COLLABORATION BETWEEN CONTAINER LOGISTICS STAKEHOLDERS
A shift in power is taking place in global supply chains and the Global Institute of Logistics believes that it is the quality of the relationships between cargo owners and their logistics service provider partners that will determine the winners.
There are three main drivers of this phenomenon.
The move towards demand-driven supply chains is undeniable, and this means cargo owners — as the players who are closest to end-consumers and, therefore, in the best position to interpret demand — are taking control of their supply chains now. It is they who are making the decisions on when and how their products travel around the world.
The contrast between this new model and the old one, in which service providers carrying out different functions failed even to build relationships with each other, is stark. Cargo owners are now co-ordinating all the activity across different modes of transport. One of the benefits for them is that the new set-up will help them make popular products available to consumers in any part of the world much more quickly. Speed, of course, is another differentiating factor between supply chain winners and losers in the twenty-first century.
The third driver derives from a further benefit to cargo owners from the new model. If they are in charge, the likelihood will diminish of terminal operators and land-based logistics service providers being asked to move partly empty containers, and of carriers being asked to transport them across the oceans of the world. ‘Shipping air’, as this practice is known, will become a thing of the past.
Our research demonstrate that this change is already taking place and that thought leaders in the industry are already changing the way they work to adapt to the new model.
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COLLABORATION INCREASES INTEGRATION & DIRECTLY INFLUENCES THE QUALITY OF LOGISTICS
Academics have been highlighting the importance of collaboration for years. The Global Institute of Logistics views itself as a bridge between academia and the way the ideas that come to light there play out in reality. Collaboration is a philosophy, already a highly developed idea, but there is clear evidence that one of the concrete consequences of it can be a reduction in inventory.
This is just one example; what we hope to show in our research is that establishing and maintaining better relationships with their logistics service provider partners will give cargo owners a greater ability to plan loads dynamically, to make sure they ship 5000 containers rather than 6000 ill-planned ones with plenty of air inside them. This will save them money and, more importantly, enable them to be more responsive to consumers. Cargo owners will also find it much easier to ‘hot-hatch’, or arrange for their products to take priority at busy, security-conscious points of entry to big markets.
It is the Institute’s contention that doing nothing is no longer an option for consumer products companies, retailers and other shippers. There are capacity constraints on ships and at ports, on railways, roads and inland waterways extending into the hinterland. There are driver shortages, and increasing fuel prices to contend with, and the possibility of green taxes on products is now very real in some of the most developed markets in the world. Globalisation as we know it is seriously threatened by this situation.
This combination of factors promises rich rewards for cargo owners who succeed in manufacturing, storing and shipping only products they know consumers want to buy, at good prices. By contrast, companies that stick to the old model and allow their supply chain partners to build up safety stock, ship air, miss shipping deadlines and so on will find it increasingly difficult to stay competitive.
Academic Argument
The idea that relationships were of critical importance in the outsource logistics industry was first academically proven in 2002 in a research paper written by the department of marketing and supply chain management, The Eli Broad Graduate School of Management, at Michigan State University by Professors Zhao and Stank.
Their research concluded that operational and relational capabilities do not only complement and enhance each other’s impact on performance, but act as a strategic fit. Based on resource-based theories, combined with the notion of capacity limitations from operations management, their research presents a theoretical explanation of the trade-off between operational and relational capabilities in the logistics service context.
They conclude: “Organisations that identify and develop relational marketing capabilities and operational capabilities to support relational capabilities set themselves apart from the competition.”
Immediately, in their introduction to an influential 2005 paper entitled The Impact of Integrated Logistics Relationships on Third-Party Logistics Service Quality and Performance, the authors — Photis Panayides of the Cyprus International Institute of Management and Meko So, a mathematics expert at the University of Hong Kong — say that the issue of integration between the various parties in the supply chain is “a crucial question” in outsource logistics today. The market is competitive, but these two academics are clear in their argument that logistics service providers that build good relationships will gain an advantage.
