And by comparison and with apparently so much to gain, why do some logistics service providers and their clients fail to team up effectively?
Making collaboration work at the logistics sharp end is possible, but there are conditions. In this article, we look at why you might want to collaborate in your logistics, where opportunities lie, what makes collaboration work, and conversely, what makes it fail.
What Can Companies Gain from Collaborating in Logistics?
The only logical reason to collaborate with another enterprise is to be better off than before.
Some enterprises still manage to miss this essential truth or forget about it after their logistical collaboration starts. Yet the opportunities for mutual gain are multiple:
- Lower costs. Sharing costs and bringing prices down through economies of scale, depending on the type of collaboration, can help each company’s bottom line. US food company Sysco offered an example when eyeing joint operations with U.S. Foods a few years ago. Sysco indicated that over three to four years, it expected annual cost savings of at least $600 million from improved logistics, supply chain and associated efficiencies.
- Shared logistical expertise. Pooling and leveraging different strengths in logistics management and technology helps each collaborating company to boost performance.
- Insights and innovation. Long-term collaborative partnerships are often the most innovative way to develop processes to decrease costs and increase value for each enterprise. Successful innovation is driven externally by customers and suppliers, as much as internally.
- Business continuity. The constant change in the marketplace makes business forecasts difficult for third-party logistics service providers (3PLs). It makes planning of staffing and asset deployment a challenge too. When 3PLs develop closer, more collaborative relationships with their key customers, they can better smooth the business peaks and troughs to come.
- Market expansion. Through logistical collaboration, companies can access new markets and provide new products and product lines, for instance through increased possibilities for postponement, kitting, and delivery.
Vertical and Horizontal Logistics Collaboration
There are essentially two ways to develop collaboration in logistics.
One is vertical, in which an upstream and a downstream entity in the chain of logistics work together. For example, a manufacturer may start to package finished goods in a way that eases handling by a logistics service provider who can then offer better prices for stocking and transport.
The other way is horizontal, in which two enterprises with the same logistical role or requirement work together. For instance, two manufacturers pool their purchasing to buy more services more cost-efficiently from the same logistics provider. Two freight forwarders might work together to achieve better geographical coverage by combing their two fleets and driver work-forces. Vertical and horizontal collaboration can also be mixed, as in business agreements between multiple shippers and carriers to reduce overall movement of empty trucks.
Business Priorities and Innovative Thinking
Collaboration in logistics will be influenced by the strengths of business needs. Cost savings or sharing may be imperative for 3PLs or freight brokers to access certain transport resources for their clients.
For example, two ocean carriers can join forces to share ship capacity. Another example is the stocking of spare parts, which can tie up considerable funds for companies using industrial equipment.
To understand the level of costs involved, in the US, spares and related services account for as much as 8% of the country’s gross domestic product.
By working together and using the fact that breakdowns requiring the same replacement parts are less likely to happen at the same time, energy companies share the same expensive spare part stocks, thus reducing their individual working capital requirements.
New ways of doing things also create possibilities for collaboration.
After the Ford Motor Company switched to a global material manufacturing system, it gave its suppliers access to the system for real-time information on stocks and shipping, with coordination by a 3PL of deliveries to achieve full truckloads of parts.
Alternatively, innovative thinking can help. In the past, energy companies tried to detect meter-rigging and illegal diversion of electricity supplies by analysing their own records, but found that they did not have enough information. Now, by pooling their data and using the data analysis capability of information services provider Experian, they will have better estimations of normal and abnormally low rates of consumption, and therefore where to check for delivery of power that is not being paid for.
What Makes Logistics Collaboration Work?
The following factors contribute to the effectiveness of collaboration between upstream and downstream, or parallel level logistics entities.
- Compelling reasons to collaborate. All the entities in the collaboration must believe they will benefit significantly in one or more area of importance to them. They must also believe that by working alone they would not have gained such benefit.
- Compatible goals. For instance, food product companies selling through shops and supermarkets have come to realise that the real battle is on the retailer’s shelf. Packaging and merchandising at this final stage, suitably supported by advertising, can make the difference between consumers choosing one brand or another. On the other hand, when in transit from factory to distribution centre, or DC to retail outlet, the enemies of food companies are not so much each other, but rather costs, delays, and risk. Competitors can all do better through collaboration to share costs of temperature controlled warehouses and ensure that trucks carry full loads for cost-efficiency.
