Collaborative Commerce – A New Dawn for the Transportation ... stock_wms... · discovered that risk management techniques not only enhance the effectiveness of collaboration but

Sumesh George, April 2003 [email protected]

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Collaborative Commerce – A New Dawn for the Transportation

Industry?

By

Sumesh George

Consultant - Transportation & Logistics, Infosys Technologies

26 April, 2003


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Executive Summary

This paper discusses the relevance of C-commerce in the freight transportation industry and seeks to

highlight the potential upside of implementing risk management techniques in a collaborative environment in

addition to describing the evolutionary process involved in successfully engaging in c-commerce.

C-commerce applications help bridge the gap between different systems across various transportation

modes and enables synergies between them, simultaneously addressing operational issues unique to each

mode of transportation. While building the case for c-commerce for the freight transportation industry, I

discovered that risk management techniques not only enhance the effectiveness of collaboration but also

take into account the downside risks of collaboration. It is generally believed that risk is distributed across

incumbent partners in a collaborative environment with reduced ‘time to market/ time to service’, in practice

however, collaborating across the entire supply chain increases the overall risk involved in ‘time to market’ or

‘time to service’. Therefore, incumbent partners in the supply chain first need to have systems and processes

in place that manage the risk inherent with their contribution to the final product or service before the supply

chain can bear the fruits of collaborative effort. Issues related to risk amongst supply chain partners have

especially come to the fore following the new cargo security initiatives - CSI (Container Security Initiative), C-

TPAT (Customs-Trade Partnership Against Terrorism) and SST (Smart & Secure Tradelanes). The renewed

push towards intermodalism and the new cargo security initiatives (e.g. Operation Safe Commerce) have in

some sense explicitly forced c-commerce upon an industry slow to embrace technology to drive efficiency.

This paper draws a connection between risk management and c-commerce and describes how freight

companies will have to advance through the four different stages of enterprise evolution before they develop

‘c-commerce capability’. The role of technology in enabling enterprises along the path toward ‘c-commerce

capability’ is dwelt upon in great detail in the section on c-commerce. C-commerce applications while driving

supply chain efficiencies and end-to-end supply chain security are bound to bring business benefits to

fruition!


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Business trends that are driving collaboration

With seamless intermodalism looming large on the business horizon, many companies are slowly but surely spreading their wings across different modes of transportation through acquisitions or horizontal integration.

Deutsche Post World Net, FedEx, UPS are examples of companies expanding into the intermodal space.

(DPWN with its acquisitions of DHL and Danzas has made its presence felt in air, ocean, road, rail and 3PL)

The collaborative chain in the freight industry typically starts with the shipment forecast, includes order

generation, load tender, and finally delivery execution and carrier payment. By addressing both shipper and

carrier inefficiencies concurrently it becomes collaborative with all parties benefiting. For carriers,

inefficiencies such at empty “deadhead” miles, unproductive waiting time at the shippers or receivers docks,

and a lack of critical network mass are addressed. For shippers, inefficiencies such as high transportation costs, long cycle times, high inventory carrying costs, and poor on-time performance are addressed. By

reengineering transportation related processes and providing order status visibility, significant business

benefits can be realized. While the push for c-commerce in the freight industry is being driven by

globalization, the impetus for an individual business to engage in c-commerce will not come about until the

risk associated with collaboration is suitably addressed.

Risk in freight transportation stems from 3 sources – demand uncertainty, contract anomalies and pricing

uncertainty. Between 1995 and 2000, there has been a 5% growth YOY in revenues of both air and sea

freight sectors to more than $130 billion. In spite of this, both air and sea freight stocks under performed in

the S&P 500.1 Comparatively, the air passenger sector contrasts in performance during the same period -

one of the reasons being its early adoption of risk, revenue and yield management techniques, not to

mention its early adoption of collaborative technology to generate efficiencies in its business processes.

These techniques are known to have saved American Airlines $1.4 billion in the period between 1989 and

1992. This history is forcing change upon the freight

industry, and is further propelled by the changing

business landscape where non-core competencies

are being outsourced.

Fig.1: Air and Sea Freight stocks underperformed in the S&P 500

1 Thomson Financial; Dow Jones


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How is Risk Management applicable to the freight transportation industry?

Risk management enables companies to understand, quantify and manage risks to their future revenues. In

the freight industry, it will help companies adjust prices and contracts to distribute risk amongst its customers,

and not take on all of the risk by themselves. Risk can be broadly categorized into three buckets -

operational, market and credit risks. The figure below explains these different risk buckets.

RISK

Operational Risk

Causes• Lack of information dissemination

• Process failures• Lack of adequate internal controls

• Data related risks• IT infrastructure/ Networking

Market RiskCredit Risk

Causes

•Fluctuation in spot freight rates• Exchange rate fluctuations

• Market downturns• Regulation/ De-regulation

• Effects of globalization• Increasing customer expectations

Solutions

• Demand forecasting • Risk adjusted price for each customer profile• Quality of Profit vs. Quantity of Revenues• Hedging instruments like Baltic Freight futures, Reinsurance

Solutions• Collaborative commerce

• Enterprise Risk Management• Globally distributed Disaster

recovery centers• end-to-end supply chain visibility

Causes

• No shows, cancellations• Customer concentration

Solutions• Analyze past behavior trends • Profile & segment at Bill of Lading level• Classify customers into risk buckets• Identify risk associated with cargo, trade lane, industry• Derive customer mix to serve• Distribute freight capacity

• Diversify customer portfolio

Fig.2 Risk categorized into three buckets –Operational, Market and Credit Risk

How should freight companies approach risk management?

