Supply Chain Frontiers issue #47
An effective way to cut costs as well as CO2 emissions is to share transportation capacity when moving freight. However, it is difficult to put the idea into practice because firms are often required to share sensitive information about their supply chains. The Zaragoza Logistics Center (ZLC), Zaragoza, Spain, is participating in a research project to help companies overcome this obstacle.
The Collaboration Concepts for Co-modality (CO3) project is a European Union (EU) initiative that involves leading research centers such as ZLC, as well as an advisory board of companies that includes P&G, Nike, Kimberly-Clark, Unilever, HJ Heinz, Nestlé, and DHL.
There is considerable incentive for giving companies in the EU the means to create joint distribution networks, and hence improve the efficiency of freight operations. For example, according to a World Economic Forum report, 24% of the freight vehicles in Europe are carrying air; the rest are filled to 57% capacity. The overall capacity utilization of freight vehicles in the region is an unacceptable 43%.
ZLC’s contribution to the CO3 project is twofold. First, it identifies the elements needed to build successful, long-term horizontal collaborative partnerships in freight transportation. And second, it pinpoints the mechanisms that encourage continuous improvement in these relationships.
The researchers interviewed various companies with different and relevant supply chain roles in Europe about the benefits of horizontal collaboration initiatives. The findings are grouped into five main areas.
- Efficiency. Realizing the economies of scale derived from shared loads reduces costs.
- Responsiveness. More frequent deliveries give greater operational flexibility and faster responses to changing customer demands.
- Customer service. Increasing the frequency of deliveries also generally improves customer service levels.
- Innovation. Partners learn from each other, the experience motivates their operational teams, and the flow of ideas encourages joint innovation.
- Sustainability. Improved vehicle utilization translates into fewer empty or partially filled trucks and reduced carbon emission levels.
Gains like these are to be expected when shippers share transportation resources. However, some of the research findings are less intuitive. For example, small and large organizations can enter into successful logistics partnerships; the partners do not necessarily have to be of similar size.
But there are some areas where there is little or no room for compromise if capacity sharing is to be both profitable and enduring. These critical elements are grouped into four categories:
Essential. Without these elements, no collaboration can get off the ground. These include trust, solidarity, and the expectation that both sides will gain even if not in exactly the same way.
Improvement. Elements such as these build success, including compatibility between the types of transportation used.
Framework. These elements define the legal and operational structure of the relationship – contracts, for example.
Distributive. Gain-sharing or value-sharing arrangements are based on these elements.
The research shows that the dynamics of relationships between two or more partners go through three phases of development: exploration, assimilation, and exploitation. Each phase marks a step forward in the maturity of the relationship.
In the initial exploration phase, the partners will assess and compare each other’s corporate cultures, management methods, and market performances to make sure they are compatible. Next comes the assimilation phase, where the partners internalize the capacity-sharing arrangement. In the final exploitation phase, the organizations begin to see the fruits of their hard work. Joint transportation services are executed, and the partners start to capture the benefits.
Although the relationship has now matured and has reached its third phase, there is one more step: continuous improvement. A feedback loop enables the participants to learn from each other, and build on the efficiencies that they have achieved.
The research findings also highlight some of the pitfalls in this type of collaboration. Three, in particular, are worth noting:
- Problems in synchronizing supply chain processes and its dynamics.
- Impaired supply chain visibility across the shared portion of the networks because one partner is lacking in this area.
- Too much complexity in the supply chain can make it difficult for one or both partners to maintain their commitment to the relationship.
In the next stage of the project, the researchers will create a framework for helping companies to develop and sustain successful collaborative relationships in logistics. As part of that effort, a new survey of companies in Europe is planned for quantifying the potential effects of these strategies.
This article is based on a three-part series written by Dr. María Jesús Sáenz, Professor of Supply Chain Management and PhD Program Director at the MIT-Zaragoza International Logistics Program, Zaragoza Logistics Center, Zaragoza, Spain, and published by Supply Chain Management Review. For more information about CO3, contact www.co3-project.eu.