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