LOGISTICS FEATURE: The masters of their freight

"When I was in college, I would've said it wouldn't work. I would have said it was socialism."

That was Cisco Systems c.e.o. John Chambers' take on his company's share-the-wealth plan for employees during a presentation at last month's executive conference of the Grocery Manufacturers of America. One wonders how many of the food industry honchos in attendance nodded knowingly at the remark, for that's just the quandary many find themselves in as they consider collaborating with suppliers and competitors on logistics plans to wring costs out of an over-built supply chain.

Efficient deliveries to retail depend on suppliers shipping full truckloads, but those efficiencies are often lost on chains, distributors, and wholesalers that are forced to either pay the high freight of LTL carriers to receive slow-moving products or stack them high in the warehouse. Indeed, full-truckload requirements penalize the manufacturers themselves by limiting their abilities to get the right products to the right place at the right time—the concept that is at the very heart of the Wal-Mart distribution model.

"Each manufacturer, retailer, and wholesaler has its own supply chain. If you want to do business with X, you must use X's supply chain. That's inefficient," says Rick Cohen, c.e.o. of C&S Wholesale Grocers, which services such northeastern retailing powerhouses as A&P, Stop & Shop, and Pathmark. In his presentation on the subject, Cohen illustrates the problem with a map of the United States imprinted with red lines that represent the shipping routes of the nation's food industry. The lower 48 are nearly completely blotted out by the crisscrossing routes, many of them representing partially full trucks racking up "empty miles."

Logistics experts are telling food industry players that the savings they've yet to claim on the shelf from their ECR and CPFR efforts may be found sitting on the loading dock. Advancements in category management and forecasting are all well and good, they say, but the big savings are to be found in streamlining the process of getting products from the plant to the store shelf.

"The industry has done well in the planning and management areas of collaborative planning, forecasting and replenishment. It's the 'R' part that was never really worked out. You can't do it without collaborative transportation management," says Dawn Russell, an assistant professor of logistics at Pennsylvania State University's Center for Supply Chain Research.

In a report on increasing efforts by companies to take control of inbound freight, consultant Adrian Gonzalez of the Dedham, Mass.-based ARC Advisory Group outlined three general areas of opportunity for cutting costs through collaborative transportation programs. They are:

•Division-to-division: Taking advantage of load consolidation and backhaul opportunities across various divisions of a single company.

•Supplier-to-shipper: Optimizing load consolidation and multiple stops across the entire supplier base and ensuring compliance with negotiated contracts.

•Shipper-to-shipper: Identifying backhaul and shared-transport opportunities among competing freight carriers with complementary distribution networks.

These kinds of initiatives lend themselves to a number of cost-saving opportunities. Gonzalez notes that, by gaining greater control of inbound shipments across the supply chain, CVS, the $20 billion pharmacy chain, expects a 17-percent reduction in inventory over a 12-month period. Gonzalez's research also put forth the contention that supermarket chains could save anywhere from 5 percent to 35 percent of their shipping and receiving costs by automating their scheduling processes, introducing optimization solutions to better manage outbound operations, and converting their inbound freight from pre-paid (manufacturer-controlled) to collect (retailer-controlled).

The opportunities for increased efficiencies and cost savings in transportation are so many and varied, in fact, that it can be difficult for retail chains to get their arms around all of the possibilities. Coming to their aid are a number of solutions providers like Elogex, i2, and Manugistics with software programs and Web-based management systems aimed at seizing tight control of the shipping and receiving process.

The merging of common technologies such as global positioning systems and bar codes (and, soon, radio frequency ID tags) make deft management of freight possible with the help of some software-based decision aids, says Razat Guarav, director of transportation and distribution solutions at the Dallas-based i2. "Feeding real-time information into decision-support and optimization software can help retailers determine the most optimal way to manage inbound and outbound freight," he says.

The need for such digital aids are clear to retailers who've attempted to solve the complex puzzle of cross-docking, for instance, a practice that could save untold shipping miles and man-hours, and improve in-stock situations. Cross-docking eliminates unnecessary inventory and optimizes transportation assets by coordinating the flow of in-bound and out-bound shipments. Instead of unloading an in-bound truck and stacking its entire contents in a warehouse for redeployment later on, for instance, cross-docking systems identify the items that need to be shipped to certain stores and immediately puts them in a grocer's outbound trucks. The efficiencies of such a system are obvious, but getting it done requires pinpoint planning of a number of variables—scheduling of inbound and outbound trucks and warehouse personnel to name a few.

"We're trying to make the warehouse an integrated component of the supply chain," says Guarav. "Inventory on hand is money lost."

The implications of Guarav's mission can be daunting, however. C&S's Cohen, for one, thinks that the food industry's current warehousing infrastructure is all wrong for collaborative transportation management. That's why his company staked a fortune on a new, high-tech, warehouse tower aimed at third-party, just-in-time delivery of freight (see box at right).