Traditional risk management approach addresses each component risk (a ‘silo focus’) without mapping it to the big picture while ERM (Enterprise Risk Management) is an integrated process to address the entire

range of risks faced by the whole enterprise. The processes captured under ERM can be suitably extended to deliver the same functionality across the entire supply chain. Essentially, the SCRM process (supply chain

risk management) entails developing a risk-matrix at the supply chain level that meshes together the risks

identified with the acceptable level of risk for each partner in the supply chain. This approach helps in

crystallizing the risk identification process and maps the supply chain’s risk management process to its


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business needs effectively. In adapting SCRM to the freight industry, risks associated with each shipper have

to be identified and shippers with a similar ‘risk profile’ are clubbed together in the same risk bucket. When

profiling and segmenting has been done by this process, a profitability analysis can then be done by shipper,

before the true ‘price to charge’ a risk profile is discovered. Alternatively, in order to be more accurate, profiling and segmenting can be done at a B/L (Bill of Lading) or manifest level. This will capture the risk

associated with a particular trade lane, cargo, industry etc. Currently, a P&L statement drawn up for each

{customer/route/cargo/ manifest} + {risk basket} combine, captures actual costs only.

The true “cost-to-serve” is completely overlooked. ABC (Activity Based Costing) can suitably address this

oversight. If yield is defined as revenue realized per unit of freight capacity available, then ‘cost to serve’ a

particular shipper will increase if the carrier’s asset utilization decreases. For example – A Boeing 747

freighter starts to lose money at an intermediate stop, if it is on the ground for more than 90 minutes.

However, due to shipper inefficiencies and poor airport infrastructure, the turnaround time could dramatically

exceed the optimal turnaround time. Another example would be shipper holding a carrier’s asset captive until

demurrage is about to kick in. Case in point – a container being used as a makeshift warehouse by the shipper. Although this behavior exhibited by the shipper increases the cost-to-serve him, it is not captured by

traditional accounting methods. ABC captures such intangibles that in fact introduce inefficiencies to the

carrier’s operations. However, implementing ABC is costly and time consuming because stringent change

management is required organization-wide and business processes need to be so aligned as to facilitate

data capture at every level of activity. The freight industry unfortunately has not evolved its management

processes enough to be able to venture down this road as of now. Hence short strides are suggested before

the big leap.

The freight industry, ocean & air in particular, are characterized by high fixed costs. This makes it difficult for

them to adjust capacity to match the supply-demand equilibrium. One way to counter this risk is to lease

these resources (ships, planes, ground handling equipment, warehouses). Case in point – British Airways

wet leased (hiring out aircraft and crew from a third party) a jet for its new freight service from London to Tel-Aviv in order to add capacity to its network, simultaneously reducing its high fixed cost structure. In addition,

freight companies can provide value added offerings such as delivery time guarantees, reservation

requirements, and handling options, to exploit price sensitivities of different customer groups. Such offerings

allow implementation of differential pricing concepts for premium shipments, late bookings, special

containers etc. (e.g. American Airlines cargo branded services are Priority Parcel Service, Expeditefs,

Confirmedfs). Although big players in the air cargo space have implemented rudimentary risk management

concepts, the ocean shipping industry remains a laggard. To start with, freight companies must align their business processes to reserve capacity for high-yielding shipments. This would require good demand

forecasting for each of these high-yield shipments on each trade lane. On trade lanes with capacity

constraints, carriers should strive to ship high-yield shipments, while medium and low yield shipments are

waitlisted until capacity becomes available. However, shippers on long term contracts should be treated

realistically based upon the volumes they offer.


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In addition to risk management, tracking macroeconomic information is extremely important and needs to be

looped into the carrier’s strategic planning process. Carriers for the most part, do not follow macro and micro

economic information on specific market demands per market segment and cargo. Tracking this information

would enhance business understanding for the carrier. By tracking macroeconomic data, the carrier’s trade manager would, for example, know that the typical lifecycle of high-tech products such as semiconductors is

around 36 months. Therefore the risk associated with signing a long-term contract to ship high-tech products

that are already at the end of their lifecycle will be higher than signing a long-term contract to ship goods that

are at the beginning of their lifecycle. The high-tech industry being an important customer in the air freight

sector, the bottom-line impact would be hugely different if a carrier’s operations were to be strategically

influenced by macroeconomic information. The significance of tracking macroeconomic information: The semiconductor industry has projected

bright prospects for 2003 and beyond, raising hopes of a recovery in a key air freight commodity sector.

However, with most chip manufacturing and consumption locations’ having shifted to Asia in the past few years, the cargo business in US / Europe is expected to decline. Given this shift, Hong Kong/ Singapore are

poised to become the logistics hub for the APAC (Asia-Pacific) region. In recognition of this, US cargo

airlines are planning to increase cargo flights to Hong Kong from 8 per week to 64. (Air Cargo World). Acting

on macroeconomic information will redefine a carrier’s strategy and operations simultaneously providing a

framework with which to approach the shipper community during the contracting season. Having concluded that c-commerce needs to be built on the foundation of risk management techniques

supported with macroeconomic information, we now explore how companies could make this transition from their current state towards becoming ‘c-commerce enabled’. Figure 3 indicates a transition roadmap for an

industry laggard to become ‘c-commerce enabled’. It emphasizes the need to embrace risk management

techniques in order to successfully enter the collaborative space, describes why the freight industry has been

a laggard, and key features of risk management and c-commerce.


