Strategy ShiftBy Dale Buss | Posted 05-09-2003
Case Study: Land O'Lakes and Collaborative Logistics
Every Monday at 8 a.m. sharp, a semi truck pulls out from a warehouse in Syracuse, N.Y., traversing 246 miles to deliver a load of Totino's Pizza Rolls, Pillsbury Toaster Strudel or other frozen General Mills Inc. products to supermarket customers in Carteret, N.J.
From there, it's on to General Mills plants and warehouses in Allentown, Pa.; Geneva, Ill.; and Columbus, Ohio1,319 more milesbefore the truck pulls into a Land O'Lakes Inc. dairy plantnot affiliated with General Millsin Kent, Ohio, on Wednesday morning to pick up a load of butter and other refrigerated spreads bound for a Land O'Lakes warehouse in Florence, N.J., before "deadhauling" back to General Mills in Syracuse to start the circuit all over again.
It's a seemingly straightforward route of 2,243 miles but it's a significant journey for Arden Hills, Minn.-based Land O'Lakes and an historic haul for companies that follow its example and use the Web to collaborate with outsiders, and perhaps even competitors, to cut costs and rewrite industry rules in a way that would have been unthinkable just a few years ago.
While this particular rig on this particular route saves Land O'Lakes only about $200 a week by eliminating the need to "deadhaul" an empty semi-rig to Kent, add all these runs together, plus other shared routes, and such piggybacking is enabling a new in-house logistics strategy at Land O'Lakes that is cutting annual freight costs by 15 percent. "Before the Net, there was no way to handle the logistical, security and scheduling challenges required to team up with other companies to share delivery savings like this," says Bruce Richardson of AMR Research Inc. "The Net can give you the tools to manage it all." And how: Logistics management innovation has dairy cooperative Land O'Lakes looking at the Internet as a cash cow: So far, costs per load of product shipped, says Land O'Lakes, have been cut by up to 20 percent on some routes.
How does it work? In concept, collaboration logistics is a lot like car pooling: Just as ride sharing helps commuters reduce traffic, save fuel and, in some cases, speed the trip, Land O'Lakes is using the Web to share thousands of supply trucks to better coordinate hundreds of thousands of deliveries of everything from raw grain to boxes of sweet cream butter. And the Web is also helping LOL to negotiate better contracts with fewer carriers and rate carriers for quality, costs and performance. Does the carrier get to customers' docks on time? Are the carrier's prices competitive?
This all might not sound like a big deal, but consider this: A year and a half ago, Land O'Lakes truckerssome 50 different carriersspent much of their time shuttling empty rigs down slow-moving backwayswasting up to millions of dollars annually.
Now, thanks to the Web, the company can identify the empty rigs, best carriers and find the fastest routesand piggyback onto dozens of General Mills' and Georgia-Pacific Corp.'s routes to gain savings. These companies are able to do this, in part, by tapping into the processing power of a Web-based logistics network developed and hosted by Minneapolis-based transportation logistics software firm Nistevo Corp., that enables 24 other companiesfrom Baxter Healthcare to Seneca Foods Corp. and Ivex Packaging Corp.to share some routes for savings.
For Land O'Lakes, it's no small changeeither logistically or budget-wise. Multiply the $200 savings on a given route by 40 to 50 new weekly shared routes this year, and Land O'Lakes expects to cut its freight costs by as much as $500,000 annually. Overall, Land O'Lakes hopes to trim several million dollars in annual expenses by applying its Internet-based logistics-management system, including tapping into a collaborative network with other firms, to its annual haul of 35,000 truckloads of dairy products. "In the packaged foods industry, delivery trucks are hauling airthey're empty20 to 25 percent of the time from one stop to the next," says Patrick Johnson, supply-chain logistics manager for the $6 billion company, and the executive who has led Land O'Lakes into this collaborative future. "In the first year alone under this system we saved $2 million in freight costs, and the company was able to take that right to the bottom line."
Since LOL's Johnson launched this leg of his new logistics strategy in 2001, the savings have kept on trucking: Land O'Lakes is also moving into collaborative warehousing, another Web-based trend for companies seeking to better manage transportation costs. "The Net is changing the way industries and companies look at the nature of competition," says Stanford University professor Hau Lee, a supply-chain expert.
Land O'Lakes is not alone in reaping substantial savings: Spice maker McCormick & Co. Inc. has reduced freight costs by 5 percent to 15 percent, while General Mills has estimated savings of up to 7 percent of its overall logistics costs. And given the savings it gets from a vast and growing Web of load sharing, Kellogg Co. eventually may find it irresistible to split a truck with archrival General Mills. Similarly, collaborative logistics is winning over manufacturers of household paper products such as Georgia-Pacific and International Paper Co. Atlanta-based Georgia-Pacific, for example, shares about 80 long-distance circuits with General Mills on a regular basis, cutting freight costs for those runs by anywhere from 5 to 20 percent, says Paul Snider, director of transportation for the Green Bay, Wis.-based consumer products division of the company.
