Part II: Driving More Efficient Logistics Networks through Horizontal Collaboration

Editor’s Note: Dr. Maria Jesus Saenz is Professor of Supply Chain Management and PhD Program Director at the MIT-Zaragoza International Logistics Program,
Zaragoza Logistics Center, Zaragoza, Spain. This is the second installment of a three-part series.

The Elements of Success

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 improves customer service levels generally.
• Innovation. In successful relationships the partners learn from each other and the experience motivates their operational teams. The flow of ideas encourages joint innovation, particularly in the development of more effective supply chain processes.
• 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. A large Spanish retailer, for instance, has targeted improvements in its distribution network in northwest Spain, where a smaller partner company dominates the market and offers significant logistics expertise. A partner’s knowledge of international markets can be another factor that trumps comparative size as a determinant of success. Also, it is not essential that the benefits of horizontal collaboration be shared equally among the partners. As long as their respective goals are met, the spoils can be unequal.

But there are some areas where there is little or no room for compromise if capacity-sharing is to be both profitable and enduring. We have grouped these critical elements into four categories as follows:

Essential. Without these elements no collaboration can get off the ground. These include trust, solidarity, mutuality – the expectation that both sides will gain even if not in exactly the same way – and dependence; the idea that your partner will adhere to a guaranteed delivery day, for instance.

Improvement. Elements that build success. Operational symmetry is a must; the types of transportation involved, the volumes and loads moved, delivery windows, and destinations, must be well-matched. The same is true for organizational compatibility. And there needs to be managerial synergy for these collaborative ventures to work; how s each shipper approaches the concepts of supply chain agility or sustainability, for example.

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.

With these elements in place the partnership is on firm ground, and the joint logistics initiative can flourish. 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. To illustrate this progression, and the various elements described above, let’s tie them together in an actual horizontal logistics partnership.

Two companies, one in the home appliance business and the other in home furnishings, have identified an opportunity to improve customer service through more frequent customer deliveries by sharing truck space on certain routes.

In the initial exploration phase they will assess and compare each other’s corporate cultures, management methods, and market performances to make sure they are compatible. Also, their respective demand patterns and logistics networks will be scrutinized to ensure that there is alignment and sufficient potential for exploiting synergies. Assuming these requirements are met, they will frame a well structured gain- or value-sharing contract.

Next comes the assimilation phase, where the partners internalize the capacity-sharing arrangement. Human Resources is brought into the picture, for example, to make sure that the right teams are in place. The shippers turn their attentions to adapting relevant processes and information systems to the collaborative effort.

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. Success is measured according to the goals set down in the agreement. If, say, cost saving is the primary focus, then this is reflected in the gain sharing numbers.

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. In effect, the end result of the exploitation phase becomes the starting point for a new exploration phase. Perhaps they identify a specific problem, such as the increasing importance of a destination that needs to be served more frequently, or the possibility of involving third-party services providers or a trustee role.

Tomorrow: Threats and Opportunities