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•No onus to manage risk & revenue•Fear of first mover disadvantage•Lack of top-down commitment•Existing business processes misaligned with risk mgmt techniques•Uncoordinated operations

•Deregulation introduced cut-throat competition•Current economic climate forcing a rethink•Alliance formation

•Introduce managers from outside the industry. E.g. Banking, Airline passenger•Segment by market, customer group, risk bucket, cargo, trade lane•Diversify customer portfolio•Demand forecasting tools•IT to smoothen revenue inflow against fixed time & capacity constraints•Address high fixed cost structure

• Cost savings, efficiencies needed to keep up with the ever decreasing rate environment•Create Strategic Differentiation•Leveraging Partner and Supplier Strengths•Reduced Risk•Lower Costs•Improved Customer and Supplier Service•Improved Performance

Industry Laggard

Why risk mgmt should be implemented?

How risk mgmt should be implemented?

Collaborative Commerce

Transition Roadmap from Laggard to Leader

HOW RISK MGMT ACROSS THE SUPPLY CHAINENABLES COLLABORATIVE COMMERCE

Risk Management

Fig.3 Transition Roadmap from Laggard to Leader

Is risk distribution disproportional in a collaborative environment?

Although risk is distributed in a collaborative environment, the risk associated with the supply chain as a

whole increases considerably as compared to the risk inherent when operating alone. Although the customer

facing partner in the collaborative chain provides the revenue foundation of the entire supply chain, it results

in him bearing maximum risk because of exposure to both final customer as well as all the other partners in

the collaborative chain from final product to source. The risk-reward effect due to customer risk and

collaboration partner risk increases in magnitude from source to final product for each partner depends on where he is located in the collaborative chain hierarchy. However, this anomaly is countered by the fact that

margins increase as the product moves down the supply chain towards the final consumer bearing out the

axiom – greater the risk, greater the return! In order to counter this risk exposure, the customer facing

partner in the supply chain should quantify the additional risk (due to relative location disadvantage in the

collaborative chain hierarchy) and incorporate the same in strategy and costing decisions. Since a carriers’

operations and strategic decisions will be based upon the collaborative decisions taken amongst the supply

chain partners (especially the customer facing partner, e.g. Wal-Mart), the risk associated with its capital

investments and strategic decisions goes up considerably as its success depends directly on every partner in the value chain fulfilling commitments uncompromisingly. Therefore, apprehensions amongst partners are likely to run high during the initial stages of c-commerce. Only time, not to mention initial success of the

partnership, can make individual partners exhibit behaviors that are essential to successfully engage in c-commerce. The transition required to achieve seamless intermodalism via c-commerce is explained in the

four stages of the Infosys Enterprise Evolution Model (Figs 4 & 5).


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The C-commerce evolution path for the freight industry

The Enterprise Evolution Model (EEM)

• Optimized cross-enterprise processes

• Process level collaboration

• Synchronization of value chains

• Increased differentiation between core & context

• Real time Metrics

• End-to-End Process Automation

Level 3Integrated Enterprise

Level 4Adaptive

Enterprise

• Optimized Processes adept to change

• Dynamic Collaboration• Real time value chainconfiguration• Increased strategic differentiation betweencore & context.• Leading Metrics

• Adaptability• Alliances, co-opetition• Approach to innovation:Manage Discontinuity

Systems automate tasks and share information

• Managed, Measurable enterprise wide Processes

• System level collaboration

• Aligned value chains• Bias towards core• Lagging Metrics

• Selective partnering

• Defined Cross functional Processes

• Information level collaboration

• Functional view of value chain

• Fuzzy view of core & context

• Lagging Metrics

• Information dissemination

Level 1Info-enabled

enterprise

Systems transact on behalf of companies

Systems automate, track and measure processes

Systems automate relationships with

partners/customers

Collaborative Capability

Pro

cess

Matu

rity

Level 2Interfaced Enterprise

Internal to the EnterpriseInternal to the EnterpriseInternal to the Enterprise

External to the EnterpriseExternal to the Enterprise

Source: Infosys Research

Fig.4: Infosys’ EEM is built on increasing collaborative capability of enterprises. A Level 4 enterprise will have advanced externally focused technologies, highly optimized processes and extremely flexible organization design as opposed to a Level 1 enterprise, which just automates task and information. Source: Infosys Research

© 2002 Infosys All rights reserved.

Level 4Level 3Level 2Level 1Function

Knowledge Management -Documentation

Electronic documentation checking and advising

service

Productizing “Documentation

Assistance” service as a differentiator or alternate

revenue generator

Outsourcing dynamic updating of

documentation requirements to a third

party

Employees can view category wise,

destination wise documentation

requirements in a central repository

Enterprise evolution in the transportation industry?

Crew scheduling

Automated skill set demand generation based

on route, weather and vessel age and technical

specifications/ issues on a dynamic basis

Tight integration with 3rd

party crew outsourcing services providing

continuous rolling view of skill set requirements and

training needs.

Automated allocation of crew members depending upon current rolling crew

schedules & skill set demands, Automatic triggers to visa, forex,

travel departments based upon cross route allocation of crew

Crew assigned to routes or vessels. Limited expertise database. Limited

interchanging between routes and vessels.

Shortage of skill sets handled by manual intervention, spot

recruitment, manpower overcapacity or multi

tasking

Pricing Ability to seek best prices across a chain of dynamic

partners

Integration with partners and pricing as a continuous

function of advance booking capture, yield, competition pricing &

customer spot requirements & “mileage points”

Differentiated pricing with key customers

integrated with discount schemes and

segmentation plans on a short/medium term

basis.

