Collaborative Transportation Management - What is it? Why do it? What are the benefits?

1. Collaborative Transportation Management What, Why, and How? Joel Sutherland Managing Director Center for Value Chain Research Lehigh University [email_address]

2. Table of Contents – CTM White Paper Chapter 1: CTM Introduction and Executive Overview (What is CTM?) Chapter 2: Business Case for CTM (Why do it?) Chapter 3: CTM Process and Enablers (How to do it?) Chapter 4: Guidelines for Adopting CTM (Getting Started)

4. What is the Objective of CTM? Eliminate inefficiencies in the transportation component of the supply chain though collaboration to bring benefit to all trading partners Overall CTM Objective What is CTM?

5. CTM Eliminates Inefficiencies (“Waste”) ECR JIT JIT II VMI “ Lean” CPFR “ Pull” Waste IPC Time Motion Inventory Errors Space Six Sigma TQC What is CTM?

6. … It is a Holistic Process Private Marketplace Rate Negotiation Inbound Management Routing Guide Standard BOL Dock Scheduling Continuous Move Appointment Scheduling Yard Management Collaborative LTL Mode shifting Terms Conversion What is CTM? Backhaul Reengineered Business Process

7. Table of Contents – CTM White Paper Chapter 1: CTM Introduction and Executive Overview (What is CTM?) Chapter 2: Business Case for CTM (Why do it?) Chapter 3: CTM Process and Enablers (How to do it?) Chapter 4: Guidelines for Adopting CTM (Getting Started)

12. CTM Opportunities Exist Across Four Key Transaction Areas Description Periodic process between a shipper and a carrier to arrange for transportation capacity -- may include the use of a transportation marketplace Proactive control of inbound goods flow and management of transportation by the receiver Aggregating truckload freight across multiple locations or divisions of a company or across multiple shippers Ability to solicit capacity from other select/core carriers Collaborators Transaction Area Capacity Procurement Inbound Management Integrated Movements Transportation Marketplace Shipper Carrier Shipper Carrier Receiver Shipper Carrier Receiver Shipper Carrier Why do it?

13. Example Opportunities in a CTM Initiative: Carrier Source – Example – Wal*Mart/JBHunt/P&G Pilot Wal*Mart/JBHunt/P&G Pilot Nistevo AutoZone reported 25% improvement Best Buy Team Estimate Team Estimate Results Achieved/Estimated Single integration point for trading drives savings of $5,000 per transaction/ customer Difficult to quantify but logically collaboration experience/capabilities would drive buyer preference Opportunity Improved Asset Utilization Fleet Utilization Better Use Of Human Resources (e.g., Drivers) Reduced Administrative Expenses Increased Sales 20% 15% (% Dead Head Miles) 12% 17% 15% improvement 33 (Dwell time Per Week/Truck) 28 15% improvement 60% (% Truck Fill) 80% 33% improvement 100% OTR Driver Turnover 85% 15% improvement Source: CTM Case Studies; Team Analysis Why do it?

14. Example Opportunities in a CTM Initiative: Shipper Source – Example – AutoZone Team Estimate Team Estimate Best Buy Pilot Best Buy Pilot Results Achieved/Estimated Improved internal planning has potential to reduce need for premium freight by over 20% and opportunity to consolidate loads from LTL to TL can be significant Early planning and visibility reduces need for detention -- LTL to TL dramatically reduces damage due to less handling Opportunity Reduction In Freight Costs Reduction In Administrative Costs Reduction In Damaged Product Improved On-Time Performance Increased Sales 10% 8% Administration as a % of Transportation Expense 4% 8% 20% improvement Significant improvements in on-time performance are achieved -- Best Buy pilot reported a 35% improvement 100% 123% 23% improvement Sales Source: CTM Case Studies; Team Analysis Why do it?

15. Example Opportunities In A CTM Initiative: Receiver Source – Example – Best Buy Pilot AutoZone experienced a 50% improvement Best Buy pilot Best Buy Pilot AutoZone transit time reduced from 7 days to 1.5 days (average) Team Estimate Results Achieved/Estimated Opportunity Inventory Reduction Improved On-Time Performance Order Lead Time Reduction Reduced Administration Costs 10% (Days On Hand) 8% 20% improvement 5% 4% 50% improvement 12.3 6.5 (% On-Time) 110% improvement (Lead Time -- Days) 10% improvement 18.8 16.9 (% Admin Costs) 32.1% 67.4% Source: CTM Case Studies; Team Analysis Why do it?

16. Strategic Profit Model Sales Cost Of Goods Sold Direct Expenses Indirect Expenses Inventory Accounts Receivable Other Current Assets Gross Margin Total Expenses Current Assets Fixed Assets Total Assets Sales Sales Net Profit Net Profit Margin Asset Turnover Return On Assets $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % . % Times Net Profit Net Sales Net Sales Total Assets - + + + - + ÷ ÷ Net Profit Total Assets Converting the Benefits of CTM to “C” Level Metrics Increased Sales Reduced Costs Improved Transportation Asset Utilization Inventory Reduction Improved Days’ Sales Outstanding – Example – Why do it?

