"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 Connection^TM 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 Connection^TM; 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. 

1. Shipping rates are going up 3-5% this year.
2. LTL carriers are looking for more tonnage, denser loads per pallet, and freight that is easier to handle. 
3. Volatile fuel prices - diesel fuel has gone up $.94 in the last 12 months, and there is no sign that this trend will change. 
4. 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.
5. Hours of service constraints.  They {Govt Regulators} keep changing the rules, so it is a continued issue to conserve capacity.
6. Greater numbers of direct customer shipments when shippers unite.  Less trucks, less transit time, and more efficient TL than multiple LTL shipments.
7. 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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