Lumpy pricing based on weekly / monthly

pricing rollouts. Pricing subjectively considers factors like expected

traffic & yields (extrapolated from past

data), competition pricing and cost

structure and segmentation

Fig.5: Enterprise Evolution Model mapped onto three functions in the transportation industry

Enterprise Evolution mapped for the transportation industry


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Fig. 6: Cargo Alliances in the Air Freight sector

By engaging in c-commerce, multiple enterprises will electronically partner in business process activities,

share knowledge and assets with multiple stakeholders, with the intent of being as synchronous as

possible, and with the ultimate objective of gaining a business advantage

across the entire supply chain. The advent of globalization has ensured the redundancy of competition between companies in the same

space. Today, competition between entire supply chains decides the market

leader. Therefore, embracing the c-commerce model is not an option in

today’s business environment, but a necessity!

To actively advocate the use of the Internet for collaboration with

stakeholders in their supply chain, many first movers built hubs – like

American Airlines’ Cordiem – to connect with its suppliers. However, the

same entrepreneurial spirit is lacking in the freight sector where tradition has, for the most part, prevailed over technology. Although level 1, even level 2,

versions of EEM such as code sharing, gate sharing, equipment sharing etc.

have been in vogue in the air passenger segment, it has not been leveraged

to the fullest in the air freight sector. With the business landscape screaming

for change, it is time the freight transportation industry embraced c-

commerce to deliver value to its customers. Toward this end, transportation

carriers should partner with its high volume-high profit, captive shipper

community to provide them with better inventory control and change-order management. This explicitly means - greater cross-company coordination.

Such strategic partnering between shipper and carrier will also suitably

address post 9/11 security measures (CSI, C-TPAT, SST) where credentials

of the shipper and his cargo will be established based on his standing in the

business community and his relationship with the carrier in question. The

TSA (Transport Security Administration) has mooted the idea of developing

an automated database of so-called known shippers. This will help in expediting shipments from known shippers through the checks and

procedures required by the Dept. of Homeland Security.

Also, post implementation of risk and revenue management systems,

transportation companies will recognize high revenue shipments and give

them special treatment so as to help the shipper gain process efficiencies

such as faster time-to-market simultaneously enabling itself to engage in

differential pricing. This results in a win-win partnership and can be achieved by following a process not far removed from the existing code-sharing

concept in the air passenger segment where real-time resource

allocation is supported across a network of partners. Although a similar

concept has been currently implemented to some degree in the freight

Cargo traffic of major alliances in 2001 in

freight-ton kilometers (in millions)

WOW Lufthansa Cargo 7176

Singapore Airlines 5848

JAL Cargo 4116

SAS Cargo 621

TOTAL: 17761

SkyTeam

Korean Airlines 5424Air France 4663

Delta Air Lines 1853

Alitalia 1530

Czech Airlines 258

AeroMexico NA

TOTAL: 13758

Wings

KLM 3878Northwest Airlines 2790

TOTAL: 6668

OneWorld*

British Airways 3936

Cathay Pacific 3887

American Airlines 2810

Qantas 1570LanChile 1316

Iberia 851

Finnair 172

Aer Lingus NA

TOTAL: 14542*oneworld is a passenger alliance

without an equivalent cargo alliance

Source:IATA


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industry, it is still in its nascent stage and is yet to become pervasive. There has been some effort in this direction amongst the various cargo alliances such as WOW, SkyTeam and Wings. (See Fig. 6)

The role of Infrastructure in enabling C-commerce

While c-commerce is thrust upon the transportation industry courtesy the new cargo security initiatives,

infrastructure providers such as airports and seaports simultaneously need to gear up in order to maintain the momentum of change in the transportation supply chain. In this context, airports and seaports would

need to understand their respective customers businesses, balance of trade along established routes,

intricacies of cargo & payloads, aircraft range & fuel burn, and other operational details pertinent to the

modes of transportation they serve.

Airports, seaports etc. need to educate themselves of their customers needs (i.e. carriers and shippers) and

have to progress alongside the latest trends in the industry. With intermodalism being the new millennium

mantra, airports and seaports need to gear up to facilitate the smooth movement of cargo through their

terminals and warehouses. Airports should wake up to the fact that expedited trucking can cannibalize short haul air freight. Therefore it is important to understand your competition and gear up accordingly. Shippers

and carriers are increasingly looking to operate out of hubs that offer least turnaround time. Consequent to

this fact, infrastructure providers cannot afford to be lax if they intend to remain in business. In fact, some

airports are breaking new ground by hosting truck terminals unconnected to flights, knowing that this surface

traffic will give it visibility in the freight world. E.g. Hahn airport in Germany. Huntsville airport in Alabama is

Panalpina’s hub for its trans-Atlantic freighter operation. Huntsville built an intermodal center at the airport

and went after a lot of non-traditional operators in the hope that it would lead to air cargo. And it worked!

That infrastructure is

progressing alongside

the latest trends in c-

commerce is evidenced

by the opening of the Alameda Corridor in Los

Angeles and the FAST

Corridor in Seattle/

Tacoma.

