Horizontal collaboration: introduction
Since a few years, horizontal collaboration has been gaining attention as a new business model that can help make the transport and logistics sector more efficient, effective and sustainable.
Horizontal collaboration requires that multiple independent shippers pro-actively work together in clusters or communities to “bundle” their overlapping freight flows.
“Bundling” in this context means that the compatible freight flows of the shippers are consolidated in space, as well as synchronized in time.
As in traditional logistics, the bundled supply chain of the community is outsourced to and physically executed by a logistics service provider.
However, horizontal collaboration is quite different from the traditional business model of “groupage”, where a logistics service provider reactively tries to consolidate freight flows based on a 1-to-1 contract with each shipper.
In many cases, horizontal collaboration requires the intervention of a neutral 3rd party to maximize the gains of the community. In CO3 terms, such a party is called a network orchestrator or “trustee”.
A trustee is needed when the collaborating shippers are dealing with confidential data or when they operate in (semi-) competing markets, when they want to redistribute synergy gains or when they need to synchronize operations on a daily basis.
It has long been demonstrated theoretically, that horizontal collaboration can create a very significant increase in network asset utilization.
This can lead to drastic improvements in efficiency (cost), effectiveness (service level) and sustainability (carbon footprint) of the logistics network.
However, horizontal collaboration has until today not often been applied in practice due to its unfamiliar and complex nature.
It is the ambition of CO3 to transform horizontal collaboration from a “blue ocean” concept into an accepted business practice.
What is new about CO3?
Horizontal collaboration requires a multitude of innovative breakthroughs:
- Methodology for identifying and bringing together compatible shippers and overlapping freight flows
- New actors (neutral trustees) to facilitate freight flow bundling
- Multilateral legal framework, compliant with European anti-trust legislation
- Win-win revenue models allowing multiple shippers to share synergy gains
- Collaboration models linking together multiple shippers, one or more logistics service providers and a neutral trustee
- ICT systems for collaborative transport management and synchronization
- Real-time solution for synergy gain calculation and redistribution
- Automated and integrated order-to-cash processes
- Advanced community reporting services
- Multimodal (rail, short sea) transport solutions
Focus points of CO3
The mission of CO³ is to encourage a structural breakthrough in the competitiveness and sustainability of European logistics by stimulating horizontal collaboration between European shippers.
Most of the innovative building blocks for horizontal collaboration already exist, but are not yet widely known and tested in the logistics market.
The most important missing link is a robust legal framework to make horizontal collaboration anti-trust compliant.
As such, the primary objectives of the CO3 project are to:
- Develop a European legal framework and remove managerial barriers for horizontal collaboration
- Facilitate, launch, and coordinate test cases
- Organize workshops and seminars to educate trustees, shippers and logistics service providers
Active orchestration versus traditional groupage
In traditional groupage, a logistics service provider signs a 1-to-1 contract with one or more shippers. In order to build efficient and effective transport networks with maximal asset utilization and economies of scale, the service providers will try to find geographical bundling opportunities for freight flows that “accidentally” move towards the same destinations. This type of consolidation is reactive because the LSP has no impact on the timing of the transport orders.
In addition to this traditional method of consolidation (=groupage in geography or space), horizontal collaboration introduces an additional dimension in which to bundle freight flows: TIME.
By synchronizing overlapping freight flows of multiple independent shippers, double-digit improvements can be achieved in asset utilization, total logistics cost and carbon footprint, while improving in many cases also the service level towards the customers.
Due to a number of legal, organizational and technical constraints, this innovative way of working often requires the intervention of a neutral external logistics actor, i.e. a “trustee”.
This independent actor helps to create and manage communities between multiple shippers and one or more logistics service providers, and to maximize the synergy gains within this community.
EU statistics show that 20-25% of all anthropogenic greenhouse gas emissions are the result of transport and logistics. At the same time, according to a study by the World Economic Forum (2009) the average capacity utilization of the European logistics network reaches hardly 43%. This means that 1 out of every 4 vehicles drives empty and that the average loading factor of the other 3 is less than 60%.
The harmful impact of this on the economy, but also on society and the environment can no longer be ignored.
Horizontal collaboration can lead to massive improvements in the utilization rate of transport assets.
In terms of environmental benefit, this translates into double digit (20-40%) carbon footprint reductions per freight movement.
In addition, flow bundling can facilitate intermodal transport solutions (rail, barge, short sea) which are now hindered by a lack of stable base volumes to make them economically viable.
Horizontal collaboration and traditional logistics service providers (3PL / 4PL)
Although primarily driven by shippers and trustees, it must be underlined that horizontal collaboration is not a movement against traditional logistics business models or logistics service providers.
Rather, it is an extension to their market and offers new possibilities which were not available before.
In the philosophy of CO3, a shipper will still have the option to operate a transport lane in a traditional way, i.e. through a 1-to-1 carrier contract with a logistics service provider (3PL or 4PL).
However, when the shipper feels that the lane is not efficient, effective or sustainable enough, he will have the possibility to bundle this flow with flows of other shippers to improve the cost, service level or carbon footprint.
A neutral trustee can assist the shipper in detecting the most appropriate bundling partners, in setting up the operational environment with the LSP and in actively managing the community which is required to obtain maximum synergy gains.
Possible impact on the logistics sector
If horizontal collaboration becomes a success, it can be expected that a new logistics market will soon emerge. Besides the traditional market of logistics outsourcing and groupage, shippers will be able to use the services of a trustee to bundle their freight flows with those of other companies in order to improve their supply chain cost, service level and carbon footprint.
Some of the largest shippers and logistic service providers in Europe are currently preparing to implement and test this collaborative strategy with support from CO3.
As such, orchestrated horizontal collaboration has the potential to become a significant new business model for the logistics sector. This may eventually lead to the development of a new (“blue ocean”) market for sustainable transport.