5.2 To Play Or Not To Play—Where Is The Value In Co-Shipping?

"Without missing a beat, Andrew responded, "If you're asking, ‘What's in it for OTM?' I think the answer is pretty clear. OTM is definitely looking for better in-stock levels at lower costs. Think about it. More frequent shipments should make it easier to lower inventory levels without hurting in-stock performance. OTM should be able to keep customers happy at lower inventory costs. Beyond that, if OTM is currently receiving 20 trucks and we do co-shipping, they may only have to handle 10 or twelve. That would greatly improve receiving efficiencies. And, OTM's costing is very good—and very transparent. If product flows through a OTM DC to the store, it only costs about $.70 a box. But, if the same box has to go in the reserve section of the DC, it costs $1.03."

"The bottom line is that OTM wins all the way around." Aaron summarized. "Better on-shelf availability at lower costs cranks up both flow through and margin. And lower inventories speed up turns. It's a perfect formula for improving ROA. But, to win, OTM has to find suppliers that are willing to give co-shipping a look--and make it work!"

"Not only that," Andrew interrupted. "But the merchandise team is incentivized by both sales and direct contribution, which is basically gross margin minus all of the supply chain costs. So, they are very aware of those supply chain costs. Co-shipping impacts them personally. If it works, they get a raise."

"For OTM, co-shipping sounds like a no-brainer—IF OTM can find two lab rats to prove the concept. But, Aaron, IF is the biggest word in the English language," Stan noted. Shifting gears, Stan continued, "What about CPC? From what you guys have said, CPC is very interested in giving co-shipping a go. What does CPC hope to gain from co-shipping?"

"CPC is a totally different story," exclaimed Aaron. "CPC is a diversified conglomerate. CPC's overall supply chain network is huge. CPC operates a gazillion warehouses and moves a lot of trucks down the road. But, don't forget, CPC is shipping a lot of air. Those trucks cube out way before they weigh out. That fact alone gives CPC a chance to improve its freight costs. But, in my opinion, the key here is that CPC is excited about OTM's invitation because it gives CPC a chance to test out the 3PL waters. I think CPC wants to leverage its network and volumes to become a player in the 3PL business."

"Imagine," added Andrew, "what it would mean for CPC if it ran a successful pilot project for OTM. If OTM got excited about the results, it could go to other suppliers and say, ‘We want you to co-ship with CPC.' OTM could almost single-handedly launch CPC as a viable 3PL, filling CPC's trucks and warehouses."

"Don't forget omni-channel," Aaron chimed in. "Both OTM and CPC are interested in online sales and home delivery. Nobody has solved the last-mile problem of home delivery—not even Amazon. In fact, did you know that in 2013, Amazon's shipping revenue was $3.1 billion, but its shipping costs were $6.6 billion—and costs grew from 4.8% to 4.9% of sales?2 However, once you start comingling resources, you can theoretically put your product in your customer's backyard all over the country. It's kind of like Amazon setting up mini fulfillment centers in P&G's warehouses so that it can achieve next-day—or even same-day—delivery without losing money on shipping."

"What you're both saying is that CPC, like OTM, is looking for a lab rat," Stan added. "CPC wants you to join this experiment so it can test a new business model. In a sense, OTM's invitation is just an excuse for CPC to see if it can play in a new competitive space."

"Exactly," Aaron exclaimed, smiling. "And we think we can use CPC's desire to play in the 3PL space to our advantage. We're stretched pretty thin. We don't have any real resources to throw at this. CPC does. We're hoping they want in badly enough to be willing to do a little heavy lifting."

"That would definitely change the equation for Sun," Stan said. "How much is CPC willing to put into this?"

Andrew replied, "That's something we really don't know. But CPC has already put some IT guys to work examining different trucking lanes and freight rates. So, on the surface, CPC seems pretty committed."

"So, saying yes is a slam dunk for CPC. You guys are now the pivot point for this initiative. That's kind of a nice place to be," recapped Stan. "And that brings us to your real question: What's in it for Sun?"

