Old economy giants team on logistics

February 26, 2001 —

Some of the oldest and most fiscally conservative names in American industry are betting on a cutting-edge technology startup to wring inefficiencies out of their distribution networks and help them participate in the Internet economy.

Later this year, corporate giants as diverse as Agilent, Coca-Cola, General Mills, Kellogg's, Land O'Lakes, and Monsanto will experiment with a unique Internet-based, collaborative commerce application to reduce their logistics costs.

These old-line companies will use the Internet to manage billions of dollars in logistics spending by sharing excess shipping capacity among a community of invited members. The system, to be fully launched this May, could bring underutilized assets, such as container trucks, to nearly 100 percent productivity and cut out as much as 10 percent to 12 percent of a company's logistics spending.

The service, created by Nistevo, in Eden Prairie, Minn., aggregates scheduling and shipping information on its site, and then creates a mutually agreed upon "tour" of pickup and drop-off points around the country.

Land O'Lakes will share distribution information with other packaged consumer goods manufacturers and supermarkets to optimize its own shipping capacity.

"We have a plant in Kent, Ohio, which ships full truck loads of butter to Burlington, Vt. As it is now, the trucker has to come back empty," said Fernando Palacios, vice president of operations and supply chain at Land O'Lakes, in Arden Hills, Minn.

Creating a community

At first blush, it might seem that a sophisticated logistics technology would make face-to-face meetings a thing of the past. But Nistevo designed a system that requires executives to meet in person several times a year.

At these regularly scheduled meetings, supply-chain executives from the various companies discuss business goals, strategy, and philosophy.

There are things that cannot be put into a computer, according to Fernando Palacios, the Land O'Lakes representative. "I will pay a half penny more for freight, but it has to be there on time. That's the corporate philosophy," he said.

In logistics, philosophy can effect the kind of pallets a company uses and whether they buy, rent, or share them.

"I don't want to be in a community of people who don't want to use the pallets I want to use," Palacios said.

From person-to-person discussions like this, communities of four to six companies are formed, agreeing that, all other things being equal, they will share corporate shipping information and are willing to comingle their products on a single truck.

Chuck Poirier, a partner at Computer Sciences, in Lake Forest, Ill., was one of the original consultants that Nistevo came to when the company was creating its business. Poirier notes that funny things happen when people from different companies meet.

"Executives need to sit down face-to-face to get them to ease up and share what they consider is proprietary information," Poirier said, "[and] suddenly, they're buying warehouse space together."

Sharing the load

The collaborative shipping network works using Nistevo's Internet-based application to coordinate shippers, routes, and load capacity.

1. Shippers coordinate schedules and negotiate sharing rules.

2. Shipper No. 1 tenders a proposal via Nistevo's system.

3. Carrier accepts tender, posts forward capacity on Nistevo's system.

4. Shipper No. 2 applies posted capacity to shared schedule.

5. Carrier is notified of collaborative tour.

6. Load departs.

Moving the goods

Internet collaboration among suppliers can reduce sizable logistics costs.

* Worldwide costs: $3 trillion or 10 percent of supply-chain costs

* U.S. costs: Approximately $921 billion in 1999, of which trucking accounted for $450 billion

With the collaborative Nistevo system, however, Palacios now gets a tour recommendation that may include a pickup for Campbells Soup in Philadelphia and a drop at Wegmans supermarket chain in New York, where yet another pickup can happen on the way to another distribution point.

"This way I end up with a full truck for a whole round-trip, no dead space, and one truck instead of four assets are used," Palacios said.

The collaborative effort will become much more appealing -- and complex -- once member companies have expanded from mingling their products on a single truck, to sharing warehouse space allowing trucks to make fewer stops, and eventually to single invoicing of shared customers. "We are in the process of talking about having integrated e-payments in the future. We are already tied into ERP [enterprise resources planning]," said Bruce Barquist, executive director of network development at Nistevo.

Palacios at Land O'Lakes believes that making it easier for his customers to do business with them will give Land O'LLakes a competitive edge. "If we can give [customers] one invoice for a comingled truck, now we are talking utopia," Palacios said.

Nistevo and General Mills are the driving force behind the effort, which combines Nistevo's Internet-based logistic application, called the Nistevo Network Builder, with old-fashioned community meetings where company representatives talk about shared business goals and strategies for finding mutually compatible shipping partners (see box, below).

Although companies such as General Mills incur some risk in partnering with a startup company, General Mills decided to go with Nistevo because of a lack of capacity, too many shipments, and not enough carriers, all factors which drive up the price of doing business.

General Mills turned to Nistevo for its Web-based logistics technology, which made integration with their back-end systems simpler, according to Adrian Gonzales, senior analyst of e-business and supply-chain at ARC Advisory Group in Boston.

Once a carrier has been agreed upon by the shippers, Nistevo, using an ASP (application service provider) technology with pricing based on yearly subscription rates, will manage contracts, create dedicated tours, and dynamically reroute tours as opportunities present themselves for shared shipping lanes.

For example, Ivex, a $700 million specialty plastic and paper packaging manufacturer, in Lincolnshire, Ill., will be sharing lane information with General Mills and Georgia Pacific. "We will piggyback where we fill up their lanes," said Jeff Stubbs, director of logistics at Ivex.

To broaden the scope of its collaborative shipping model, Nistevo will also partner with vertical exchanges. The first deal will put Nistevo on the Envira chemical exchange that includes about 50 companies.

Sharing load information electronically gives companies forward visibility to perform shared operations, which keep the trucks going at full capacity, allowing companies to lock in a better discount from the carrier who benefits from loading to capacity on its trucks.

"Right now you pay for X number of miles regardless of whether the trucks are full or not," Stubbs said.

When a business improves its use of physical assets, its overall productivity improves, according to Barry Liebert of the New Economy Research Lab at Massachusetts Institute of Technology.

"This is why Greenspan did not predict the half-trillion dollar surplus [in the U.S. budget]," Liebert said.

InfoWorld