
"Collaborating with competitors is good for customers and it's
good for the industry," proclaimed Ross Born, Co-CEO of Just Born Candy, makers
of Mike and Ike, Hot Tamales, and those yellow Peeps that are synonymous with
Easter.
Collaborating with competitors is good? You might be thinking that all of those years
of eating marshmallow Peeps have finally gone to Ross's head. But in fact, his long term vision and
strategic partnership with international logistics firm OHL, was the keynote
presentation last week at Lehigh
University's Center for
Value Chain Research Spring Symposium.
According to Kevin Westervelt, SVP of Business Development
for OHL, "Ross Born's commitment to this program will allow small and mid-size
candy companies that make up 30% of the market, to compete with Mars and
Nestle, who make up 70% of the candy market.
With the savings from the Confection ConnectionTM supply chain
consolidation program, the participating candy companies will be able to take
those dollars and re-invest in manufacturing and growing their business."
Since hearing the presentation and taking a tour of the new 600,000
sq foot refrigerated distribution center, I have been left wondering about the
potential of applying this Vested Outsourcing® model to different industry
groups.
Many retail executives ask, "How do you compete with
Wal-Mart?" They have built an exemplary
supply chain system, have economies of scale on their side, and have managed to
cut out inefficient expenses like no other company. In the confection industry, mid-size
manufacturers are asking the question, "How can I level the playing field with
giant multi-national companies Mars and Nestle?" One way is to cut 20-25% off of a
significant cost component, freight, by collaborating with like-size
competitors who ship to the same clients.
Freight consolidation is nothing new. It began 45 years ago in West Virginia. ‘Collaboration' and ‘partnership' are the two
most overused terms in supply chain presentations today. But there are not many case studies of
successful implementation in collaborative freight consolidation between
competitors. Here at the Global Trade
Best Practices Organization we have examined many leading edge sourcing models
including, Kate Vitasek's Vested Outsourcing, Anirban Dutta's process of
clinching multi-million dollar outsourcing deals, Jeff Ryan's proprietary
collaborative sourcing model, and the value that supply chain visibility
companies like GXS, Sterling Commerce, SPS Commerce, and InfoBorders play in
these relationships. Now we will explore
the process Just Born and OHL followed that resulted in the Confection ConnectionTM;
the industry's new shared logistics model.
Ross Born explained to the audience that, like most other
manufacturing companies, Just Born started out handling its own freight. As the business grew, they partnered with a
third party logistics company (3PL), Kane is Able, out of Scranton Pa. The 3PL relationship helped to grow their
business but they evolved to a point that in order to gain additional market
competitiveness, Ross knew he would need to put a collaborative partnership in
place. He turned to Lehigh University's
Center for Value Chain Research (CVCR) for help.
The CVCR is headed by Managing Director Joel
Sutherland. Joel is a supply chain
industry veteran with over 30 years of industry experience, and recently the
recipient of the CSCMP Distinguished Service Award. He and
his team began a Consolidation Optimization Study that included the following
data sources and business rules/assumptions:
- Order data provided by four confectionary
manufacturing companies
- Aggregated one year of order history for all
shippers
- Market truckload rates applied: fuel surcharge @
$4/gal.
- Direct
Customer & Pool Point shipments incurred linehaul cost
- LTL rates - applied same class and discount to
all shippers' - price per cwt
- Annual volume: Tonnage 141.8 Million#; 8.2
Million Cubic Ft.
- Line-haul trucks may make at most two (2) stops
- Truck capacity: 40,000 lbs. & 2,400 cu ft.
Larry Snyder of Lehigh
University went on to
explain the Consolidation Optimization Study.
"We took the data from 4 companies, Just Born and three
competitors. 1 year of data was feed
into a proprietary formula. The goal of
the program was to determine which customers should get consolidated TL
shipments, which customers should get LTL shipments from crossdock and pool
point locations, which pool point locations should be utilized, and how the
trucks should be routed through the network."
The results: referring to the graph below. The top line is the companies running their
separate models after the routes were optimized. The second line represents using consolidated
freight. The allocation of the freight
cost would simply be charged by the space utilized on the trailer.

"The Lehigh
University's CVCR study
validates the value premise," mentions Kevin Westervelt, OHL, "it gives us an
independent academic reference when talking with other candy companies about
collaboration."
At this point Just Born began approaching 3PL providers to put
in place a long term partnership agreement.
After talking with several companies, they moved away from the incumbent
3PL provider, and chose OHL.
"OHL agreed with the vision of like companies going to like
customers as a way to create critical mass (i.e. larger consolidated shipments)
to drive down costs and improve end-customer (i.e. delivery to the customer's
DC) service. There are other synergies beyond consolidation - including
packaging. While it is unusual for large competitors like Hershey and Mars to
work together, this is ideal for small to medium size companies that are trying
to compete "supply chain to supply chain". This is the only way they
can gain scale." explained Joel Sutherland, Lehigh University.