- Mutual satisfaction. All the collaborating entities must be satisfied with what they get out of the collaboration. Whether gains should be redistributed if one entity ends up with greater benefit than another is another matter. Gain sharing agreements between a customer and a 3PL may work well, incentivising the 3PL to achieve cost savings, while the customer benefits too.
- Mutual trust. Both parties must have confidence in the other that it will maintain its side of the bargain, whether this is about making resources available or buying goods or services to ensure a certain minimum volume and favourable pricing. Manufacturers must share information as needed about their business, supply chain, and logistics goals.
- Supportive management. As a minimum, senior management should be aware and “onboard”, ready to participate by creating an environment conducive to collaboration success.
- Enough time. Collaborating logistics entities may need time to understand how to make the collaboration work, come up with ideas and put them into practice, and measure the outcomes. A balance must be struck to prevent unrealistic expectations, while avoiding unnecessary delay.
- Compatible business cultures. Appetites for risk and attitudes to achieving goals are two fundamental characteristics that must be sufficiently similar between customers, freight brokers, freight forwarders, 3PLs, and any other logistical collaborating party.
Finding Opportunities for Collaboration
Putting logistics collaboration in place, when previously there was none, may mean a change in operations.
It may also mean a change in mindset and supply chain organisation that starts earlier in the supply chain than at the distribution centre loading bays for final shipment.
In the manufacturer-distribution-retail chain, for instance, manufacturers should consider how inventory might be collocated with other companies shipping to the same retailers.
Conversely, collaboration between different retailer buying groups for different product lines can allow the consolidation of orders with increased efficiencies in shipping and receiving.
Additional factors such as retailers controlling inbound freight to move towards leaner and greener practices also encourage suppliers to work together rather than separately.
When a manufacturer knows how its main retailers operate, collaborative actions can include shipping in pallet or carton sizes that fit the retailer’s put-away routines. When products are delivered, the retailer can then immediately place them into storage without having to break them down or reorganise them.
The Maytag corporation went further to set up joint distribution facilities for its durable goods and appliances with Best Buy Co. Inc, one of its largest retailers. Best Buy could then take delivery by midday of an order placed with Maytag the same morning, with the goods simply being wheeled through from the Maytag area to the Best Buy area for immediate delivery to the end customer.
Longer Logistics Collaborations Tend to Lower Costs
The more time collaborating parties can spend to get to know each other, the easier it is for them to propose and agree on collaborative actions for additional advantage.
The longer the collaboration lasts, the more smoothly each action runs and the better it amortises any initial effort or investment to set it up. At the beginning of a relationship, inefficiency is higher because of learning curves and possible organisational and management misalignment between the collaborating entities.
Later, procedures become more streamlined. IT departments work more closely with the business goals of the collaboration. Interpersonal communications between teams get more results for less time on the phone or fewer exchanges of emails.
Embedded 3PL Relationships
3PLs are often well placed to identify opportunities for collaboration, orienting their shippers towards collaborative distribution for savings and efficiencies.
They sometimes increase their collaboration still further with individual customers by placing a 3PL representative inside the customer’s organisation (with the customer’s approval, of course). The 3PL becomes acquainted with the customer’s staff, including its engineering, manufacturing, and supply chain experts.
The perspective of the 3PL changes to one of driving supply chain efficiency across longer sections of the supply chain. The 3PL takes part in strategic conversations in the customer’s organisation, as well as the daily operational activities. In this kind of embedded relationship, the 3PL’s role is transformed from externally reactive to internally proactive.
Transaction, Collaboration, Acquisition, Interruption?
The purely transactional relationship in logistics (“Here, deliver this package”) is not collaborative.
The relationship is at arms-length, with no notion of mutual improvement or gain. The provider does the job for the customer, but without any foundation being built for the future. The switching cost either for the customer to find another provider or the provider another customer is low, with little or no investment in the relationship to recoup.
