Collaborative Distribution: Taking Off the Training Wheels
To break the cycle of needless, duplicative logistics costs, many competitors are choosing to work in tandem.
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A small but growing number of shippers now view the infrastructure required to move product from manufacture to retail as an opportunity to collaborate, rather than compete. That opportunity lies in cutting expenses that are needlessly duplicated across shippers: transportation planning, warehousing, exception management, accessorials, less-than-truckload shipments, underused capacity, and other supply chain costs.
Collaborative distribution has long been the no-brainer idea that no one acts on, with obstacles mostly related to entrenched investments, cultures, and hidden agendas. While the group of early adopters is small, the tide is beginning to turn. Promising case studies and compelling research prompted some market leaders to open their minds to new ways of moving product, satisfying customers, and boosting the bottom line through both savings and increased sales.
"Over the past 10 years, interest in collaboration has picked up, but it has consisted of forecasting between manufacturer and retailer, or a few manufacturers pooling resources together. Supply chain was not involved," says Brenda Hambleton, chief marketing and strategy officer for York, Pa.-based ES3, which specializes in working with consumer products goods (CPG) manufacturers. "Today, collaboration is more in vogue, and encounters less resistance."
More frequent collaborative distribution can reduce U.S. transportation carbon footprints by up to 25 percent, according to The Environmental Defense Fund (EDF). "We see strong value in the concept of collaboration," notes Jason Mathers, senior manager, corporate partners program for EDF. "It can increase the productivity of every move, while using less fuel."
Some compare collaborative distribution to consolidating freight containers for steamship moves: bringing multiple shippers together into one container and one move to maximize efficiency.
There's Green, Then There's Green
While carbon reduction is a big benefit of collaborative distribution, for most adopters the bigger drivers are cost savings and customer satisfaction. Collaborative distribution creates substantial opportunity to operate more efficiently—the U.S. Department of Transportation estimates that 15 to 25 percent of all the miles trucks travel in the United States are empty miles, and trailers are 36 percent underutilized for non-empty miles.
Collaborative distribution helps maximize asset utilization, reduce transportation costs, and keep customers happy. In retail, for example, it can help meet tight delivery deadlines and support smaller, more frequent deliveries. Some forms of collaborative distribution enable low-volume goods to move more quickly because they are consolidated with fast movers, reducing out-of-stocks, and benefiting retailer, supplier, and customer.
Another driver for collaborative distribution is resource constraints resulting from driver shortages. "Over the next 10 years, driver shortages and poor infrastructure will make it harder to move product, but demand will increase," Mathers notes.
Early adopters have forged new ground in making collaborative distribution work, although shippers often play these arrangements close to the vest. Among the more well-known collaborations:
- Beverage maker Ocean Spray used to ship product more than 1,000 miles from its Bordentown, N.J., distribution center (DC) to another DC in Lakeland, Fla. Meanwhile, competitor Tropicana was sending refrigerated rail boxcars via the nearby CSX terminal to New Jersey. Wheels Clipper, a third-party logistics (3PL) provider in Woodridge, Ill., saw the synergies, and proposed an intermodal lane from New Jersey to Florida using Tropicana's empty orange juice boxcars for Ocean Spray's southbound shipments.
- Frisco, Texas-based 3PL Transplace matched up two disparate customers with opposite problems but similar routes across the U.S.-Mexico border. Ceramic tile and natural stone provider Dal-Tile's heavy loads would weigh out, while appliance maker Whirlpool's trucks cubed out. Each company used only 20 percent of capacity. Dal-Tile and its co-load partners—which now also include Convermex, a maker of plastic cups, plates, and utensils, and Werner Ladder with its aluminum and fiberglass ladders—have seen a consistent 20- to 30-percent net reduction in process and resource costs.
- Competing confectioners The Hershey Co. and The Ferrero Group share joint warehousing, transportation, and distribution facilities, creating one North American supply chain. The goal is to improve supply chain efficiency, enhance competitiveness, and reduce carbon dioxide emissions and energy consumption, with fewer vehicles needed to move products to customers.
- Tupperware and Procter & Gamble's (P&G) European operations both manufacture in Belgium and were shipping significant volume to Greece—Tupperware via trailers and P&G via intermodal. Tupperware was cubing out, while P&G would weigh out, according to a presentation by Europe's Collaborative Concepts for Co-Modality Project. By consolidating shipments via intermodal, the two companies improved container and weight fill from 55 percent to 85 percent, saved 150,000 truck kilometers, and realized a 17-percent savings in total lane costs.
As these examples demonstrate, partners in a collaborative distribution project are sometimes in different industries, but more likely occupy different product spaces and share customers. CPG or auto parts suppliers make good collaboration partners because they are more likely to share consignees.