The agreement was truly collaborative in sharing gains and
risks, and completely transparent. They
went back and shared years of financial data down to monthly line item
costs. What are the costs of the
warehouse staff and how many do we need?
Then they got down to profit margin and fixed it in a 10 year
agreement. They outlined who was taking
on what risks in filling the vacant space as well as outlining gain sharing if
OHL exceeds expectations based on defined metrics.
As you can imagine, one critical component to executing on
this model is the supporting technology that will handle the flow of
information. Just this past February,
Wal-Mart started imposing chargebacks for freight that is not delivered in the
"Must Arrive By Date" window. It levies
a 3% off the cost of goods sold, as a reimbursement charge. Can you imagine the complexity in volleying
EDI and XML data and unique customer UCC128 barcode labels between multiple
suppliers and systems to one consolidated shipment? At a 3% cost of goods, there is no room for
error.
Scott McWilliams, CEO of OHL, explained the information flow
and the technology backbone that OHL uses to provide communications and
visibility between partners and independent operating systems. OHL alone has several systems including
Oracle Transportation Management System, Synapse, Manhattan Associates, Red Prairie,
and CargoWise. To integrate these
systems, the systems of their trading partners, as well as give visibility to
stakeholders worldwide, OHL uses Sterling Commerce solutions.
Today, the Just Born - OHL partnership has been in
production for six weeks. They are
currently working on bringing in the first candy manufacturer freight
consolidation partner.
"All eyes are on us now to execute", mentioned Mr.
Westervelt, "This collaborative effort is unique in three ways. 1. A
candy manufacturer can warehouse together and naturally be part of the
consolidation. 2. They can crossdock through. If the manufacturer is in Baltimore, they can bring in the loads and
have the shipments broken down for specific locations. 3. If the manufacturer is west of Bethlehem, we could
consolidate the freight on our long hauls already headed west. There is no point in having the trucks come
east, if we are just going to turn around and head west."
"Our challenge to overcome is status quo and being able to
communicate the value of Confection Connection", Ross Born pointed out, "Many
of the candy makers are not technologically advanced. They have been shipping the same way for 25
years and if they are making a profit then they have other things to worry
about like making candy."
Mr. McWilliams went through the key driving market factors
that bring urgency to collaboration today.
He started out by revealing that in his 20 years of industry experience,
only once was he able to convince two competitors, who were shipping to the
same client, to agree to share a truck.
But today, he outlined seven major drivers that are pushing competitors
to agree to freight consolidation.
- Shipping
rates are going up 3-5% this year.
- LTL
carriers are looking for more tonnage, denser loads per pallet, and
freight that is easier to handle.
- Volatile
fuel prices - diesel fuel has gone up $.94 in the last 12 months, and
there is no sign that this trend will change.
- Driver
shortages. Currently the ATA says
they are 20K drivers short and that is expected to rise to 111K by
2014. This is a serious issue. The
average driver is 46 years old and there are not many new drivers entering
the market.
- Hours
of service constraints. They {Govt
Regulators} keep changing the rules, so it is a continued issue to
conserve capacity.
- Greater
numbers of direct customer shipments when shippers unite. Less trucks, less transit time, and more
efficient TL than multiple LTL shipments.
- Lastly
the new 2010 tractors to meet the EPA guidelines are $30K more
expensive. Therefore, there is a
lot less new tractors being purchased which means that the fleet on the
road today is aging and not as safe or efficient.
In conclusion, competitor collaboration makes a lot of
sense. With the proliferation of
information being shared and mined in databases, a 3PL provider is not only
consolidating product for shipment, they are also consolidating redundant
processes at a higher network level.
This is very similar to why companies outsource their payroll to ADP or
outsource their EDI to companies like GXS and SPS Commerce. There are significant efficiency gains that
can only be attained at a higher collaborative network level.
For the small and mid-size manufacturer, survival is less about lean internal operations and
plugging away ‘as is' and more about becoming a part of a competitive
supply chain network. Many leading companies, like Just Born and
OHL, have their eye on where the puck is headed, and are putting in place
vested outsourcing agreements and utilizing new supply chain visibility tools
to grow their business. Companies who
continue to go at it alone with the mantra, "it has been working this way for
25 years", and do not pay attention to the supply chain, might one day realize
that status quo will kill them.
I look forward to revisiting this deal a year from now. Reporting down the street from the new Sand's
Casino, the grave stone of where status quo killed an icon of American
industry, Bethlehem Steel.
Presentation Courtesy of Lehigh University's Center for Value Chain Research.
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Comment by Rob Guerriere on 2010-05-24 10:25:19 The full detailed Just Born - OHL presentation from the CVCR Spring Symposium can be found under 'Shared Documents' in the Members Lounge. Link to Members Lounge on the left toolbar. |
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