But for Land O'Lakes, using collaborative logistics to find new savings has been particularly urgent. The nation's third-largest seller of branded dairy foods ran into trouble last year in every major area of operations. Sales fell $712 million from the previous year, to $5.8 billion, partly due to smaller markets for branded dairy products as a result of the souring economy. Land O'Lakes also is saddled with debt from its 2001 acquisition of Purina Mills, the St. Louis-based company it bought to boost its clout in the highly competitive feed business.
Another factor is the long shadow of Wal-Mart Stores Inc., which is marching further into the grocery business. Wal-Mart's renowned distribution system includes super-efficient regional distribution centers across the country, where trucks bringing goods in and taking them out can simply "cross-dock" without hav-ing to stash a lot of inventory in a holding area. Land O'Lakes and its rivals, therefore, must be able to accommodate Wal-Mart's demanding schedules by having trucks show up exactly when they're due. "You want to make sure," Johnson says, "that you take care of Wal-Mart."
But most pressing of all may be Land O'Lakes CEO John E. Gherty's new internal "Fit to Compete" program, a push begun earlier this year to bolster the co-op's internal efficiencies to cut costs, boost market share and shore up sagging sales. Land O'Lakes' farmer owners are insisting the dairy foods co-op play harder against the big guysdirect rivals Dean Foods Co. and Kraft Foods Inc., among them.
Land O'Lakes has to compete for space in the refrigerated case with these giants, which throw their weight around using their size, clout and relationships with supermarket retailers, paying slotting allowances and engaging in other practices that make the fight for grocery-store real estate a brutal one, says David Phillips, editor of Dairy Foods, a Chicago-based industry publication. "They're all having a hard time right now because the price of cheese has dropped and new players have come in, the price of milk has dropped, and the market appears saturated," Phillips says.
Meanwhile, the grocery business is consolidating. Fewer, bigger players are dominating the landscape, including Wal-Mart, which is shaking up the natural order in grocery retailing with its immense purchasing power and huge mind share with American consumers. Wal-Mart's aggressive foray into grocery sales cannot be underestimated, analysts say. Grocery-only chains are consolidating nationwide as well, including huge conglomerates of former regional chains such as Dutch-owned Ahold USA. Historically, supermarket profit margins top out at 2 percent, and these developments are threatening to drag them even lower in the short term.
Against that backdrop, says Land O'Lakes' Johnson, collaborative logistics has been a step toward a more connected and real-time supply chain. "The Net, with its ability to track, in real time, various shipments and what's being loaded on which trucks at any given time, made sharing routes for savings seem like a no-brainer," he says.
How does the Nistevo network work? Nistevo's site continuously updates and consolidates information about routes, loads and schedules from members' in-house logistics scheduling systems. It's an impressive feat: Consider that on any weekday, Land O'Lakes alone has some 145 loads hauled by 20 different carriers, running on hundreds of regular routes. Only Nistevo sees the whole picture: "Land O'Lakes routes are not shown to General Mills, for examplebut Nistevo sees where scheduling can occur, and does all the matching," says Johnson.
According to Johnson, the industry estimate is that 20 percent of the miles traveled by common carriers are "non-revenue miles"in other words, miles traveled by empty trucks. Nistevo scans the millions of possible route configurations and route-load combinations to look for inefficiencies that could be solved by merging loads from different companies bound for the same destination.
But it's not all peaches and cream. Collaborative logistics hasn't yet delivered the supersized savings that the early hype promised. Originally, Land O'Lakes had been hoping for twice the savings over five years; now, the dairy co-op expects savings of only a fraction of that by 2003. "We've not achieved the savings we'd hoped on route-sharing but we still felt it's significant," Johnson says. One drawback, Johnson says, is that there aren't many member companies who need refrigerated trucks like the ones that Land O'Lakes uses to transport its perishable cargo.
Cultural problems also continue to slow wider adoption of the concept. "Teaming with others inside your industry, some of whom are considered the enemy on other fronts, still isn't a simple concept for a lot of people," says AMR's Richardson. The misgivings of one could erode a collaborative logistics network's usefulness for all. Adds Johnson: "Learning to share is still a tremendous challenge. External sharing, our company with another, is hard enough, but sometimes it's even a challenge internally."
There's also worry about scheduling; some shippers are afraid that sharing routes with other companies could make a firm more vulnerable to scheduling delays over which individual companies may have little control. "If production went down, if a customer didn't end up ordering a product, if one link in the chain breaks, then what happens to us when we've built our schedule around that?" says Mike Sinclair, vice president of national accounts for Crete Carrier Corp., a Lincoln, Neb.-based carrier and Nistevo subscriber. "There's no shipper out there who wants to pay an extra 200 to 300 deadhead miles because one company's leg isn't there that week."