When collaboration begins, the entities involved start cooperating to achieve better combined results over the longer term. The deeper the collaboration, the more the commitment between the partners and the greater the willingness of the companies to adjust their business objectives and practices.
For instance, Walmart’s recent decision to use Uber and Lyft drivers to provide a delivery service for its shoppers has begun life as a transactional logistics relationship.
If either provider (Uber or Lyft) wants to make the relationship more collaborative, it can try to find some way of aligning better with Walmart’s goals, such as overall shopper satisfaction.
Possibilities might include offering in-car refrigeration to keep shoppers’ frozen goods intact, or food heating services to have food bought at Walmart hot and ready to eat at the end of the ride (Uber recently started a separate hot-meal delivery service).
Moving beyond an agreement to collaborate, one party sometimes acquires another party, such as manufacturer buying a supplier. This may in turn put an end to any collaboration with a competing manufacturer in using the same supplier. A company may feel good about sharing an independent resource with a competitor for mutual gain, but consider the risk of business interruption too great if the competitor then buys or acquires control of that resource.
For similar reasons, a shipper extending collaboration with a 3PL must balance the benefits of collaboration with the dependence on the 3PL. There is always the risk that the 3PL becomes unavailable, because of acquisition by a competitor or because the economic climate or a disaster puts the 3PL out of business. If so, the shipper may need to start handling its own logistics again, at least within the interim period needed to find and engage properly with a new 3PL. Retaining a core of logistics competence inhouse can therefore be a wise precaution for the shipper.
Why Collaboration Fails
Unsurprisingly, collaboration typically founders because one or more of the conditions described above is not fulfilled.
- No good reason to collaborate. Some companies have tried to set up a collaborative relationship with a 3PL, when logistics management was in fact already a key strength in the companies concerned. With no prospect of improvement (no chance of doing it better, cheaper, or faster, for instance), the same companies end up bringing their logistics management back into their organisations.
- Incompatible goals. If one manufacturer is aiming for cost savings when another wants superlative quality, incompatibility may put paid to any realistic chance of working together to share logistics resources.
- When there are different but compatible strategic reasons for collaboration, for example, innovation for one and market expansion for the other, one collaborating entity may be more accepting of outstanding success for the other, if it reaches its own objectives. When cost savings are the common factor, however, one partner getting disproportionately more out than it puts in is unlikely to encourage any long-term agreement.
- Insufficient trust. While trust must be earned, lack of trust makes it difficult to cooperate or even feel motivated to do so. Some companies are wary (and often rightly so) of an external logistical partner accessing more of their internal information than appropriate. IT systems and cloud solutions can often help solve the issue by better management of access to information for partners.
- No properly supportive management. Any company that thinks collaboration can work as a “throw it over the wall” exercise is likely to be disappointed. On the other hand, it is also possible to destroy collaboration by over-managing or micromanaging a relationship. Supportive management needs to be a happy medium.
- Not enough time. Sometimes even three-year contracts may not be long enough to optimise results from collaboration. Yet some companies try to rush new 3PLs into taking over their logistics requirements within 3 months or less, and expect collaborative results to flow immediately afterwards.
- Incompatible business cultures. When one partner’s management style is “Ready, Fire, Aim” and the other’s is “Check It, Check It, Then Check It Again”, the two may be too far apart for any productive collaboration.
On the other hand, there are indications that when economic conditions get tough, collaborative results tend to improve. The parties are more motivated to solve problems together, leverage each other’s good ideas, and put mutually beneficial solutions in place.
Finally, Collaboration Success or Failure – How Will You Know?
Measurement of collaborative initiatives and activities to compare achievements with objectives is the only rational way to see if a logistics collaboration is working as you want.
Metrics may be financial, such as profits, revenues, and costs. They may also include strategic parameters such as market share and levels of new business.
A properly designed service level agreement for the collaboration will have key performance indicators designed in, with metrics agreed between your enterprise and the other parties, and reviewed by all at regular intervals.
By using the agreements, metrics, and indicators that are right for your logistics collaboration, and by applying the pointers described in rest of this article, you will know how to set up logistics collaboration for success, what to aim for, and what to watch out for to keep the relationship on track for the results you expect.