Sometimes, different divisions of the same parent company come together to collaborate. In a few cases, collaborating partners are direct competitors. Early adopters include consumer goods, automotive, and electronics companies.
Similarity fosters the most likely synergies. "If companies try to collaborate across industries, they can face business continuity difficulty, and different equipment needs," says Dave Belter, vice president and general manager of transportation management for Ryder, a 3PL based in Miami.
3PLs Take the Lead
One early proponent of collaborative distribution is Kane is Able. The Scranton, Pa.-based 3PL first got involved 14 years ago, working with a group of competing confectioners shipping to wholesaler McLane Company. "Even though they were in the candy business together, they realized they couldn't steal anything that they don't already have. They both shared the same customers," recalls Dave Ward, load planner and consolidation manager at Kane is Able.
One benefit was to eliminate the need for mixing centers, where manufacturers brought together multiple product lines to consolidate into retailer shipments.
Since then, the 3PL has built its collaborative distribution practice around moving dry goods to mass merchants and grocery stores. Customers include Sun-Maid Growers, which saw its cost per hundredweight decrease by 62 percent for consolidated vs. non-consolidated freight. Collectively, shippers participating in Kane's collaborative distribution program report shipping costs dropping by 35 percent year over year, with as much as a 70-percent drop in some lanes.
"The program is basically a cooperative," notes Alex Stark, director of marketing at Kane is Able. "We pull freight together from different shippers to fill an entire truck, with each shipper paying for what it uses. It's a fluid operation. We set ourselves up as the matchmaker. We're the eHarmony of matching shippers to retailers." Consolidation strategies include merge in transit and cross-docking.
To stimulate more interest, Kane is working with retailers to urge their suppliers to adopt collaborative distribution. Instead of receiving many small shipments from lower-volume manufacturers, collaboration enables retailers to receive those goods more efficiently, without having to change their processes.
It is not only 3PLs that are seeking to match up shippers for collaborative distribution opportunities. Industry organizations and conferences also have given rise to some relationships. The key is to have a means to compare supply chain networks to look for synergies, which 3PLs can do with the data they collect from multiple shippers. 3PLs typically become the broker, securing services on the shipper's behalf, rather than direct shipper-carrier contracts.
Transplace offers a TransMATCH co-shipping program, which enables shippers to consolidate freight through collaboration with multiple shipper companies, and increase delivery frequency to targeted customers without increasing costs. About 10 shippers—including Dal-Tile and Whirlpool—are currently participating in the program's U.S.-Mexico border-crossing arm, moving about 7,000 collaborative loads annually.
Ryder matches shippers with backhaul opportunities among its dedicated contract carriage customers. "We identify customers who can collaborate with complementing flows," says Belter. "Tighter truckload capacity creates an opportunity to leverage the networks where shippers can share their relationships with carriers, and keep trucks loaded in both directions," delivering savings. A 3PL brings technical and engineering capabilities, as well as subject matter expertise, to guide potential partners through the discovery process, initial pilots, and on to execution.
Ryder has also helped original equipment manufacturers create collaborative inbound and dealer-direct shipment services for automotive parts that can be particularly helpful for smaller shippers, explains Darcee Scavone, Ryder's vice president of automotive.
Founded on the concept of collaboration for the consumer products industry, ES3 now uses two different models for more than 60 manufacturers. One model ships to retail DCs, while the Direct to Store (D2S) model eliminates a distribution center and leg of transportation. D2S currently serves two chains—Giant of Carlisle and Giant of Landover—and plans to add two more retailers. The D2S model handles 25 percent of northeast grocery volume through a massive, highly automated facility in York, Pa., with another facility soon to come online in the south. ES3 is also looking to add temperature-controlled goods to the D2S service.
"Most manufacturers and retailers are trying to set a different bar for speed and fill rate—on-shelf availability," says ES3's Hambleton. But because most grocery manufacturers use bracket pricing based on truckload order quantities, as many as one of every 12 or 13 products in a grocery store is intentionally out of stock, while the manufacturer waits to have enough volume to justify that fulfillment, she explains. The D2S model replaces that approach.
"The real way to get there is through smaller, more frequent orders, but that's hard for single manufacturers to accomplish," Hambleton adds. The D2S model enables goods to flow at a less-than-24-hour speed, which improves service levels to stores by at least four percent, driving about a one-percent improvement in revenue and on-shelf availability.
Obstacles to Collaboration
On its surface, the concept of collaborative distribution is compelling—even sexy. But shippers have not been totally captivated.
For several years, Penn State's annual Third-Party Logistics Study has tracked the fluctuating level of shipper interest in collaboration. In the 2015 study, 39 percent of respondents report collaborating with other companies to achieve logistics cost and service improvements, a drop from the 48 percent reported one year earlier.