Below ground rail tracks, 3 wide Bridges Underpasses

Below ground rail tracks, 3 wide

Elevated rail tracks over LA freeways

Over 200 level crossings eliminated

Automated toll collection

Dynamic load balancing

Around 5000 trucks eliminated from LA freeways Weight compliance monitoring

• 5 years to build at a cost of $2.4 billion• 25% of all US trade moves through ports in this region

• Increased efficiency and safety

Fig. 7 Alameda Corridor Infrastructure


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The role of technology in enabling C-commerce

EDI

High Capital costs in maintaining connectivity

Proprietary trade vocabulary

High integration barriers

Partners own infrastructure

Co-ordination Costs

Time

Loosely Coupled IT systems & Web services

Connectivity is a given

Industry standard trade practices (eg CPFR)

Firm subscribes to application services

Cost of collaboration is falling

Network ApplicationsLower cost of connectivity (Campus Networks, FDDI,

ATM, Frame relay, Internet)

Application specific vocabulary

Customizable interfaces

Application take relationship view (e.g.. ERP to CRM)

Proprietary collaboration applications

Fig. 8: Better technologies have ensured lower cost of collaboration. Source: Infosys Research

Collaboration technology has come a long way from the days of EDI to the present day web services. The

availability of affordable technology has encouraged the formation of cargo alliances in the freight industry.

These alliances, in turn hope to counter the rapid growth of integrated carriers offering “one-stop shop”

logistics solutions. E.g. FedEx, UPS, Deutsche Post World Net.

Asia is one of the prime markets for the air freight industry as the geography of the region combined with the

comparatively short shelf life of its main product- high-tech goods, demands air transportation. Mr. R. Sam,

General Manager of UPS Jetair Logistics says the electronics industry is a huge customer for air cargo services in the region. "In Asia 90 per cent of the electronic goods move by air." Asia sits at the top of the air

freight league table with 2.3 billion tons shipped annually. North America comes second with l.8bn tons

followed by traffic between Europe and Asia at l.4bn tons. Moreover, trends indicate that shippers are looking

for tighter delivery schedules even as they adapt lean manufacturing techniques and

JIT distribution. IBM aims for a three day delivery in the US and a four day delivery in the European market.

One of the reasons, shippers can look toward tighter delivery times in the US is because the air freight sector

being a relatively mature industry allows for a symbiotic relationship between shipper and carrier. British Airways realizes freight revenues to the tune of $870M by carrying cargo in the bellies of its passenger

aircraft, and the company is investing $385M in a new cargo center at London's Heathrow airport. BA prefers


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to collaborate with partners in air freight. The company's World Cargo operation is a joint venture with Japan'

Airlines, Singapore Airlines and Korean Airlines, an alliance which reflects the Asian dominance over

airfreight. BA collaborates with $l.3bn freight forwarder AEI which ships goods for Hewlett-Packard and

Motorola. These trends are indicative of the important role collaborative technology can play in order to bring these business strategies to fruition.

Alliances tend to mask consolidation which in turn couldlead to anti-trust regulations and other Govt. regulations being imposed on the industry

War with Iraq could increase fuel prices

Cargo capacity could reduce in the short term becauseof requisitioning by the military

Insurance premiums could increase, thus effecting profitability

Terrorism; Homeland security’s 24 hr rule could be extended to the air cargo sector. TSA currently deliberating same

Thre

ats

Morph into Global Lead Logistics Provider

Political issues in one sector can impact operations in another sector e.g. air cargo volumes spiked after west coast port strike

One freight sector almost always cannibalizes another. e.g. interplay between trucking, air and sea freight

C-commerce can exploit respective core competencies of carriers to create formidable alliances

Web services – building blocks of c-commerce

Opportunities

Global reach & increased market share

Economies of scale and scope for both carrier and shipper

One-stop shop

Risk-pooling of assets

New avenues of trade for the alliance

Strengths

Coordinated-collaborative IT initiative called “Cargo 2000” is underway in the air cargo sector

Integrating operations/ IT systems/ sales force/ product lines/ warehouses

Optimizing route networks and schedules across collaborative networks

Current economic climate forcing capacity reduction which in turn is forcing temporary spike in freight rates

Stowing problems associated with technology shipments

Infrastructure failing to evolve at the same pace as industry

Inefficiencies of the freight forwarder of one carrier borne by the alliance

Weaknesses

Collaborative Commerce

Fig.

9: SWOT Analysis of C-commerce

The air cargo industry having been directly impacted by the current state of the world economy has

downsized its fleet considerably. Fierce competition has further forced passenger airlines to increase the

utilization of each aircraft. This translates into faster turn-around times, which reduce the time available for loading and unloading freight. With dwindling passenger traffic, airlines are reinventing the way they do

business. Airlines are partnering with suitable players in the global logistics supply chain to deliver value

added services such as door to door delivery service, moving shipments across the globe in one seamless

process. UPS operates a fleet of 197 aircraft, with 302 more on charter, to move its share of the 11m

documents and packages it estimates are shipped within and from Europe every day. But it turns to third

parties such as the Swiss freight forwarder Danzas (now acquired by Deutsche Post), to move heavy freight.

UPS plans to focus on packages weighing less than 150 lbs leaving Danzas to deal with large palletized shipments. The UPS-Danzas combine illustrates that the integrators (FedEx, UPS) cannot do everything by

themselves. Air freight specialists such as HeavyLift will continue to occupy their niche in the global logistics


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chain by offering a distinctive service that slips neatly into the transportation vacuum between the airlines

and the integrators.

Some other trends indicating the move towards c-commerce in the freight industry:

• Air France cargo and Delta Air Logistics have cemented a number of commercial partnerships. • The USA Cargo Sales joint venture was formed jointly between Air France, Delta and Korean Air in 2001.

This company basically oversees coordinated sales in North America under the SkyTeam banner.