17. CTM Financial Impact: Base Case Indirect Expense Sales 2000 300 1500 100 400 100 100 500 400 600 400 2000 1000 5% Net Sales Total Assets - + + + ÷ 2 100 10% 2000 Sales Cost Of Goods Sold Direct Expense Inventory Accounts Receivable Other Current Assets Gross Margin Total Expenses Current Assets Fixed Assets Total Assets Sales Net Profit Net Profit Margin Asset Turnover Return On Assets Times Net Profit Net Sales + - ÷ – Example – Why do it?

18. CTM Financial Impact: A 0.25% Improvement in Sales, 1% Reduction in Costs, Asset Utilization, Inventory, and DSO Drives Significant Gains in ROA Indirect Expense Sales 2005 297 1485 100 396 99 100 520 397 595 400 2005 995 6.13 Net Sales Total Assets - + + + ÷ 2.02 123 12.36% 2005 Sales Cost Of Goods Sold Direct Expense Inventory Accounts Receivable Other Current Assets Gross Margin Total Expenses Current Assets Fixed Assets Total Assets Sales Net Profit Net Profit Margin Asset Turnover Return On Assets Times Net Profit Net Sales + - ÷ 23.6% Improvement in ROA – Example – Why do it?

19. Table of Contents – CTM White Paper Chapter 1: CTM Introduction and Executive Overview (What is CTM?) Chapter 2: Business Case for CTM (Why do it?) Chapter 3: CTM Process and Enablers (How to do it?) Chapter 4: Guidelines for Adopting CTM (Getting Started)

20. The Investment Required to Capture the Opportunity is Mostly the Resource Time Required for Culture Change Investments Required People Capital This is in most cases the most significant investment -- resources and commitment are required to build internal readiness for CTM and to create the collaborative culture within and between parties Assets In most cases no additional assets are required, assuming sufficient information system infrastructure to capture and process needed information Some funds may be required in the testing phase, but can be limited by ensuring a tightly scoped pilot How to do it?

27. Making the Process Work Requires Recognition and Avoidance of the Key Impediments to Collaboration… Doing things the old way Conventional accounting practices Tax laws Limited view of supply chain Annual negotiation process Time investment Inadequate communication Inconsistency Betrayal Impediment There's a natural resistance to change that confronts any broad initiative like supply chain collaboration These practices become impediments to collaboration when they focus on the traditional accounting role of determining the value of a single firm, rather than measuring cross-company values Tax laws dictate the need for a clear "price paid" and "price sold" to determine profitability. Yet these practices can obscure the synergistic, and often indirect, cost savings that are primary drivers of supply chain collaboration This is a legacy of the traditional silo organizational structure in which people thought only about their own functional area Annual negotiations consume time and energy, plus they are usually adversarial. There are better alternatives Collaboration takes time and a lot of hard work. To get people to make the necessary effort, they have to be clearly shown the expected benefits When communication between supply chain partners is nonexistent or inadequate, the potential for problems increases exponentially Behavioral attitudes and operational execution must be consistent at all interfaces in the supply chain relations Lying, misleading, misrepresenting -- these may be the ultimate barriers to successful collaborative relationship Comments Source: John Mentzer, James Foggin, Susan Golicic (Supply Chain Management Review) How to do it?

28. … and Adoption of Key Enablers Common Interest Openness Recognizing who and what are important Mutual help Clear expectations Leadership Working together and adjusting to one another Cooperation, not punishment Trust Benefit sharing Technology Impediment Both parties need to have a stake in the collaboration's outcome to ensure their ongoing commitment For a relationships to work, the partners must openly discuss their practices and processes. Sometime this means sharing information traditionally considered proprietary Not all partners and supply chain activities are created equal. Choose those that will deliver the greatest benefits When addressing supply chain problems or opportunities, the old adage applies" two heads are better than one" All parties need to understand what is expected of them and others in the relationship Without a champion to move collaboration forward, nothing significant will ever be accomplished There's no CEO of the supply chain, so the partners have to work collaboratively to figure out how to get the job done When things go wrong in a relationship, punitive actions seldom make them better. The right approach is to solve the problem jointly This basic human quality must be evident throughout the organization -- at every management level and functional area In a true relationship, the partners need to share both the pain and the gain -- use of a shared modular supply chain scorecard can help It's not the be all and end all, but advanced technology is essential to enabling a collaborative relations across the supply chain Comments Source: John Mentzer, James Foggin, Susan Golicic (Supply Chain Management Review) How to do it?

