DECISION 2002: TECHNOLOGY: Have exchanges evolved enough to help carriers survive the perfect cost storm?
November 1, 2001
The need for increased collaboration in transportation logistics may have become a certainty, but what does the buzzword 'collaboration' entail, and will exchanges help you achieve it?"Collaboration m...
The need for increased collaboration in transportation logistics may have become a certainty, but what does the buzzword ‘collaboration’ entail, and will exchanges help you achieve it?
“Collaboration means the ability for visibility across the supply chain for transportation management, increasing inventory turns,” says Edward Wolfe, senior managing director with Bear Stearns Company, Inc.
In collaborative transport management there are higher end user/consumer expectations, and therefore bigger hurdles to overcome. “The challenges for transportation today are leveraging the Internet, turning suppliers, competitors and carriers into collaborators. But there is also concern that exchanges may be getting tarred with the dot.com brush,” says Wolfe.
So the pressure is on for the surviving exchanges to enable collaboration. “Many public exchanges have not survived because of their open format, i.e. making freight business public,” says John Lanigan, CEO of Logistics.com.
To best collaborate, he says, you need to leverage the benefits of your traditional ways of doing business, valuing the face-to-face communication while agreeing on the behind-the-scenes technology.
“We think supply chain collaboration should be focused on order release management. The industry is at a crossroads. And we feel there is opportunity in the future with visibility. So when we’re thinking of exchanging, we’re thinking of information, of logistics flows of material, information and funds, and making these accessible through exchanges, which sit in the middle between carriers, suppliers and partners,” says Rodger Mullen, senior vice-president, operations, Schneider Logistics Inc.
Carriers are facing their share of challenges right now, many of which could be improved by better collaboration, which could make more effective use of resources, both labor and equipment, says David Goodson, president of Class8 Solutions, Inc., a consulting firm which specializes in the transportation industry. Carriers are in the thick of what Goodson calls a “perfect cost storm”.
“Carriers are now probably in the most severe state they’ve ever been in. Everything bad’s up, everything good’s down. Trucking failures vs. (increasing) average diesel prices are perfectly synchronized. Equipment value is evaporating, so now you can’t even borrow against your assets,” he says.
Add to this the eternal driver shortage and average wait times that are 37.5 hours per week (for American truckload carriers), with a low wage rate and the picture isn’t pretty.
How can collaboration improve the situation?
“Carriers only make money in the last 3-5 days of the month. Up until then, they’re doing what we call ‘practice trucking'” says Goodson.He says that when incremental revenue inches past the fixed cost, it fundamentally changes the profit margin, while reducing wait time. So basically, the more trucks, and drivers, that are on the move versus in a holding pattern, the better the bottom line and the fewer the tiring waits for loads. And setting up a collaborative network will increase carriers’ knowledge of when, where and how to guarantee more of that incremental revenue.
“Collaborative networks could enable building continuous moves, the optimization of empty miles, and the elimination of excess deadhead. A hub would have visibility into capacity,” says Jim Griffin, director of logistics consulting at Elogex, Inc.
Routes would become predictable, “virtual dedicated”, reducing costs and improving driver satisfaction, he says.
“In a theoretical collaborative network, there is no more good freight or bad freight, just utilization. Carriers swap loads to improve utilization,” he says. Appointment scheduling could harness online information using accurate, real-time communication, visibility to transactions, and reducing wait time.
The Internet, says Mullen, is a major focus of this initiative but it is essentially only a tool. To properly proceed with collaboration ideals, there is a consensus that we need to first adopt standards.
“What’s interesting in collaboration/exchanges is that everyone’s interested yet confused at the same time. Collaboration has (just) recently become a concept. But different databases, protocols, and standards still inhibit collaboration. We need to think hard about what provides a competitive advantage. And we really do need to think long and hard about standards if we’re really serious about this,” says Lanigan.
But he also readily acknowledges that standars represent a double-edged sword.”There’s very little collaboration between service providers, even while we tell shippers and carriers to do so. It’s darn expensive to figure out how to cobble together the services of three different service providers,” he says.
And there is little sense in introducing a set of rules when not everyone is willing to play the same game. “Standards work where they are not strategic and not introduced as a competitive advantage,” stresses Kevin Lynch, chairman and CEO of Nistevo, a private Web-based collaborative logistics network that includes some of the largest shippers in North America and their carriers.
Beyond the issue of standardization in tool sets, motivation, cost, and control of the relationship are also key when it comes to initiatives on collaboration.
“Many exchanges failed because relationships are the things that are important, and assets are not to be considered commodities. With public exchanges, the control of the relationship was lost. People were not willing to equalize intellectual property. With independent exchanges, you aggregate the volume but lose control of the relationship. With consortia exchanges, there’s industry support but little hard value. It’s not clear to me that all examples of collaboration really work. The cost benefits must outweigh the flexibility needs,” says Lynch.
Motivation to collaborate, and the realization of its potential savings value, also largely depends on the industry, says Mullen.
“We have seen, especially in the automotive service parts industry, a visibility thereof, a motivation to understand how much I can get to reducing inventory. And cost savings need to be there for motivation,” he says.
Once the benefits of collaboration outweigh the unknowns, however, the concept will be an easier sell.
And, says Lynch, collaborative logistics networks are already becoming somewhat more sophisticated, in that the transaction systems that have been internal and in-house have been increasingly extended to the outside world.
Griffin suggests that carriers start immediately investigating the marketplace on collaborative networks.
“Too often we wait for the phone to ring and have some shipper tell us from now on, this is how we’ll be doing this,” he says.
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