• American Airlines (AA) uses Global Freight Exchange (a freight portal) and may join Cargo Portal

Service. CPS is built around Unisys technology and jointly launched by Northwest, United and Air Canada.

• Lufthansa has obtained a stake in United Airlines to form the newly named Lufthansa-United Airlines. All

747 freighters between the two will be dedicated to the WOW Cargo alliance.

• KLM plans to sign up to the SkyTeam cargo alliance. • Cargo alliances have largely followed the more extensive passenger alliances that grew out of code

sharing agreements.

• Low cost and ease of the Internet infrastructure is one of the key drivers for collaborative commerce.

Also, the cost of data interchange has been falling primarily because of increased deployment and

demand for communication infrastructure. A faster rate of technology adoption in data transfer domains has led to a decline in cost of technology ownership.

The trends described above clearly indicate how business needs are forcing c-commerce upon the freight

industry. Intermodalism is explicitly forcing operators of different transportation modes to come under one

single umbrella. C-commerce is therefore, enabled via the medium of hubs or portals and corresponding

systems integration across multiple enterprises that comprise the supply chain.


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Portal Architecture for C-commerce

In order to propel the freight industry towards establishing c-commerce as a regular business process in its

day-to-day operations, it would first need to build a hub or portal which can monitor, manage and optimize

the collaboration process. Such a hub or portal should have the following characteristics:

1. Order transparency

o Generate exception alerts

For e.g. applications from Yantra can trace PO’s and produce delay alerts.

2. Workflow transparency

o Data sharing between shipper and carrier

o Data format compatibility between shipper and carrier

Aligning internal business processes of shipper and carrier to flow with software

applications will add to the cost structure. However, web services effectively address this

issue.

3. Integration

o Partners must have data integration adaptors that translate incoming and outgoing data into a universally acceptable format such as XML. Various partners in the supply chain can have their

data in formats ranging from flat files or Excel to EDI or XML. The adaptor will have to perform

common translation so that various systems can comprehend different data formats.

Licensing and maintenance fees for middleware integration from firms such as Tibco

and Vitria are costly compared to web services.

4. Coordination features

o To obtain a low TCO (total cost of ownership), the hub should incorporate coordination tools which enable collaborative decision support for processes like order execution and fulfillment.

o To aggregate data across multiple shippers, the hub should also have forecasting capabilities

such as those provided by applications from Manugistics, i2, Talus, Ariba.

o To deliver dynamic data like cargo capacity available/ price etc., the hub would have to be

interfaced with numerous internal systems, network of partner carriers, as well as high value

shippers.

5. Optimization features

o To ensure reduced time-to-market, the hub should automatically feed rate/capacity/route information as a value added service for high value shippers.

o The carrier will have to collaborate with its high value shippers to ensure shipment is designed/

packaged to stow with minimum broken stowage. Such a design should also ensure easy

handling for quick loading and unloading.

Design for quick loading and unloading is extremely important. Port systems Inc. has

conceptualized C-CATS (Container-Cargo Automated Transfer System), which uses

container sleds coupled with AS/RS (Automated Storage & Retrieval Systems)


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warehousing to deliver velocity, visibility and security efficiencies in the supply chain

across liner shipping, ports, trucking and rail.

o Software to support capacity planning at the carrier end, and strategic sourcing at the at the

shipper end. Application vendors, portals in this space – Webplan, eBreviate, GTNexus, INTTRA, GF-X, Cargo Portal Service, Air Cargo Exchange.

Transportation carriers are a key enabler of global commerce and therefore a crucial spoke of all c-

commerce initiatives within a shipper’s (e.g. Wal-Mart) supply chain. To start off with, manufacturers,

shippers and carriers can use relatively cheap web services to integrate crucial applications via a portal and

progressively engage in c-commerce across the four different levels described in the Enterprise Evolution

Model.

Some features of C-commerce applications

The carrier and its captive shipper network need to collaborate to drive synchronicity and innovation from the

front. In this context, c-commerce applications will allow the carrier to synchronize capacity utilization with

that of the shippers needs to drive profitability. By virtue of its functionality, c-commerce applications allow for

real-time course corrections based on shifts in demand. It has been successfully used in the retail industry

and even with products with a short lifecycle, like electronics, apparel, and ski clothing. For example –

Apparel-maker Zara has integrated its POS (point-of-sale) systems and product design applications via the internet. This allows Zara’s designers to track buying patterns in real time. The designers can then decide

when to incorporate a new color or design etc., to its products – right up to the last week of its three-week

‘concept to store’ cycle.

The success of c-commerce in the perishables space suggests that it is likely to follow a similar trend in the

freight industry because cargo capacity not used is tantamount to a perishable. C-commerce applications

allow the exchange of both structured as well as unstructured communication. Structured data would involve RFP’s, load-tenders etc. Unstructured data would involve something like instant messaging that allows

spontaneous communication. Instead of simply sending data from PC to PC, Web tools let people talk via

their computers while looking at shared documents, carry on e-mail chats, and use electronic white boards

where two or more people can draw pictures or charts, in real-time, as others watch and respond.

Web services can also be used effectively to promote cross-company collaboration. This will result in the

carrier gaining real-time visibility into its supply-demand equation, and as a consequence will be better

positioned to decide its marketing strategy. Carriers often engage in fire-fighting as they attempt to fill up unsold cargo capacity, or plan for delayed shipments. RFID tags can be used to track inbound shipments

and identify those that are likely to be delayed so shipment reallocation can be done well in time so as to not

impact the carrier’s schedule. Case in point – Dell uses Savi technology to track movement of inbound


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material. The application generates alerts in case of inbound delays, giving the plant manager enough time

to adjust his JIT production capacity.

