CO3 case study: Retail Collaboration in France
November 2012
Alain Guinouet, Mars Marjolein Jordans, ArgusI Frans Cruijssen, ArgusI
The project is financed by the European Commission 1 Efficiency of EU road transport
100% 180
90% 160
80% 140 70% 120 % Load factor 60% 100 % Load factor (estimated) 50% 80 % Road efficieny
40% billion euro % empty running (km) 60 30% Cost of inefficiency 20% 40
10% 20
0% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The project is financed by the European Commission 2 Future Supply Chain 2016
• Global Commerce Initiative & Capgemini • Joint work of 24 major FMCG companies • New sustainable supply chain architecture: collaborative warehousing and distribution • Time to act is now!
The project is financed by the European Commission 3 Supply chain development
Effectiveness
Proposition: Supply ChainCross Supply Chain ‘Beside technology OptimisationSupply Sustainability Supply Chain Chain improvement, only cross- Supply company collaboration can Chain simultaneously improve efficiency, effectiveness and Efficiency sustainability’
The project is financed by the European Commission 4 Horizontal collaboration
. Traditionally: vertical collaboration (SCM) • Alternative: horizontal collaboration
Product 1 Product 2 Keywords: • InventorySynergy control • JustBundling in time Supplier Supplier • PushGain sharingor pull • TransparencyCompetitors • CustomizationLegal aspects Producer Producer • OrderingGive and policiestake • Bullwhip… effect • Chain dominance Retailer Retailer • Product design • Integration • Power Shop Shop • …
The project is financed by the European Commission 5 How to organizie this? Roles and responsibilities
The project is financed by the European Commission 6 Mars and partners taking on the challenge
. Mars works according to five key cultural principles
. These principles are in line with the challenges posed in the previous slides . Quality - Satisfy high customer requirements . Responsibility - Minimize environmental footprint . Mutuality - Give-take mentality in collaboration . Efficiency - Optimize load factors . Freedom - Partners are free to join
. Mars and partners have started a collaboration that can serve a roll model for other prospective collaborators
The project is financed by the European Commission 7 Background Case study
. French retailers demand full truckload (FTL) deliveries from suppliers to their various warehouses throughout France . Vendor Managed Inventory (VMI) makes the suppliers responsible for the inventory replenishment at the warehouses . A group of four suppliers led by Mars collaborate to fulfil the full truckload delivery requirement and to keep logistics cost under control
The project is financed by the European Commission 8 Collaboration Partners
Company Products Head office Group
Pet Foods: Whiskas, Mars PF France Orléans Mars Inc Pedigree, Sheba
Biscuits: Delacre, United Biscuits Nanterre BN
Saupiquet Fish products Courbevoie Bolton Group
Candy & gum: Wrigley Biesheim Mars Inc Freedent, 5
The project is financed by the European Commission 9 Mars Petcare & Food
The project is financed by the European Commission 10 United Biscuits
The project is financed by the European Commission 11 Saupiquet
The project is financed by the European Commission 12 Wrigley
The project is financed by the European Commission 13 The Supermarket Supply Chain
Shared Production Retailer Supermarkets Warehouse facilities warehouses FR outlets FR Orléans
P W VMI information
Individual suppliers Supplier collaboration Retailers
All four producers have factories in France. From the factories they transport their products to the shared warehouse in Orléans. This warehouse is operated by a logistic service provider (LSP). From this joint warehouse collaborative deliveries are made to the various retail warehouses in France. From there, the individual retailers supply their supermarkets.
The project is financed by the European Commission 14 The collaboration consists of number of phases:
Phase 1: A joint LSP is hired by first two companies
Phase 2: A shared warehouse is opened in Orléans in 2010
Phase 3: First joint shipments are executed in November 2010
Phase 4: Two additional companies enter the collaboration
Phase 5: Today, deliveries are combined to form full truck loads on a daily basis
Phase 6: Planned: Increase scope by adding new retail clients
Phase 7: Planned: Increase scope by adding new joint warehouses and additional suppliers
The project is financed by the European Commission 15 Deliveries from Orléans to retail DCs
Orléans
Total volume
Mars
United Biscuits
Saupiquet
Wrighley
The project is financed by the European Commission 16 Tariffs from joint warehouse Orléans
Orléans
Tariffs
Low
.
.
High
The project is financed by the European Commission 17 Elements of the collaboration concept
Strong consortium The consortium consists of strongly committed companies that truly want the collaboration to flourish and last. The LSP has been of great importance for bringing the right producers together.
