Towards fruitful collaboration in logistics

Talked about for decennia but still difficult to achieve; fruitfull collaboration in logistics. First you have to find a suitable and trustwurthy partner, then establish the potential benefits and risks, and finally determine the way to share these gains and risks.

“ No player has the incentive to deviate from the strategy chosen, since no player can choose a better strategy given the choices of the other players…”

Famous words of John F. Nash in 1951 [Cooperative Games Ann. Math., Vol. 54, 286-295, 1951], that eventually led to his Nobel Price winning insight about game theory. The economic downturn, shortening of product life cycles, fierce competition in global markets and the heightened expectations of customers have generally caused companies’ profit margins to shrink. As more and more value is added outside of their doors, companies must rely more on their suppliers.  Partnering with key suppliers becomes more and more important.

Threshold number 1: Finding suitable partners.

How can one find the right partner? When does a company fit the process and flows of others? A lot has been written about the drivers and thresholds of collaboration. Roadmaps, Do’s and Don’ts, complete books have been dedicated to this subject. However, in our opinion, the biggest barrier by far is the tremendous difficulty to find a suitable partner in the first place.


Before a partnership can fail, you first have to find your partner.  For an executive or logistics manager, it is often difficult enough to initiate an internal improvement project and get the resources needed, let alone to start a project with outside partners. Analyzing possible partnerships without having access to accurate and detailed information is often fruitless. You can not simply call someone at another company and ask for their orders, customers, warehouses and cost levels, especially when potential partners are sought among competitors. However, those are usually the ones that have the highest potential for synergy, those servicing the same customers, having similar products, flows, and service levels. So confidentiality is a major issue. But, without a thorough analysis of the flows, customers, and costs, it is impossible to make an accurate assessment of the potential benefits and investments. In turn, without a solid business case listing the pros and cons, an executive in logistics, most likely, will not get the resources needed to investigate and initiate a potential partnership. Between a rock and hard place.

Threshold number 2: Sharing risks and rewards

Once a suitable set of partners has been found and set up, the next step is to start up a pilot project in which the collaboration can be tested. The correct setup of these steps is highly case dependent and is therefore different for every project. A topic that is critical for every cooperation is the fair distribution of risks, costs and benefits among the participants. This question is too often underestimated, and many promising partnerships have clashed on discussions about gain sharing. To tackle this issue, we promote the use of cooperative game theory instead of the more popular rules of thumb, such as: proportional to the total load shipped, the number of customers served, total spend, distance traveled, or number of orders. These rules of thumb simply do not work. In the long run, some participants will inevitably get frustrated since their true share in the group’s success is undervalued.

 

 

In a recent project we tested a number of rules of thumb versus the cooperative game theory models of the Shapley value, the nucleolus and the compromise value, in the context of a joint warehouse location study. The figure above represents the results of the various gain sharing methods. It shows that the three game theoretical concepts on the left are in good agreement. The rules of thumb on the other hand seem to go anywhere. Using one of these rules of thumb obviously benefits some companies, where others will be dissatisfied. This is a big risk for the stability of the cooperation.

This post is also available in: Dutch

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