I have asked Bill Loftis, a supply chain and transportation operations expert who recently joined Tompkins Associates, to talk to us about horizontal collaboration once again. He has conducted a number of development and implementation initiatives for clients involving collaboration for improved distribution and transportation. Take it away, Bill!
In my last post, “Horizontal
Collaboration: It’s Back on the Front Burner,” I explained how
collaboration has returned to the forefront for progressive shippers.
Today, I want to discuss a particular solution – collaborative
distribution. This solution is
particularly compelling for several reasons.
First, the focus is on service.
The idea is to flow products nearly every day to eliminate stock-outs, for the
larger purpose of increasing revenue and improving competitive position. Operating this product flow in response to
the actual market (versus forecasting) can be achieved by demand-driven supply
chain processes.
Second, collaborative distribution converts a significant
amount of truckload mileage into intermodal, so it has a unique sustainability
advantage over conventional solutions.
This is why I have been pushing the collaborative
distribution concept recently and will continue to do so.
But you might be wondering, how is it possible to flow
products daily and also use intermodal service?
Three key concepts create this scenario:
- Combine
volumes of multiple shippers to provide high shipping volumes (collaboration).
- Create
a separate collaborative network and locate DCs close to the customer (in
addition to the conventional dedicated network).
- Regularly,
consistently move replenishment products that should flow on the collaborative
network informed by demand-driven decisions that reflect the market in
real-time – More erratic product flows
should be on a dedicated network.
Inventory &
Transportation Challenges
Note what I am describing here is a completely different network. That’s what makes it a
different and better strategic solution. Dedicated (single company) networks
are the default standard in America today, and when cost-optimized to as few
DCs as possible (which everyone in practice does), dedicated networks present
tremendous cost versus service challenges in inventory and transportation.
The inventory
challenge is created because the economic order quantity is a full truckload,
meaning for most customers, delivery frequencies are weekly or often much
longer. This creates tension between the
costs versus service: You can either compromise on cost by shipping LTL, or
suffer stock-outs on selected items when waiting for the next truckload
consolidation. Not pretty.
Long haul trucking is the transportation challenge. Service-minded shippers are constantly
trying to improve service (retailers demand 98% on-time, but shippers only
average 94%). In this fragmented space, there is only so much one can do.
The reality is, for a large CPG manufacturer to achieve 98%,
its rates will increase a few points at a cost increase of millions per
year. So they don’t do it, service is
less than desired, and stock-outs persist.
This unpredictable supply base is inherent in long haul trucking and is
a defining attribute of a cost-optimized dedicated network, made worse in
capacity-constrained or high-fuel markets.
So how is a collaborative network different? Begin by envisioning what a collaborative
network looks like: with DCs placed close to the customer (within 150 miles).
Given high volumes of co-mingling multiple shippers, the
economic order quantity (EOQ) and delivery system changes. With multiple shippers on the same delivery,
a shipper’s EOQ becomes a pallet, rather than a truck. With daily deliveries within 150 miles, this
is no longer a long haul network, it is a dedicated shuttle network, similar to
outbound retail transportation where 98%+ on-time is standard. Collaborative networks eliminate the inventory
and transportation constraints of dedicated networks.
The Real Reason for
Collaborative Networks
Imagine ... reducing your
economic order quantity from a full truckload to a single pallet, and
eliminating long haul trucking from your delivery system. This can happen with collaborative
distribution. My message today is that collaborative
networks are superior because they shed these constraints.
There is much more to discuss (the intermodal advantage, how
costs are reduced, how to implement these ideas), which will come in later
posts. But let’s close on the most
compelling point: with such difficulty,
why pursue this?
My opinion:
It’s about service, increasing competitive advantage, and adding value
by increasing sales. It’s not about
cutting another penny, but about driving sales.
To help make my point, I would encourage you to
read Steve Demming’s recent contribution on Forbes.com where he says: “Half a century ago, the life expectancy of a
firm in the Fortune 500 was around 75 years. Now it’s less than 15 years and
declining even further.” He suggests the
one reason why this happens: “It’s more difficult to add value than to cut
costs.”
Lasting companies add value. I suggest that logisticians should aspire to
this more difficult but smarter path of creating solutions that increase
sales. I believe this is the way of
collaborative networks: more difficult,
yes, but also smarter and better.
Thanks for reading, and let me know your thoughts on this
topic.
Bill Loftis