Opposite poles attract each other: a principle that horizontal logistic collaborations should apply

Two opposite magnetic poles on a permanent horseshoe and bar magnet attracting each other marked N - north and S - south and viewed from above on white

Optimization and horizontal collaboration

The freight transportation sector accounts for a major percentage of the global economy. According to the Organization for Economic Co-operation and Development, the transportation of goods and services contributed 1156 billion dollars to the US economy during 2003 (around 11% of that year’s GDP). Transportation was ranked the fourth most demanded sector in the US economy (after housing, healthcare and food). A large fraction of the freight volume is carried via the road network. In the EU, for example, this mode accounts for around 72% of the total freight transportation. One of the main challenges that companies in this sector face is related to the efficiency of their operational plans. These companies need to decide, on a daily basis, which truck delivers which orders and in which sequence. Generating a cost-effective operational plan requires solving a very challenging optimization problem. Fortunately, for the last 50 years, the operations research community has been busy developing very powerful optimization methods. These methods provide the means for companies to reduce their operating costs and become more profitable, as well as more environmentally friendly. Despite these important advances, the transportation sector still feels an increasing pressure to improve its operational efficiency while maintaining competitive service levels. According to the official statistics of the EU, for instance, around 27% of the trucks in the road network are empty. The fact that such a large portion of the road-transportation capacity is underused shows that there is still room for improvement.

A recent trend in supply chain management, called horizontal collaboration, sees companies join forces to perform their distribution jointly. The principle behind this trend is straightforward: companies can achieve higher efficiency levels by forming a coalition and carrying out a joint operational plan. One of the main motivations for companies to collaborate is that the total distribution cost of a coalition is lower than the sum of the stand-alone costs. The difference between these two costs is referred to as the coalition gain or coalition profit. Several studies show that the synergy achieved by horizontal collaboration can achieve coalition gains of up to 30%. The extent of these gains is, however, highly dependent on the partners that form the coalition and the characteristics of their operations. Different companies might have substantially different requirements, and could enforce different restrictions on the (joint) operational plan. One partner might, for example, require its orders to be delivered on specific days, whereas another partner could be willing to delay some of its orders for a few days. One partner might be a major supplier that transports very large orders, whereas another partner could be a retailer that ships several orders of small size. Such differences between the partners’ characteristics have a large impact on the performance of the coalition. For that reason, it is important that companies take them into account when choosing the best partner(s) to collaborate with. What might be an ideal partner for a company, might not be so for another one with different characteristics. The task of choosing the best possible partner(s) therefore gives room to the following questions:

  1. Which partner characteristics have the largest influence on the coalition’s performance?
  2. Which companies are more suitable to collaborate with each other? Or, in a more specific sense: which combinations of partner characteristics lead to a large coalition profit?

A recent paper by Daniel Palhazi Cuervo, Christine Vanovermeire and Kenneth Sörensen shed some light on the answers to these questions.

  • D. Palhazi Cuervo, C. Vanovermeire, and K. Sörensen, "Determining collaborative profits in coalitions formed by two partners with varying characteristics," Transportation research part C: emerging technologies, vol. 70, pp. 171-184, 2016.
    [PDF] [DOI] [Bibtex]
    @article{palhazicuervo2016determining,
    title = {Determining collaborative profits in coalitions formed by two partners with varying characteristics},
    author = {Palhazi Cuervo, Daniel and Vanovermeire, Christine and Sörensen, Kenneth},
    journal = {Transportation Research Part {C}: Emerging Technologies},
    volume = {70},
    pages = {171--184},
    year = {2016},
    publisher = {Elsevier},
    doi = {10.1016/j.trc.2015.12.011},
    keywords = {horizontal collaboration},
    }

They investigated the effects of different partner characteristics on a coalition’s performance. They assumed these coalitions to be formed by two partners and to involve a joint operational for a time horizon of several days. The partner characteristics studied are the following:

  1. The number of orders a partner requires to transport.
  2. The average size of the partner’s orders.
  3. The maximum number of days a partner allow its orders to be delayed.

Partners that form the most profitable coallitions

collaborationThe results obtained in the simulation show that partners with complementary order sizes lead to the most fruitful collaborations. In these coalitions, one company transports large orders that cause the trucks to have plenty of unused capacity. The other company transport small orders that, in the joint operational plan, can take advantage of the unused capacity in the partner’s truck. A great example of a coalition with these characteristics is the alliance formed by the companies JSP and HF-Czechforge. JSP produces light but voluminous plastic beds, whereas HF-Czechforge manufactures heavy but compact metal automotive brake disks. By transporting their orders in the same truck, these companies were able to achieve a very substantial reduction in the transportation cost. The simulation suggests that coalitions involving companies with complementary order sizes lead to average profits almost twice as large as those generated by coalitions involving companies with the same order sizes.

The results obtained also show that the ability of a company to delay its orders has a much milder effect on the coalition profit than the other characteristics. Such flexibility is beneficial for the coalition when it cannot be exploited by the company itself, but it can enhance the efficiency of the joint operational plan. This happens when, in a company’s stand-alone plan, there are many trucks with a large unused capacity. In these cases, the company’s flexibility allows the joint operational plan to make a better use of the left-over capacity of these trucks. Our simulation suggests that, by becoming more flexible (allowing their orders to be delayed), companies with these characteristics can help to increase the average coalition profit up to 50%. On the other hand, when the company can take advantage of this flexibility to achieve a more efficient stand-alone plan, the added value of collaborating might reduce significantly.

It seems that the long-standing belief that complementary partners lead to the most fruitful relationships not only applies to humans, but also to companies. For the sake of a more efficient and sustainable economy, we need opposite poles to attract each other (at least, in horizontal collaborations).

Opposite poles attract each other: a principle that horizontal logistic collaborations should apply