Trustee The role of the trustee is divided in online and offline tasks, both conducted by the same neutral player. (1) Main online tasks: the coordination of the shipments and the communication with transport companies. (2) Main offline tasks: The gain sharing and fair cost allocation
Legal There is a formal contract between the individual producers and the LSP, and trustee respectively. Between the producers there is a letter of intent (gentlemen’s agreement or protocol).
The project is financed by the European Commission 18 Elements of the collaboration concept (2)
Gain sharing The efficiency gains are shared based on the principle of equal profit margins. Each company will have a similar saving percentage.
Transport execution FTLs with products of the four companies are shipped to the retailer DCs by the jointly hired LSP Norbert Dentressangle
Tariff The LSP works on the basis of an LTL tariff table with rates per 1 pallet – 33 pallets to each region in France
Synergy The tariff table is used to look up both the FTL price and the (LTL) cost for each company should it have shipped products individually.
The project is financed by the European Commission 19 Elements of the collaboration concept (3)
Gain sharing basis Gain sharing is done for every departing truck for the collaboration, i.e. more than 1200 trucks per year
Financial settlement Periodically, the gain sharing is settled by the trustee via the LSP’s invoices
Gain sharing rule The consortium has picked the equal profit method, which quite closely resembles the Shapley value in this case (see next slides)
Exit clause Should one of the companies wish to leave the collaboration, it can only do so after a minimum 6-month notice.
The project is financed by the European Commission 20 Cost and gain sharing: current
100%
80% Savings
60% Wrigley -29.1% Saupiquet -32.2%
40% UB -32.4% Mars -31.0%
20%
0% Individual Collaboration
Current gain sharing methodology Initially each partner pays proportional to the shipped volume. At the end of the accounting period efficiencies are calculated and compared to individual costs for each shipment. Cost are then reallocated based on an equal profit margin rule.
The project is financed by the European Commission 21 Gain sharing rule properties
. When designing a gain sharing rule, two aspects are important . Stability . Fairness
. Stability can be objectively determined . If all possible subgroups of the consortium are better off in the consortium collaboration then they would be in a smaller group . This will be further explained in the following slides
. Fairness is much more subjective . However game theory provides some well-defined fairness properties . Efficiency: The complete savings of collaboration are distributed . Monotonicity: If player A adds more value to every coalition than player B, player A will get a higher payoff . Dummy: A player that adds no value to any coalition, will receive no payoff . Symmetry: If two players add exactly the same value to every other coalition, they will get the same payoff . Individual fairness: No player will suffer from collaboration (cost level after collaboration is not higher then individually, i.e. without collaboration) . The ‘Shapley value’ is the only rule that has all these properties
The project is financed by the European Commission 22 Stability based on gain sharing rule
The boundary of the blue plane indicates the sum of the costs made by the individual companies (so without collaboration)
The colored lines indicate what part of the total cost under collaboration is The yellow rule assigns even allocated to the companies in less of the total cost under this group following a collaboration to players 1 Apparently, the orange/red specific sharing rule (in this and 2. rule results in lower costs case the green rule). attributed to players 1 and 2. The project is financed by the European Commission 23 Stability based on gain sharing rule (2)
To have a stable collaboration, every subgroup must have a cost level after gain sharing that is lower than without collaboration.
This is identified by the blue plane in the graph, called the ‘core’.
With this graph every gain sharing rule can be evaluated on stability
For example, a rule’s outcomes for companies 1 and 3: OK, stable Not OK, companies have lower cost without the collaboration with 2 and 4
The project is financed by the European Commission 24 Stability based on gain sharing rule (3)
The graph to the left shows that gain sharing deserves some good thought.
The simple rule of thumb of cost division based on individual cost per shipment, results in an unstable situation.
The subgroups (3), (4), (2,3), (2,4), (3,4) and (2,3,4) are not happy and would split off with this rule
The project is financed by the European Commission 25 Stability based on gain sharing rule (4)
The current cost division rule (EPM) result in a stable situation.
The Shapley value, the advertised rule by the CO3 consortium, gives only a slightly different stable solution.
Therefore, there is no reason to switch gain sharing rules at the moment.
However, the Shapley value would give more reliable stability when new partners enter, and is more objectively fair.
The project is financed by the European Commission 26 Thank you
The project is financed by the European Commission 27