The 7 Immutable Laws of Collaborative Logistics

October 10, 2000
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There is an interesting paradox in today's logistics market. A trend toward smaller, more frequent shipments has resulted in a serious shortage of available capacity. At the same time, every shipment is creating excess capacity.

The reason for this contradiction is that a shipper tends to buy capacity in only one direction, and if the carrier cannot fill the backhaul, the truck returns empty. The result is a loss for both shipper and carrier; the shipper pays more, and the carrier makes less. As shipping volume increases, so do the incremental losses. In fact, according to an International Data Corp. (IDC) report dated June 2000, 18% of capacity moves empty. In a $921 billion US business logistics market, the collective loss is staggering: more than $165 billion.

In the past, when transactions were conducted primarily by fax or phone, collaboration would have been too unwieldy to consider on a large scale. The Internet eliminates that obstacle. With its capacity to make data and information exchange easier and more affordable, the Internet is quickly providing everyone in the supply chain with the potential to improve profitability and performance. Technology alone, however, is not the answer.

The Solution: Collaborative Logistics

In using collaborative logistics, many trusted partners collaborate via the Internet to fill excess capacity. They jointly manage complex contracts, jointly execute each step of the logistics process, and optimally exchange capacity. Through collaboration, excess capacity is filled, thereby reducing shipper costs and increasing carrier revenue.

A critical feature of collaborative logistics is its capacity to effect both the buy and sell sides of the equation. In other words, shippers must gain increased product velocity in the logistics pipeline with a reduction in logistics unit costs while, simultaneously, carriers dramatically improve logistics asset use and transaction efficiencies.

General Mills recognized the importance of collaboration early on as a fundamental supply-chain strategy and an important earnings-growth driver. In 1997, General Mills Enterprises was established to build external alliances, which now exceed 35 companies. In March 2000, General Mills, Land O' Lakes, Pillsbury, Fort James, and Graphics Packaging formed an alliance network. In June 2000, seven more companies joined the alliance: Nestlè USA, Inc.; Nabisco Inc.; ConAgra Inc.; McCormick & Company, Inc.; Hormel Foods; International Multifoods, and IVEX Packaging Corporation. Through this new alliance, General Mills estimates a total logistics savings of between 4% and 7% and improved customer service.

All Participants Gain

Collaborative logistics networks create a synergistic environment in which all organizations gain by sharing information and resources. As these networks evolve, they must remain as an unbiased infrastructure for each link in the supply chain-not just for shippers, and not just for carriers. Furthermore, they must adhere to a set of guidelines that uphold the principles of true collaboration. These guidelines are described in detail in a white paper entitled, The Seven Immutable Laws of Collaborative Logistics, by Dr. C. John Langley, Jr., the John H. Dove Distinguished Professor of Logistics at the University of Tennessee.

Briefly, the seven immutable laws of collaborative logistics are as follows:

Law #1: Must result in real and recognized benefits to all members.

Members of an alliance must be able to share gains and losses equitably, and the outcome of the collaboration must be quantifiably beneficial to everyone. This is achieved in part through "rules of engagement" which members establish cooperatively to define the equitable allocation of gains and losses. For each collaborative endeavor, members work through a five-step process:

    1. Define rules of engagement

    2. Track network gains/losses

    3. Allocate

    4. Measure

    5. Enforce

Law #2: Must allow members to dynamically create, measure and evolve collaborative partnerships.

Successful collaborative logistics networks must allow participants to organically engage in a number of partnering activities in order to attract and maintain members. Members must be able to quickly and easily:

  • Investigate-Understand the value proposition prior to joining the network.

  • Integrate-Synchronize individual firm business process with those of the network.

  • Acclimate-Find potential partners on the network that may add value.

  • Negotiate-Establish the rules of engagement with a collection of partners.

  • Cooperate-Share resources according to the rules of engagement, transact on the network creating gains via shared resources.

  • Evaluate-Measure the collaboration benefit/cost for each member firm.

  • Regenerate-Extend or regenerate the collaboration assuming it has benefited each of the member firms.

Law #3: Must support co-buyer and co-seller relationships.

Collaborative logistics extends the baseline model of a buyer to seller collaboration to allow for buyer-to-buyer and seller-to-seller collaborations-even between competitors-to create im-proved efficiencies. For instance, two packaged goods companies would be collaborative partners on the truck, sharing excess carrier capacity, but would remain aggressive competitors on the shelf at the grocery store.

Members must be able to establish public, private and semi-private relationships that allow them to choose the most viable alliances and limit risk. Thus, a collaborative logistics network must offer a combination of both public and private markets. An important feature of multiple collaborations is the ability for members to form their own alliances within the membership and to limit risk.

Law #5: Must support collaboration across all stages of business process integration.

Organizations will be in different stages of business process integration, with capabilities ranging from EDI messaging to automated cost- and gain-sharing agreements. A collaborative logistics network must be able to support the enterprise needs of all members, regardless of the extent to which their capabilities are automated. By doing so, the network greatly increases the options available to all members.

Law #6: Must support open integration with other services.

Because logistics is a horizontal market, a collaborative logistics network must provide both logistic functionality for the vertical procurement network and facilitate logistics collaboration between vertical procurement networks. This is achievable only if the network is open to connect to other logistics and procurement networks, within the same and across different industries.

Law #7: Must support collaboration around all five of the essential logistics flows.

Collaborative logistics provides complete visibility to the entire process flow, from beginning to end, to all participants. Members gain forward visibility throughout the supply chain, as well as the ability to create efficiencies as they establish and modify their rules of engagement with alliance partners. To equip member organizations for optimal performance, a collaborative logistics network must support meaningful collaboration between participants as they move through five relevant areas of process flow: information, products, assets, documents and capital.

Collaboration for Mutual Benefit

Collaborative logistics is the new supply chain management frontier. The seven immutable laws of collaborative logistics provide a framework for organizations to follow as a collaborative logistics environment evolves. In this new dynamic frontier, working relationships will remain vital and technology will still be a critical factor in any organization's capacity to improve profitability and performance. Collaborative logistics effectively ties these loose ends together to create a synergistic mechanism for communities of shippers and carriers to thrive in unison.
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