C-commerce applications are well suited to manage varying roles with multiple dependencies across a network of partners. For example, i2’s applications might not be able to support work flows associated, with

say, negotiation across a network of partners – primarily due to proprietary interfaces and centralized data architecture associated with these big names. However, c-commerce applications like Xebic, World Chain,

Valdero provide such functionality.

C-commerce applications will inform carriers of exceptions where service levels have been negatively

impacted and thereby enhance customer service. Most defects are noticed after the fact leading to costly

reverse logistics as was the case with Ford recalling all Bridgestone tires. In the freight sector, RFID tags can

associate each shipment with an airway bill/ manifest at each touchpoint in the network (e.g. warehouse, customs yard etc.). Consequently the carrier can ensure that the right shipment is being transported to the

right place and at the right time. In addition to accommodating cargo security related concerns, any delays

faced by the shipment would be communicated in real time and network capacity (i.e. cargo carrying

capacity) can be adjusted for, just as in the Dell case mentioned earlier on. RFID tagging will also enable the

freight industry to comply with the new cargo security requirements introduced under CSI, C-TPAT and SST.

Currently, these cargo security initiatives are applicable only to the Liner Shipping industry, but some variant

of these rules are likely to be extended to the air, truck and rail freight sectors as well.

C-commerce applications will enable cargo booking agents to make informed decisions on customer-cargo

selection and reject non-profitable shipments. In this context, c-commerce applications will help the carrier

evaluate its demand against supply and costs. Consequently, the carrier is enabled to make informed

strategic decisions on fleet sizing, deployment, capacity planning and opportunity pricing, simultaneously

providing operating guidelines to the sales organization in terms of optimal customer-cargo mix based on the

worldwide demand of its network. In short, the carrier will have enough information that will enable it to

understand its profitable demand simultaneously providing opportunities for enhancing customer profitability. For example, c-commerce software upon detecting a shipment that has been wrongly routed for some

reason would identify and locate the key stakeholders (i.e. salesperson, warehouse manager, traffic

manager, customer etc) and alert them of the exception. The concerned stakeholder can then direct

corrective action via the system to restore normalcy. In order to pragmatize the investments associated with

such a project, carriers will have to slice and dice its captive shipper network, as suggested in the section on

risk management, identify profitable shippers in terms of volume-margin mix, and then pilot such programs

with these shippers before scaling up to include the whole network. Such a pilot can be deployed quickly and

its benefits understood before the decision to scale up is made. However, the carrier needs to have a robust risk/ revenue management system in place before it attempts to pilot any collaboration technology across its

network. Needless to say, such innovation should be attempted only if the initiative is driven top-down and

senior management is committed to see such a project reach its logical conclusion.


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Capacity management within a carrier’s network should be driven by real-time data. For example – Wal-Mart

could report sales of 116,000 American flags, twenty four hours after the 9/11 terrorist attacks. Similarly,

information on RCA (Remaining Capacity Available) route-wise will enable the carrier to sell its freight

capacity, while adopting opportunity pricing techniques, down to the last minute before cutoff time. Additionally, given the dynamic flow of information across the network, the cutoff time itself can be extended.

Last but not the least – change management is of utmost importance. When technology drives business,

failure looms large. However, when business drives technology, synchronicity follows. For c-commerce to be

effective in this industry there should be executive level commitment between shipper and carrier. Business

and IT champions should be identified at both shipper and carrier organizations to ensure cross fertilization

of best practices and thereby successful cross-company collaboration.

How a carrier might transition into the collaborative space?

a) Identify one key business process (say warehousing or capacity planning) that can be migrated to the

web. The partner alliance should build and maintain state-of-the-art warehouses where shippers can

deliver their loads on a JIT basis. These warehouses should function along the lines of Wal-Mart’s cross-

docks (where inventory is not held beyond 24 hours), and security/ customs can be cleared at these

points. Such warehouses should be located within the airport or seaport hinterland.

b) Map out associated business processes in XML and pilot with a partner you trust. XML’s advantage comes from its tagging characteristics that creates self-identifying data

structures and helps companies with different c-commerce applications to communicate with

each other.

c) Conduct performance mapping (b2T – business-to-Technology) and publish lessons learnt

d) XML enable your hub architecture.

e) Once c-commerce enabled, pilot capacity planning/ load planning based on loads available at the cutoff

time This can be achieved if data dissemination across business units at both carrier and shipper

organizations is similar to dissemination of POS data in the retail industry.

Optimal planning and asset utilization is achieved when all concerned stakeholders have access to real-time

data on confirmed shipment loads for a particular schedule. At its current stage of evolution, c-commerce

applications are focused on interactions between various stakeholders across multiple organizations and

various computer systems. However, as c-commerce applications evolve, we can envision a scenario where

auto-id devices on the shipment that has left the shipper dock will alert the loading supervisor at the airport ramp of details such as waybill number, estimated time of arrival at loading ramp etc. As a proactive

measure the loading supervisor, at the carrier end, can alert the shipper to the latest time by which the

shipment should arrive at the aircraft/ seaport loading dock, so his loading sequence is not impacted vis-à-vis

the constraints of departure time fixed in the schedule.


