December 2012 | Commentary | IT Matters

Measuring the Value of Collaboration

Tags: Logistics I.T., Supply Chain Management

Bill Michalski is Vice President of Product Strategy, ArrowStream, 312-267-4456

Structured, achievable supply chain collaboration that drives savings relies on the relationship between purchasing and inbound logistics departments. Without real collaboration, two distinct decision-making processes exist based on separate performance metrics and personnel incentives.

Buyers determine what orders to place. Logistics planners determine how to route the shipments. Buyers strive to avoid stock-outs while keeping inventory levels low. Logistics planners work to avoid service failures, while minimizing freight costs.

The problem is, this two-step decision process can result in adjusting an order to save $50 in inventory carrying costs, at the expense of $500 in lost freight savings. In most networks, up to 30 percent in logistics savings may be left on the table.

In a true collaborative relationship between purchasing and logistics, order and routing pattern planning comprise a single, optimized decision process.

The prevailing assumption across many supply chains is that logistics savings improvements require ordering more full truckloads of product—a theory that feeds the gap between purchasing and logistics. Buyers and their purchasing systems can adopt the concept of ordering full truckloads whenever feasible, so why is a deeper collaboration necessary?

Optimization technology provides the answer. If companies use a planning-based optimization engine to consider all feasible possibilities for order size, timing, and frequency, while simultaneously considering all routing options, a significant percentage of the resulting solutions will recommend reducing order sizes to align them for the highest-possible trailer utilization.

In many freight lanes, the engine will still propose bigger orders. At a summary level, however, in most inbound networks, the proposed solutions have proven to reduce inventory levels, increasing turns while generating significant new freight savings.

This changes the game, removing the barrier to joint planning by delivering wins for both purchasing and logistics departments. It also creates a clear, measurable return on the collaborative activity.

This approach requires implementing new processes and technology, but the following strategies can make this solution extremely palatable, and begin driving results without wholesale change:

  • Implement the collaboration as a tangential planning process. Establish guidelines for ordering and routing, without generating the orders and loads. Most purchasing systems can accept the ordering guidelines users create, and most transportation management systems find the most efficient routes once the orders are optimally placed. The respective teams retain process ownership.
  • Don't rely on spreadsheets. Route optimization is nearly impossible without optimization software. Adding inventory constraints and order pattern flexibility exponentially increases the number of possible solutions. Hunting and pecking for the opportunities will simply never find the savings.
  • Don't forget the inbound freight you don't manage today. By incorporating planning for inbound lanes currently managed by shippers, you will find new opportunities in lanes that previously seemed out of alignment with your network.
  • Measure, monitor, and close the feedback loop. Your solutions are not just guidelines—they are performance targets to measure against. They can also drive compliance monitoring as orders are generated, and provide the means to correct savings shortfalls before the loads are tendered.

It's time to stop talking about collaboration, and start measuring it.