Johnson says that he, too, was worried at first, but less so now because Land O'Lakes has limited how often it uses Nistevo externally, opting more to use the network to ship products from one company location to anotherand less to coordinate direct shipments to external customers. "If there was a problem at General Mills and the truck was delayed leaving General Mills and we were counting on it being at our warehouse at a certain time so we could ship out some customer freight on it, sure we'd have some concern. But with us, it hasn't turned out to be a problem, at least not yet."
But concern across companies still runs high. According to the Georgia Institute of Technology, in a survey of corporations about their logistics practices over the past three years, interest in collaborative logistics is greater than actual use for many firms. "If you ask to what extent they're using collaborative logistics or Web-hosted spot buying right now, and to what extent they'll be doing so in the future, we always get enthusiasm for future results," says C. John Langley, professor of supply-chain management at the Atlanta school. "But when we look at the survey the next year, we keep having to conclude that the future hasn't quite arrived yet."
Johnson says the main reason for this in his view is that collaborative logistics is tough to execute. "You're having to share stuff," he says, "and that's never easy in a competitive environment that's made up of companies with different cultures and different objectives and different metrics and performance measurements." Still, Johnson believes the prizesignificant potential savings and efficienciesmake the struggle worthwhile. "Everyone at Land O'Lakes had talked about doing this for a long time, and there have been savings so far, and more to come. There are trucks, for example, that have the space on them to take 45,000 pounds of stuff to customers, yet we're getting only 34,000 or 35,000 pounds on them. If you could get somebody else on that truck with you, to fill it to capacity, it's gravy."
For now, though, some packaged goods partners continue to be plagued by a palpable cultural disconnect between their IT departments and "the logistics guys," Langley says. The big problem, he says, is the indifference or even antipathy some corporate CIOs display toward business-side logistics managers. "Particularly where companies have had a big systems implementation like SAP, they'll stiff-arm everyone else for two or three years until they think they've got everything under control," Langley says. "If you're trying to manage logistics activities, that doesn't help you a whole lot." Adds Adrian Gonzales, senior supply-chain and logistics analyst for the ARC Advisory Group: "Sometimes, the logistics groups aren't high enough on the pecking order to get the good IT support they need."
But not so at Land O'Lakes, where Johnson was determined to make logistics a priorityand worked closely with IT to develop the new logistics strategy from the start. When Johnson arrived at the company in 2000 from Pillsbury's Häagen-Dazs division, he expressed no dissatisfaction with the job being done by traditional third-party logistics provider C.H. Robinson, which saved Land O'Lakes money by negotiating better shipping rates than the co-op could get, charging the company a $15 fee every time Robinson procured a truck.
But Johnson was convinced Land O'Lakes could do betterand he was right. "From talking to carriers, we knew that there was some money on the table if we eliminated the middle person," Johnson recalls. "We figured we could go with a core-carrier strategy, using fewer carriers, which would allow us to leverage our size. We would be more important to them, and they'd want to make us happy." Direct control also would assure that needed capacity was always available. Johnson says LOL's IT people were supportive: "I think the challenge in working with IT any time is finding something you both agree on," Johnson said. "Lots of times, IT thinks it's got bigger fish to fryyou know, ERP systems and the whole nine yards. Logistics is only a very small piece, but it's been very successful for us."
To join Nistevo's network, Land O'Lakes paid an initial subscription fee of $250,000, and the co-op incurred nearly again that much in related startup costs, such as training its 10-person logistics staff to use the Web site. But Johnson says those fees were covered by savings from his logistics strategy within the first six months of use. What's next? Some companies remain determined to try to go to the next level and achieve the holy grail of collaborative logistics: two or more producers sharing a single truckload, not just a route. "There are some products we have that fill up the truck but don't weigh out, such as toilet paper," says Georgia-Pacific's Snider. "If we could partially fill that truck with items that are heavy and dense it would help. Ideally, we'd like to weigh and cube the truck out at the same time."
Land O'Lakes' Johnson, for one, is game. He's trying to arrange for a single truck to carry a refrigerated load for his company, then turn off the cooler and carry a dry loadtoilet paper would qualifyfor a collaborator on the return route. "These problems," he says, "aren't insurmountable." Indeed, for Johnson and Land O'Lakes, collaborative logistics has only begun to milk big savings.
Dale D. Buss is a freelance journalist based in Rochester Hills, Mich. He regularly writes about IT issues and the consumer packaged goods industry. His work has appeared in The New York Times, The Wall Street Journal, BusinessWeek, Business 2.0, Chief Executive and Brandweek. Please send comments about this story to firstname.lastname@example.org.