"Yes, that is the question," Aaron replied, smiling—this time a little grimly. "As I said, we're struggling to find quantifiable benefits. The big players didn't walk away because co-shipping would be an easy win! What's in it for a supplier, especially one of our size and limited resources? Last year was pretty tight financially. I don't think this year is going to be much different. My boss, Blair, is under a tremendous amount of pressure for transfer freight and transportation costs. Simply put, we don't have a lot of free cash flow. And, we just went through the painful process of outsourcing our warehousing to Exel Logistics. We're worn out on the analysis side. Change management is tough!"

"That's right," Andrew agreed. "If we team up with CPC acting as a de facto 3PL, we'll be taking product out of our current system. That might change volumes and make last year's redesign obsolete. Nobody really wants to see that."

"Besides," Aaron continued, "it's just Andrew, me, and a few other members of my team who can dedicate any time to this. We're stretched pretty thin. We've already got fulltime jobs. If we pull the trigger on this co-shipping project, the added hours of analysis will have to come out of our hides."

"That raises a great question," Stan said, pausing. "What is OTM offering to induce you to sign on?"

"Nothing directly. OTM isn't going to give us a cost change or anything like that," Aaron replied. "It would be great if OTM would give us an extra event, but there are no guarantees."

"But, the proposal really does get to the relationship piece," Andrew added. "I can tell you that our relationship is very good right now. By saying yes, I think that we buy some goodwill. If there is ever a fill-rate or safety-stock issue, OTM will be more understanding. That's worth something—even if we can't put a number to it. It's a situation where they'll say Sun worked with us on this let's work with Sun now."

"Relationships matter!" Stan agreed. "If you decide to go forward, you're going to need to pilot the idea. What type of analysis have you already done? I assume you've started to look at how your networks mesh?"

"Yes, we have," Andrew volunteered. "We've put together a network map. Aaron, do you have a copy you can share?"

"I've pulled it up on my screen," Aaron answered.

"Great," Andrew continued. "Our DCs are in blue, CPC's are in green, and OTM's are red. The accompanying table shows our shipping lanes to OTM's DCs."

After glancing at the network map, Stan quipped, "It looks like you've got the potential for a pretty nice spider web. How deep are you into the analysis of costs by lanes?"

"We really haven't gotten into that just yet," Aaron responded. "As we gather the data, we're trying to get our hands around exactly how co-shipping might work. My EDI guy wants to know what the order and invoice flows will look like. Does OTM place a single order to CPC? Do we keep the information flows separate? What about exceptions management? What should the rules of engagement look like?"

"Those are great questions Aaron," Stan acknowledged. "You will definitely need to keep them in mind. But, if you can't make the physical flows right, you won't need to worry about the systems integration and financial flows."

"Speaking of getting the physical flow right," Andrew jumped back into the conversation, "Aaron, can you pull up that spreadsheet that we've started to build?"

"It's up and ready to go," Aaron replied.

"Fantastic! Stan, as you can see, we've pulled together about six months shipping history. You'll find that in The first sheet: "Shipping History Data." You'll see what we are shipping from each of our DCs to each of OTM's DCs. This should help us see what is going on."

"That's a real nice start," Stan agreed.

"But," Aaron interrupted, "We're going to have to pull out the data for OTM's store brand. That product line is undergoing a packaging revamp. So, we won't be using it in any pilot test."

"That will help you decide which SKUs to include in the pilot," Stan noted. "How many SKUs do you sell to OTM?"

"We sell 66 SKUs to OTM," Andrew replied. "The packing and shipping dimensions for each SKU are shown in second sheet: "Product Dimensions." The key here is to maintain a focus on weight. We almost always weigh out before we cube out. And, many of our products are heavy enough that we can only stack them one pallet deep. To go two deep would damage product."

"Exactly! That's why it might make sense to partner with CPC," Aaron added—with emphasis. "Together, we could fill trucks more efficiently."

"But, only if you can figure out how to do it without losing money on freight rates and handling," Stan warned. "Do you know what kind of rates you're going to get from CPC?"

"Nothing precise, but CPC has provided some initial guestimates," Andrew answered. "You'll find those in fourth sheet: DC List."

"Andrew, it looks like you've done your homework. Based on your rival CPGs' response, co-shipping is certainly no slam dunk. Once you've run the numbers, I think Sun's story will come into better focus," Stan concluded. "Aaron, when did you say Blair was coming out to meet with you and your team?"

The conversation continued . . .