This can take the form of reductions in inventory, lower costs for shipping, storing, sourcing and handling products. They point out that this is already a well documented concept — they quote papers by Brewer and Speh in the Journal of Business Logistics in 2000 and by Mentzer et al in the Journal of Marketing in 2001.
A new angle the Cyprus-Hong Kong paper took, though, was one that examined how having good relationships in place can simply make a logistics service provider better at its job; its performance and service levels will improve as it increases the level of its relationship orientation.
A logistics service provider of this kind will be able to reduce its own costs and become more responsive to its cargo-owner customers. Through integration with clients, and with other players along the supply chain, it will be able to reduce transaction costs and increase the accuracy of the information it shares with them.
They decided to test this theory by measuring the impact of relationship orientation on a group of logistics service providers based in Hong Kong. They conducted a large-scale industry survey there, plus 10 “in-depth interviews” with some of these companies, basing their questions on the findings of earlier academic studies and using a scale developed by Sin et al to measure relationship orientation (see the Journal of Services Marketing 2002).
The authors say this: “The findings indicate that when ties between logistics service providers and their clients are strong, the logistics service provider can provide the logistics service in a more coordinated fashion, in a way that enhances the economic outcomes of the firm through potentially higher client satisfaction. This suggests that strong ties may yield a level of information exchange, accuracy, flexibility and solidarity, which impacts directly on the productivity of the exchange process.”
Their conclusion is that management teams must consider organisational as well as operational issues when drawing up their logistics strategies. To concentrate only on the operational side will, they argue, make it harder for logistics service providers to achieve the necessary acceleration in the flow of materials and information, and to provide customer service and high-quality logistics solutions to specific customer requirements.
“Logistics service providers may be confident of high returns for building relationships with their clients,” they say. “Not only will a strong relationship increase integration but it will also have a direct influence on the quality of the logistics service offered as well as performance.”
They acknowledge that, in some industries, buyers will not be inclined to commit to relationships with suppliers; they want to promote as much competition as possible between suppliers and drive prices down. However, this is not the case in the logistics industry, according to Panayides and So, because buyers will gain more from long-term cooperation and integration with logistics service providers than from price competition.
They suggest various measures for improving relationships with client organisations. Logistics service providers could perhaps launch a programme of formal and informal communication, focusing on ways to improve performance cooperatively.
A 2003 study in the United States (published in the Journal of Logistics Business) by Michael Knemeyer, Paul Murphy and Thomas Corsi made the point that communication was a key element in establishing the trust required to build any relationship. They examine a previously established academic theory that divides partnerships between outsource logistics service providers and cargo owners into three types.
In type I partnerships, organisations coordinate their activities and planning, but only on a limited basis. These partnerships typically have a short-term focus and involve only a few areas of the business.
Type II partnerships are ones they define as having “progressed beyond coordination of activities to integration of activities”. For example, the partners undertake joint planning activities to avoid conflicting goals. These partnerships have a longer-term view towards the partnership and involve multiple areas within both firms.
Finally, type III partnerships involve organisations that share what the authors describe as “a significant level of operational and strategic integration”. They talk of one partner being able to make changes to the other’s systems without waiting for approval and of the partnerships being viewed as having no end in sight, with each party looking on the other as an extension of their own firm.
“A firm will have a wide range of relationships,” they conclude, “with a decreasing number of partnerships as they move from type I to type III. The three types of partnerships reflect increased strength, long-term orientation, and level of involvement between the parties. It should be noted that no particular type of partnership is better or worse than any other. The key is to try to obtain the type of relationship that is most appropriate given the business situation.”
This is fine in theory, but as these three academics acknowledge, translating it into the realities of the business world is difficult. They admit that the base for their 2003 study was small (337 complete responses to 5000 surveys sent out), they were surprised to find that companies with type III partnerships did not have the highest levels of trust with their partners — type II partnerships scored higher, leaving the authors of the study to conclude: “This finding raises questions regarding the distinction between type II and type III partnerships.”
They accept that their work provides no more than “mixed support” for the potential existence of the three distinct levels of partnership, but insist their findings do offer support for relationship efforts in the outsource logistics industry. They are certain that firms that want to establish closer relationships with logistics service providers can achieve benefits such as an increased level of outsourced activities, referrals and customer retention. Companies that achieve these benefits will “necessarily become more interconnected”, they say.