31. Table of Contents – CTM White Paper Chapter 1: CTM Introduction and Executive Overview (What is CTM?) Chapter 2: Business Case for CTM (Why do it?) Chapter 3: CTM Process and Enablers (How to do it?) Chapter 4: Guidelines for Adopting CTM (Getting Started)

35. Step 3: Establish Performance Metrics Affected by CTM Finished Goods Inventory Delivery (On-Time) Delivery (In Full) Out of Stock Frequency -- Finished Goods On-Shelf Availability KPI Avg. Value of Inventory = $5,000 Avg. Daily Sales = $400 Inventory = 12.5 days (5,000/400) Ordered; Product A = 100 cases; Product B = 60 cases Delivered On Time; A = 80 cases; Product B = 60 cases % Orders on time for lines = 50% (1 out of 2) % Orders on time for cases = 87.5% (140 out of 160) Ordered; Product A = 100 cases; Product B = 60 cases Delivered; A = 100 cases; Product B = 50 cases on time, 10 cases one day later % Orders in full for lines = 50% (1 out of 2) % Orders in full for cases = 93.75% (150 out of 160) OOS should be measured as frequently as capabilities allow. The target is a systematic approach to daily measurement. However, key is to measure OOS based on whatever capability exists (daily, weekly, audit) There is a wide range of measurement methods. It is recommended to agree on the measurement among the trading partner's including the time of measurement Example Source: CPFR ® Metrics Days % Order On Time % Order In Full % OOS % On-Shelf Availability Measure Value/units of inventory (cost of goods) divided by the value/units of average daily sales (calculation based on past 6 months history or on forecast for next 6 months) of these products Number of order lines/cases/SKUs delivered on time divided by the total number of lines/cases/SKUs ordered Number of order line/cases/SKUs delivered in full divided by the total number of lines/cases/SKUs ordered Number of items not available divided by the number of items Number of days/hours the product is available on the shelf divided by a defined period of time Definition Getting Started

36. Step 3: Establish Performance Metrics Affected by CTM (cont.) Finished Goods Order Lead-Time Capacity Planning Transportation Planning Full Truck Vehicle Fill Empty Running Distribution Costs Invoice Accuracy KPI Order sent at noon. Picked and shipped at 17:00 the next day. 6 hours transit time Finished Goods Order Lead Time = 35 hours (1.4 days) A manufacturer plans its capacity two months in advance and does not adjust it afterwards; KPI =60 days A supplier has scheduled three trucks two weeks in advance and does not change the plans; KPI = 14 days Number of full trucks during May = 20 Number of trucks filled less than 95% of their capacity during May = 10 % Full Truck = 66.6% (20 out of 30) Number of full trucks = 20 Number of trucks filled with 80% = 10 % of Vehicle Fill = 93.3% Number miles driven empty = 300 Total miles driven = 6,000 % Empty Running = 5% (300/6,000) Total distribution cost = $750 Total sales = $2,000 KPI: % of Sales = 37.5% (750/2,000) 16 lines ordered 10 had 100% match % Invoice Accuracy = 62.5% (10/16) Example Days /Hours Days Days % Full truck % Vehicle Fill % Empty Running % of Sales % Invoice Accuracy Measure Number of days/hours it takes from finished goods order generation to order receipt Number of days for frozen period of capacity plan Number of days for frozen period of transportation plan Number of trucks with over 95% of volume full divided by the total number of trucks shipped Average volume of vehicles used divided by total volume of vehicle Number of miles driven empty divided by the total number of miles driven Total distribution cost of products (e.g., warehousing, transport, people) divided by value of total sales of product Number of lines with matching data (specification and price) divided by total number of lines Definition Source: CPFR ® Metrics Getting Started

38. Step 5: Defining Next Steps Where do we go from here? Key Elements to be Addressed in Evaluating Pilot Results and Defining Next Steps What did we learn? Why did the pilot meet/not meet/exceed its objectives? What is the appropriate path moving forward? How did we do relative to our targets? Were there unanticipated beneficial lessons? Are there modifications to the procedures that should be made? Were our communications effective? Were our objectives reasonable/rationale? What are the real root causes for our change or lack of change in performance? Are there elements of the pilot that we can/should implement now? Is there further testing to be done? How will we institutionalize the changes we are ready to make? Are there capabilities that one or more partners needs to develop before we can go further? How will we know that we are going to achieve the benefits? Where is the money? Getting Started

39. Lessons Learned and Best Practices from Previous CTM Pilots Lessons Learned Area Mindset Unbiased Guidance CTM Readiness Face-To-Face Meetings Values of the Interaction Scheduling Commitment to Supply Chain Improvement The mindset of the individuals participating on the CTM team has to be one of collaboration. While CPFR specifically may not be the requisite mindset, a willingness to share information and jointly manage the process is critical to success In order to keep the process focused, and to enable the interaction among companies in the process development stags, third-party unbiased guidance is recommended Once there is commitment to the concept of CTM, it can be used by each individual partner as a tool to build relationships with other business partners, where the existing relationships may not be as strong The value of face-to-face meetings is crucial to maintaining the momentum of the project, and to ensuring the quality of the CTM process that is developed As a result of face-to-face, telephone, and e-mail communications, companies tend to encounter unanticipated opportunities along the way, even if there is not 100% follow through on some initiatives To ensure participation in face-to-face meetings, scheduling the sessions a month in advance compels participates to make them a priority While CTM is focused on "transportation" management, its impact is spread throughout the supply chain Getting Started

40. CTM Paper published in Montgomery Research’s ASCET, Volume 6