Thinking Out Loud: Patrick JohnsonBy CIOinsight | Posted 05-09-2003
CIO Insight: How does sharing truck loads with other companies fit in with Land O'Lakes' corporate goals?
Johnson: We needed to cut costs, and when I came on board in 2000, we were using a third-party logistics provider, C.H. Robinson, to handle 8590 percent of our freight. We had been outsourcing our transportation management to them for roughly six years, but by doing so, we were leaving money on the table. So we decided to insource our logistics, and buck a trend, and make logistics a core competency of Land O'Lakes. It was a change in strategy for us. It meant eliminating the middle man and changing the way we managed our freight, to put us in a position where we could save money. At the end of the day, we'll probably also greatly enhance customer service.
How did going this route help you to get leaner?
Using collaborative logistics software, you can piggyback routes with other companies to eliminate the time you're paying a carrier to drive an empty truck. We in our industry, analysts tell us, haul air 20 to 25 percent of the time. That's a costly inefficiency that happens less if you can team up with a company that shares a similar route and you can coordinate it so that you can pay them to use their carriers during the times they'd otherwise be hauling air, and vice-versa. Sometimes you can share the burden of the dead-hauling. It all depends, and is subject to negotiation when you are setting up a shared route with another company. You can split the costs of the dead-haul, or you can have it as part of the quoted overall rate that's being charged by the carrier, or you can have the partner that is loading the truck after the deadhead miles pay for them. Generally, you look at the entire route you're sharing, determine who benefits the most from the route-sharing, and most often, you can arrive at a fair and equitable agreement for everyone involved. Collaborative logistics software also helps us see which carriers out of the thousands out there are the most reliable, which cost the least to LOL over time, and, overall, provide the most value to LOL. Just in the past year alone, we've been able to get a better handle on the characteristics of our carriers, based on facts we've been able to accumulate over time using the metrics in this software. We've gone from having 50 core carriers to 15, for better service at less cost overall.
How is collaborative logistics evolving as a concept at LOL and across industries?
I don't know if I'll see it before I retire, but I think, long-term, what you're going to see is a ton of collaborative warehousing. That's the next big thing. There are some people trying to do this now but there are system challenges associated with it. We're looking very seriously at this now. I can't go into specifically who we're working with, but it's a couple of middle-sized players, to see whether we have an opportunity to bring stuff from one truck, across dock, and into the trucks we're controlling, and that way get into our sailing schedules. By the end of the year, we're going to be doing some of this. There are cost implications and system kinks to be worked out and cultural challenges to overcome with this, of course, but I think the size of the prize of sharing storage costsor working collaboratively to minimize warehousing costswill be big enough to be worthwhile. We're about to launch a pretty good-sized pilot of this by summer, in Chicago, and I'd say we're probably looking at something that would be worth $200,000 to $300,000 to us and about the same to the outfit that we're talking about doing it with.
But keep in mind that you've also got C&S Wholesale Grocers and some of those companies back East that are trying to sell our end-customers on super warehouses, where all of the consumer packaged goods manufacturers would put their products into these vast warehouses, and essentially, C&S would handle shipping it all to the various, individual stores. What that would do, really, if you have, say, ten super warehouses spread around across the country, this would help cut the total number of warehouses that everyone in the food business has.
Wouldn't that take control away, again, from individual companies such as yours?
Yes, it would. But the reason people are looking at collaborative warehousing is that whoever can coordinate industry-wide warehousing better is going to take a ton of money out of the supply chain for everyone. Instead of having 50 warehouses, say, you would have maybe ten or even less, and you'd be shipping directly to the stores that carry your butter, say, as opposed to shipping into those stores' warehousesand it's more convenient in that way for your end customers. They would carry much less inventory, and down the road, that's probably the trend you're going to see. We're just now starting to see it in a couple of areas, and there's a lot of people that would like to do it. What you gain in terms of inventory savings and supply-chain efficiencies would be huge. I'm much more of a transportation guy than I am a warehousing guy, but warehousing is three-quarters of our logistics budget, and that budget is roughly $40 million.
What are the cultural challenges involved in sharing logistics at any level?
It's hard enough sometimes to team with the people inside your company, let alone those outside your company. Externally, you need to match systems and cultures but sometimes it's even a challenge internally. You've got to develop a certain amount of trust. But ironically, perhaps, what we've found by experimenting so far with collaboration is that if you can control your own destiny a little bit more than you would by outsourcing transportation almost totally to a third partyand if you can save more money by doing sothen, you know, it can help shape a whole new transportation management strategy for a company and open up new opportunities for more savings and more areas of potential sharing.
And your end customers? Is there an advantage to them in route-sharing?
You've got a couple of food chains like Food Lion, Safeway and others that are looking into this notion of collaborative warehousing and load-sharing, and maybe joining into the collaborative logistics network so they, too, can just click on an Internet site and see, for example, what the status of their order is. I think that gives us a little bit of a competitive advantage, if we can offer our end customers a way to do thisespecially if our own direct competitors are not joining the collaboration network. I don't know if it would be a huge advantage, but the opportunities are certainly interesting to consider.
How much collaboration with other companies have you been able to do? Right now we probably have about six or eight of these shared routes going, and they change. Most of them operating have three to four legs we can use. But most of the savings and success we've had so far with this is being able to do a better job rationalizing our own loads from one Land O'Lakes location to another. It makes your entire transportation plan cheaper and more effective.