The Real World View
The Institute’s position is that collaboration, the term that characterises the attitude of openness towards greater collaboration is a welcome development in the industry and will help to move the focus of discussions among companies away from meeting service standards and minimising storage and transport costs towards the much more strategic aim of reducing inventory levels.
Here we present what the Global Institute of Logistics has encountered around the globe as smart companies attempt to turn the theory outlined above into practice. The starting point for this is to notice that the lengthening of the supply chain is forcing shippers and their logistics service providers to work together more closely with the common goal of achieving greater supply chain visibility. More visibility will, in turn, lead to process improvements and a reduction in inventory levels.
The Institute’s position is that collaboration, the term that characterises the attitude of openness towards greater collaboration is a welcome development in the industry and will help to move the focus of discussions among companies away from meeting service standards and minimising storage and transport costs towards the much more strategic aim of reducing inventory levels.
Greater visibility and collaboration will lead, then, to a decrease in safety stocks which have traditionally swallowed up working capital and valuable space and will do much to reduce the $750 billion tied up in inventory globally.
Thanks to the internet, global communication and improved transportation infrastructure, it’s easier than ever to forge international business ties. However, whether it is sourcing raw materials, or finding a global customer for your finished goods, that is only a first step in a journey toward fulfilling those obligations.
With the continued push toward efficient manufacturing processes such as lean and Six Sigma, it’s not enough to know that critical parts or stocks are on the way or have been shipped. You need to know exactly where they are in the supply chain, whether they’ve cleared customs, whether they’re sitting in a warehouse or if they’re on the last leg in a journey to your loading-dock or your customer.
Keeping up with inbound and outbound shipments on a global basis is not a core competency for manufacturers, which has led to the rise of third-party logistics (3PL) providers. Calculating the value of this market is an inexact science because not all industry commentators agree on what services to include. Total annual revenues of US-based 3PL providers in 2005 were about $100 billion. Dr Alexander Pflaum, director of the IT and supply chain management department at the Fraunhofer Institute’s Arbeitsgruppe Technologien der Logistik- Dienstleistungswirtschaf (ATL) in Nuremberg, Germany, said that the size of the market was now €730 billion a year in the European Union (25 countries) alone. On both sides of the Atlantic fourth-party logistics (4PL) or lead logistics (LLP) providers are emerging now to manage the supply chains of various companies, as the intermediary between manufacturers and suppliers.
Both types of providers can help manufacturers negotiate the maze of shipping goods around the corner or around the world, provided they can stay in touch with shipments at each stage in the journey on behalf of the shipper. To facilitate continuous visibility more and more 3PLs are working to improve their relationships with port operators who, as the custodians of the export and import gateways, have an enormous influence on the safe, secure, efficient and timely execution of the dispatch and receipt of cargo.
Although the ports industry is one of the world’s most traditional and long-established communities, the globalisation of business and the internationalisation of trade has led to the development of a new, more modern type of port operator, which — rather than seeing itself as the Big Brother in the transportation cycle — now sees itself as an equal, but vital, member of the global supply chain ecosystem.
Consider this: in 2006 more than 40 per cent of imports into the US are from the overseas subsidiaries of its corporations. At the same time, China accounts for about 25 per cent of the global growth of gross domestic product. Both of these factors are imposing a major shift in global freight flows and creating an ever-lengthening supply chain.
In essence what we are witnessing in the global marketplace is that comparative advantages are shifting rapidly, leading to de-industrialisation in North America and Europe, and industrialisation in Pacific Asia.
Global manufacturers are basing decisions on how they organise production and, in fact, their whole corporate structures entirely on the provision of logistics services. The ‘modular production’ model is an example. In this, contract manufacturers carry out production against a background of organisational change. The set-up comprises small and large firms, and small and large geographical scales; it aims to create a large number of products in few processes to receive maximum revenue through economies of scale.