"In our warehouses, there are no more than 100 items that move two pallets a day. That's astounding, because warehouses are built as if all of the items moved four pallets a day," says Cohen. "We all built the wrong warehouses, because we were responding to an archaic distribution system. That's where all the costs are."

Pre-paid vs. collect

Third-party shipping looks to become much more popular in the food business as large supermarket chains begin shifting their freight to a collect basis from pre-paid. The majority of freight arrangements in the industry—more than 60 percent by analysts' estimates—are controlled by manufacturers and figured into the grocer's cost of goods. But grocers want to take control of the freight themselves to get product at a lower rate and exercise direct control over shipping costs.

Moving to collect freight arrangements was a key topic of discussion at a supply chain management conference sponsored by Elogex last month that was attended by executives from six of the top 10 supermarket chains. "We talked a great deal about the need for grocers to take control of this business problem. The desire was consistent across all the grocers in attendance. Paying for the freight allows retailers to take more control of the supply chain," says Travis Parsons, c.e.o. of the Charlotte-based Elogex. "Most said they use a combination of their private trucking fleets and third-party carriers."

Naturally, money is the primary motivation for the move. Retailers are realizing that manufacturers can profit from freight activities by burying an up-charge in their cost of goods. What's more, large retailers with huge volumes see opportunities to reclaim some of their transportation costs by seeking deeper discount rates from carriers and taking part in more backhauling arrangements.

Not surprisingly, major players in other retail channels set the stage for this shift. Chains such as JCPenney, Best Buy, and Home Depot have been moving from pre-paid to collect freight over the past few years. "Retailers like Wal-Mart are in the business of improving value, and they're putting new kinds of pressures on grocery chains," says Gaurav. "To get the right product to the right place at the right time, you need a very efficient supply chain."

But to successfully adapt their systems, supermarket chains must make the investment to duplicate the technological infrastructures of leading specialty and discount retailers. Most grocers need to catch up with the technological times in order to make a go of CTM anytime soon, contends one top logistics consultant. "My observation of grocers is that, every 10 to 15 years or so, they adopt a new technology, and in between they don't do anything," says Brad Forester, senior manager of solutions marketing for Rockville, Md.-based Manugistics.

Forester believes, too, that the cloak of secrecy most supermarket chains draw over internal operations stymies collaboration and big potential cost savings. "They think they've got the best system and a major strategic advantage, whereas the guy down the street is doing the exact same thing," he says. "Grocers need to be looking at technology to differentiate themselves from the competition, but the reality is that they are not adapting technologies at the same rate other industries are."

That's good news, however, for supermarkets willing to take the plunge, says Forester, because there are significant competitive advantages to gain by rebuilding logistics plans during this period of change. He points to one forward-thinking southwestern chain, which he declined to name, whose understanding of current logistical complexities has unearthed opportunities even he hadn't imagined. "They've accomplished a true synchronization of their fleet assets," he marvels. "They've made sure that they're not only in the right place with product to satisfy demand, but also to react to shifts in supply.

The Wal-Mart case

Suppliers such as Nabisco, Land 'O Lakes, and Kraft have all experimented with CTM, but few are out of the test stage. The most complete case study to date remains the VICS (Voluntary Industry Commerce Standards) pilot done with Wal-Mart, Procter & Gamble, and carrier J.B. Hunt that was completed in 2000. While neither Wal-Mart nor P&G reported any significant savings or revenues from the test, they did report improvements in the process, especially as it related to products on promotion. The pilot team did, however, leave behind lessons for fellow pioneers in collaborative transportation management:

Have collaborative mindsets. A willingness to share information and joint-manage the process among multi-company team participants is crucial to the success of a CTM plan.

Seek unbiased guidance. Guidance from an unbiased third party is recommended to keep the process focused and improve interaction.

Start with trusted partners. For a pilot program to have any chance at success, there should already be proven processes, strong relationships, and trust among partners.

Have face-to-face meetings. Pilot team members all commented that the only way to develop relationships strong enough to enable CTM is to conduct face-to-face meetings. Ongoing communications, including phone and email, also uncovered unanticipated opportunities among the three parties that fell outside of the project area.

Be committed to improving the supply chain. Partners need to be committed to improving the broader supply chain in addition to transportation management.

Document. CTM is opportunity to secure comprehensive and useful documentation, regarding internal transportation management processes.

Improve forecasting methods. The pilot underscored the need for improved forecasing methods among trading partners.

The truth is that there is no right or wrong approach to attempting collaboration, apart from a willingness to engage your business partners—and even competitors—in ways you may never have entertained. "Logistics is an arcane art," notes Penn State's Dawn Russell, who authored the Wal-Mart case study for VICS. "Even the people who work in it every day don't know the best way to do it."