Fluctuating fuel prices are part of the reason. When oil prices are up, shippers are more open to new ideas for squeezing out costs. But one big barrier is the current, substantial investment many have made in infrastructure, although facilities can sometimes be repurposed for collaborative activities.
Another significant factor in resistance to collaboration is the entrenched culture, which encompasses everything from plain old fear of change to job protectionism and hidden agendas.
Collaboration does represent a small loss of control, and some shippers fear hiccups in their shipments could damage retailer relationships and lead to losing shelf space. Transparency can go a long way toward assuaging manufacturers' fears by providing visibility to goods at all times, and informing partners whenever exceptional events occur.
A related fear is the need to share sensitive shipment data. The Third-Party Logistics Study finds shippers are reticent to share the relevant information needed to collaborate effectively.
"Shippers still have concerns about data sharing," says Dr. Kimberly Ellis, associate professor at Virginia Tech and site director for the school's Center for Excellence in Logistics and Distribution.
Even though 3PLs have compelling reasons to respect the sanctity of customer data, ceding full control creates a certain amount of risk. "Shippers with tighter margins are more risk-averse," says Stark. "There is no margin for error."
Collaboration processes themselves are still evolving as well. In addition to the challenge of finding compatible shippers, the technology and automation must be in place to ensure visibility and efficiency. "The lack of automation is a big barrier because it makes processes too labor-intensive," says Mathers.
Many shippers overcome their initial fears once collaboration programs are underway and the benefits surface. "The benefits are so good that shippers never let go," says Ben Enriquez, country director for Transplace and Celtic in Mexico.
Though the number of collaborative distribution relationships is relatively small, the positive shipper experiences have helped 3PLs forge some best practices for making these arrangements work. "We've learned what shippers will support, and built a list of do's and don'ts," says Enriquez. "We've also learned to mitigate risks throughout the process."
What to Expect
Collaboration projects developed by a 3PL typically go like this:
- Once the 3PL makes a potential match between two shippers, projects start with a cost model to determine feasibility and potential benefits.
In some cases, the 3PL acts as the middleman, and no shipper-to-shipper contact is required. But for others, after a potential synergy is identified, the parties have to meet. Participants need to understand what the other parties are looking to accomplish, and align on goals. These terms and conditions should address details such as payment terms, and dealing with specific situations such as overshipping. Strong exception management and risk mitigation capabilities are a must.
It is important for shippers to approach the project with full commitment. "They have to be prepared to have a collaborative—not a procurement—mindset, and be willing to share the appropriate information within parameters," says Enriquez. Collaboration must be a top priority for all partners because of the time commitment required to arrive at a win-win arrangement and manage the associated changes.
- The parties create a documented set of rules and commitments, such as identifying the minimum volume and lanes that are part of the program. These rules include how the relationship will be managed, and how partners will communicate. 3PLs may cover some of these functions.
To ensure the expected level of savings, for example, ES3 manufacturers agree to a flat assessorial per truck and to build to a set load size, while retailers agree to accept any product they carry, even if it's mis-shipped.
- The companies develop a pilot collaboration program, based on shared definitions of success.
- The program is implemented and managed.
Even before collaborative distribution gains more traction, some are looking ahead to its next phase.
Researchers from Virginia Tech's Center for Excellence in Logistics and Distribution, for example, are pioneering the idea that manufacturers and retailers may have the opportunity to leverage such an interconnected network for product movement in the future. Just as no one cares what servers their email touches on its journey from sender to receiver, Virginia Tech's Physical Internet concept applies the same approach to physical goods.
"We envision it as an open, global logistics system with many analogies to the digital Internet," says Dr. Ellis.
The National Science Foundation and a group of transportation, retail, manufacturing, and technology companies commissioned Dr. Ellis and her colleagues Dr. Russell Meller and Bill Loftis to explore the potential benefits of such an approach. The results were overwhelmingly positive. For the data sets analyzed:
- The cost per load decreased 29 percent.
- Capacity utilization of trucks rose 34 percent.
- Because they drove shorter distances in a relay-type model, drivers could be home every two to four days at the same cost as today, reducing turnover.
The team sought out the pinch points in such a system, but didn't find any. Every party—transportation providers, shippers, and retailers—benefitted. Phase II of the project has a second group of researchers focusing on the operational aspects: How "Dynamic Horizontal Collaboration" would work, what obstacles arise, and how incentives or other mechanisms could drive adoption.
While research continues, collaborative distribution advocates continue to evangelize the concept. Says Mathers: "Collaborative distribution will move forward because it makes economic sense."