Logistics has grown to become the key unit within this set-up, since it has to provide agility and flexibility for any one module, as well as for the interaction of all modules, in the entire network. That means organisational as well as geographical flexibility. Thus a major shift has occurred in how and where commodities and their components are being assembled, manufactured and distributed.
As this phenomenon takes hold we are beginning to witness a very welcome development in the way organisations behave, the principle for which is best summed up in the old adage, “Necessity is the mother of invention”.
The lengthening of the supply chain is forcing shippers and their service providers to relate more closely in the pursuit of visibility and process improvement, this phenomenon is leading to the adoption of ‘relationship orientation’ as one of the central tenets of organisational behaviour in the global supply chain.
As we have shown earlier in this paper, academics have long since identified the power of ‘relationship orientation’ in improving logistics service quality. Before any of them, however, the Institute’s founding chairman, the late Bob Delaney, wrote in 2001 as part of the thirteenth Annual State of Logistics report that relationships would “carry the logistics industry into the future”.
Collaboration refers to the creation, development and maintenance of relationships between global supply chain partners resulting in mutual exchange and fulfilment of promises at a profit. It is a philosophy for doing business successfully; it promotes a culture that puts the buyer-seller relationship at the centre of a firm’s strategic and operational thinking.
We at the Global Institute of Logistics believe that the higher the levels of relationship orientation between the stakeholders in the global supply chain, the greater the logistics service quality and, as a consequence, the better the economic performance of all partners.
The crucial question in logistics has always been the issue of integration between the various parties in the supply chain. In fact the Global Institute of Logistics, in its official definition of supply chain management, includes coordination and collaboration with channel partners, (suppliers, intermediaries, third-party service providers and customers) as being critical to supply chain operations.
The theory has always been that integration is essential among supply chain partners and leads to improved operational and economic performance. That theory is now, thankfully, turning into practice.
The evolution in supply chain and logistics has driven supply chain partners such as shipping lines, stevedoring companies, inland transport operators and forwarders to re-think their role in the logistics process.
In the research process, the Institute found that ports and terminals were the weakest and least transparent link in the supply chain, and that the introduction of a reliable benchmark to measure container terminal efficiency and port performance was essential to improve port/terminal-led best practice and relationship management.
A COMMITMENT TO COLLABORATION BUILT ON PASSION AND TRUST
Findings from the Institute’s “Collaboration Between Container Logistics Stakeholders” led to the accreditation of Hellmann Worldwide Logistics as the world’s “Best in Class” logistics service provider.The main reason for the accreditation was Hellmann’s commitment to building relationships with customers, partners and employees throughout the world.
Findings from “Collaboration Between Container Logistics Stakeholders” led to the accreditation of Hellmann Worldwide Logistics as the worlds “Best in Class” logistics service provider.The main reason for the accreditation was Hellmann’s commitment to building relationships with customers, partners and employees throughout the world.
The announcement follows a rigorous programme of study undertaken by the Institute’s research department following on from an in-depth analysis of logistics services providers with a view to identifying the organization, which would illustrate the Institute’s classification of a ‘best in class’ provider.
Within this parameter the pre-eminent criteria for the accreditation of leading global LSP, was that the organization identified, short-listed and subsequently honoured with the accolade, would demonstrate an exceptional level of regard for the role and function of relationship excellence in the development of their business. In keeping with the Institute’s published thinking, the measurement of the ‘Relationship Orientation’ quotient leveraged was the most important criterion in the final adjudication of the quality of logistics service provided.
Kieran Ring CEO at the Institute, speaking at the formal presentation of the accreditation to Klaus and Jost Hellmann at the worldwide meeting of Hellmann Worldwide Logistics in Singapore, said:
“I am delighted to announce Hellmann Worldwide Logistics (HWL) as the recipient of the Global Institute of Logistics inaugural as the worlds “Best in Class” logistics service provider accreditation. It is our considered opinion that HWL are the finest example of a relationship driven global logistics service provider and evidently meet with the specific criteria set down by the Institute’s research in the naming of this award.
MORE ABOUT HELLMANN WORLDWIDE LOGISTICS ACCREDITATION
