The project is financed by the European Commission 1

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 2

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ion

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% Load factor

% Load factor (estimated)

% Road efficieny

% empty running (km)

Cost of inefficiency

Efficiency of EU road transport

The project is financed by the European Commission 3

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 4

Supply chain development

Proposition:

‘Beside technology

improvement, only cross-

company collaboration can

simultaneously improve

efficiency, effectiveness and

sustainability’

Efficiency

Effectiveness

Sustainability

Supply Chain

Supply Chain

Supply Chain

Supply Chain

Cross Supply Chain Optimisation

The project is financed by the European Commission 5

Supplier

Producer

Retailer

Shop

Retailer

Producer

Supplier

Shop

Product 1 Product 2

Traditionally: vertical collaboration (SCM)

Horizontal collaboration

• Alternative: horizontal collaboration

Keywords: • Inventory control • Just in time • Push or pull • Transparency • Customization • Ordering policies • Bullwhip effect • Chain dominance • Product design • Integration • Power • …

Keywords: • Synergy • Bundling • Gain sharing • Competitors • Legal aspects • Give and take • …

The project is financed by the European Commission 6

How to organizie this? Roles and responsibilities

The project is financed by the European Commission 7

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

Mars and partners taking on the challenge

The project is financed by the European Commission 8

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

Background Case study

The project is financed by the European Commission 9

Collaboration Partners

Company Products Head office Group

Mars PF France Pet Foods: Whiskas, Pedigree, Sheba

Orléans Mars Inc

United Biscuits Biscuits: Delacre, BN

Nanterre

Saupiquet Fish products Courbevoie Bolton Group

Wrigley Candy & gum: Freedent, 5

Biesheim Mars Inc

The project is financed by the European Commission 10

Mars Petcare & Food

The project is financed by the European Commission 11

United Biscuits

The project is financed by the European Commission 12

Saupiquet

The project is financed by the European Commission 13

Wrigley

The project is financed by the European Commission 14

The Supermarket Supply Chain

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.

RetailersSupplier collaborationIndividual suppliers

P

Production

facilities

Shared

Warehouse

Orléans

Retailer

warehouses FR

Supermarkets

outlets FR

VMI information

W

The project is financed by the European Commission 15

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 16

Deliveries from Orléans to retail DCs

Total volume

Mars

United Biscuits

Saupiquet

Wrighley

Orléans

The project is financed by the European Commission 17

Tariffs from joint warehouse Orléans

Tariffs

Low

.

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High

Orléans

The project is financed by the European Commission 18

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 19

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 20

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 21

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Individual Collaboration

Wrigley

Saupiquet

UB

Mars

Cost and gain sharing: current

Savings

-29.1%

-32.2%

-32.4%

-31.0%

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 22

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

Gain sharing rule properties

The project is financed by the European Commission 23

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 allocated to the companies in this group following a specific sharing rule (in this case the green rule).

The yellow rule assigns even less of the total cost under collaboration to players 1 and 2.

Apparently, the orange/red rule results in lower costs attributed to players 1 and 2.

The project is financed by the European Commission 24

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 25

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 26

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 27

Thank you