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Example of an area where C-commerce can be applied: Collaborative Freight Transfer Decision Systems (TDS)

One of the key problems in the freight industry is the inefficient transfer of shipments at gateways or hubs which causes inadvertent delays. Therefore, a key prerogative of existing cargo alliances, in both liner and

air-freight, will be to make transshipping across hubs more seamless, so expediting will not be required as a

shipment moves within the alliance network from one company to another. For example, BMW’s R&D team uses Tecnomatix Technologies’ (a c-commerce application), to simulate its latest car design against supplier

Magna International’s infrastructure to spot and fix manufacturing problems within seconds. Parallel

opportunities for using such technologies exist in a collaborative environment between shipper and carrier. In

freight TDS systems, a carrier alliance can customize such technology to deploy appropriate capacity against

shipper volume out of a particular hub. At present there are no commonly used tools within these cargo alliances for assimilating inter-line transfer

information or to facilitate management of the inter-line transfer process between the alliance partners. One approach is to establish ‘collaborate n connect’ hubs at all major gateways. This approach will require the

underlying TDS (Transfer Decision System) to detect and carry out shipment transfer procedures

automatically. The TDS will monitor and manage dynamically changing data from a number of different sources to identify ‘at risk’ shipments between partner freight networks at a hub, thereby enabling seamless

shipment and on-time deliveries for customers.

Features of a TDS

The TDS should have a graphic user interface (GUI) that allows centralized observation and management of

shipment transfer between alliance partners’ at all major hubs. The TDS will track shipment information on

arriving carriers (flights/ ships/ trucks/ rail), identify ‘at risk’ shipments in danger of missing scheduled

connections using predetermined criteria, and facilitate the expedited transfer of such shipments between

carriers. For those transfers deemed ‘at risk’ and ‘salvageable,’ the system will alert a dedicated ‘Shipment Expeditor’ to retrieve the shipment as it is being unloaded and move it directly to its connection.

Communication is automatically facilitated through radios or palm like devices. Connection coordinators stationed at the ‘collaborate n connect’ control centers at major hubs will access the

TDS via the internet to receive information of ‘shipments at risk’. The connection coordinators will be

responsible for determining a course of action to handle each ‘hot shipment’ identified by the TDS. Prior to

the arrival of the incoming flight or ship, the connections coordinator will have prescribed a course of action

for each ‘shipment at risk’ so that all stakeholders (receivers, loaders, shipment expeditors, fork-lift operators

etc) will know what action is required to get the shipment to its respective destination. The connections coordinator should also be able to communicate with the carrier and/or even directly poll the shipment’s

RFID to determine location and other information.


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TDS

Transfer Coordinator

Logs in

Transfer Functions

Airway bill,Manifest,

B/L,RFID tag

Position Info,Schedule systems,

Shipmentmessage,

DCS

Shipment Handlers, Fork Lift Operators,

Transfer coordinators

Rebook

Data Archive to Perform Analysis

Hub Profiles

Quality Assurance

Analytics

Business Rulese.g. crew mgmt,

Optimal routes/ loadsOptimization Engine

Fig.

10: Business Process Flow of a Freight Transfer Decision System

The TDS should receive information from carrier’s schedule systems, position information systems, DCS (Departure Control Systems), and AMS (Automated Manifest System). Using predetermined sorting criteria

that allows for local environment variability (specific to airport, seaport, truck terminal, intermodal facility), the

TDS will sort and prioritize shipments and display available connections.

One solution in this space is Eland’s Runway which allows various airlines’ systems to be linked through

Runway, enabling them to talk to each other and exchange information. The system will allow connection

coordinators to access flight/ ship status information for any airline/ ship in the alliance as well as

redeemable capacity available on various onward routes. To put it simply, when a cargo forwarder calls a

booking agent in say, Frankfurt, to check for space available on the Frankfurt-Singapore route, that agent can find out the inventory available on all flights (belonging to different carriers in the alliance) flying onward

to Singapore, simply by looking at the information on his or her computer. The Eland Runway also translates

diverse languages from various airlines into a common language that all airlines’ systems will comprehend.

Futuristic as it sounds, many carrier-shipper alliances are already experimenting with such systems. And

before too long we are likely to see first mover advantage translate into core-competencies for these early

collaborative supply chains.


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References

1. “Optimize and Execute: SCM applications are converging” by Karen Peterson and Jeff Woods,

Gartner Inc.

2. “Enterprise Profit Optimization creates value through Integrated Decision-Making” by Ken

Heaghney and Todd Noden, Manugistics

3. “The dynamic value chain: Quickly reducing complexity” by Sanjiv Sidhu, i2 Technologies 4. “Successfully managing distributed commerce” by Devdutt Yellurkar, Yantra

5. “Collaborative Product Commerce: Creating Value across the enterprise” by Mike True and

Carmine Izzi, Accenture

6. “Designing product for the synchronized supply chain” by William T. Walker, Agilent

Technologies

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Eric Johnson, Tuck School of Business, Dartmouth College

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Corporation

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15. “A Collaboration Enabler: Sharing Open-Book profit and cost data” by Gary Cokins

16. “Linking supply chains to support collaborative manufacturing” by Chris Cookson, Accenture

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Schrader

19. “Connectivity, Collaboration, and Customization: New Benchmarks for the future” by Bud

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Cecere, Gartner Group


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26. “eHubs: The new web-enabled technology driving true supply chain collaboration” by Kevin M.

McKelvie, Accenture and Mark Simmonds, Yantra

27. “The future of the networked company” by Remo Hacki and Julian Lighton

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June 1994

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Oklahoma State University, 2003.

34. Selling Cargo by Paul Page, Air Cargo World, Jan-Feb 2003

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37. www.apl.com

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41. www.fedex.com

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48. www.mckinseyquarterly.com

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