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Defining and Highlighting the Steps to Collaborative Transportation Management

When companies are searching for ways to cut costs and increase efficiencies associated with supply chain operations Collaborative Transportation Management (CTM) offers great promise. Here’s a look at how CTM can provide you with a winning business strategy.

By Terry L. Esper, Ph.D.

The competitive marketplace is placing more pressure on companies to be increasingly responsible and effective in meeting their customers’ needs. Market changes such as electronic commerce, economic uncertainties and increased globalization as well as heightened competition are prompting many companies to explore new ways of operating. Consequently, many companies have turned to collaborating with supply chain exchange partners as a way of facing the challenges of operating in today’s rapidly changing marketplace. Over the last decade, supply chain relationships have moved from adversarial exchanges toward more collaborative ventures. Thus, instead of relationships based on opportunism and competition, many supply chain exchanges now put a greater emphasis on trust, interdependence and win-win solutions when focusing on operational issues.

Collaboration in the supply chain has traditionally involved the buyer-seller dyad as the primary collaborating parties. However, with so many other entities involved in supply chain execution, such as financial institutions, 3PLs and transportation service providers, there are many additional opportunities to extend collaborative arrangements to other areas of the supply chain. For example, Collaborative Planning, Forecasting, and Replenishment (CPFR) is a collaboration initiative that has become increasingly adopted and has received major support for the benefits it delivers. CPFR involves collaboration on operational planning through automated sales and demand planning activities and order placement. The primary outcome of CPFR is an order forecast that provides the buyer-seller dyad with information that can be used for more effective planning, inventory management and facility utilization. However, given that there are other organizations involved in actually executing on the order forecasts developed via CPFR, there is still more room for collaborative execution in the supply chain. One initiative that is a major area of collaboration opportunity is Collaborative Transportation Management (CTM).

What is CTM?
Collaborative Transportation management is a holistic process focused on managing distribution operations – mode/carrier selection, load tendering, tracking, scheduling, and payment – in a manner that ensures shared risk and benefits for all parties involved. The primary goal of CTM is to drive inefficiencies out of the transport planning and execution process by improving the operating performance of the shippers, carriers, receivers and 3PLs participating in the CTM exchange. Hence, companies engage in CTM by sharing key information (i.e. forecasts, capacity plans), exchanging ideas on how to improve the planning and execution of transportation processes, and even co-investing in assets that provide all parties involved with operational benefits.

Collaborating on the transport process has been considered the next logical step to CPFR, as CTM can definitely be an extension of the CPFR process. In this case, CTM involves converting the order forecast that is developed via CPFR into shipment forecasts and ensuring effective and efficient fulfillment of those orders. However, CTM can also be a stand-alone process, whereby the order forecast that initiates the CTM process originates from one of the parties involved in CTM independently. So, while CPFR and CTM are often considered complementary, and even integrated, processes, CTM alone promises added value to participating companies.

Collaboratively managing transportation is of particular interest to many companies when we consider the nature of today’s transportation environment. Since deregulation, increased competition among transportation carriers has required that companies optimize efficiencies in order to remain in business. Moreover, driver turnover rates in the carrier industry – many times caused by driver frustration with carrier inefficiencies – have consistently been in the area of 100 percent. To further complicate the current landscape of the transportation industry, revised hours-of-service regulations that went into effect in the United States in January of 2004 will impact carrier operations and driver on-duty time in a way that puts even more emphasis and criticality on transportation operational efficiencies. Carriers, shippers and receivers are all impacted. As inefficiencies in carrier operations increase, so do transportation costs and service issues for shippers and receivers. Hence, when considering the current issues facing carriers, and the importance of transportation to the buyer-seller dyad interface, the promises of CTM are well worth exploring.

The Benefits of CTM
The collaborative nature of CTM means that all entities involved in the exchange (i.e. shippers, receivers, and carriers) should realize benefits of engaging in CTM initiatives. Recent research and pilot studies on the benefits of CTM have shown that there are a number of major benefit categories that participants can expect. These benefits include:

Reduced transportation costs – Shippers and receivers have realized freight cost reductions in excess of 20 percent and administrative cost reductions of 20 percent through CTM initiatives.

Increased asset utilization – Carriers have indicated that fleet utilization has improved by 33 percent. In addition, deadhead miles, dwell time, and driver turnover have all decreased by 15 percent as a result of CTM pilot projects.

Improved service levels – CTM initiatives has resulted in on-time service improvements of 35 percent and lead time reductions of more than 75 percent for participating shippers and receivers. Furthermore, inventory reductions of roughly 50 percent have also been realized.

Increased revenue and end-customer satisfaction – Sales improvements of approximately 23 percent have been gained through the improved customer service that results from CTM initiatives.

Increased visibility – Shippers, receivers, and carriers alike have indicated that CTM initiatives have resulted in an enhanced ability to identify the location of freight in the supply chain, giving them the ability to manage their supply chain more effectively. This benefit is particularly due to the interorganizational systems that are utilized to integrate firm involved in CTM.

While benefits of CTM have begun to be documented, the CTM process is still in its infancy. One of the major reasons why CTM hasn’t been widely adopted, notwithstanding the fact that it’s a relatively new supply chain initiative, is because many firms haven’t been able to identify the key areas of CTM opportunity or the practical steps to engaging in more collaborative exchanges with supply chain partners. The following discussion will highlight some of these issues.

Implementing CTM
There are four primary areas that represent key opportunities for CTM implementation. These key areas can serve as a starting point for firms interested in engaging in CTM initiatives, as they embody the core of CTM pilots that have been implemented by several companies to date. These key areas include:

1) Capacity Procurement – the interaction between the shipper and carrier to arrange transportation capacity. Under CTM this area involves collaboratively developing load tendering plans, so the carrier can anticipate and plan for demand more effectively, and the shipper can potentially realize a carrier base reduction and enhanced opportunities for load consolidation.

2) Inbound Management – the recipient of freight proactively controlling and managing the transportation of inbound goods. A CTM approach to inbound management involves the receiver working together with carriers and shippers to determine inbound consolidation and management transfer opportunities that result in decreased costs and lead time for the recipient, a reduction in administrative expenses for the shipper, and increased volume commitment and scheduling predictability for the carrier.

3) Integrated Movements – aggregated volumes for multiple firm locations or across multiple firms. From a CTM perspective, this initiative entails searching for opportunities to consolidate or aggregate volumes across locations and/or companies that results in enhanced operational efficiencies for shippers, receivers and carriers alike. Such an approach can lead to such benefits as reduced transportation costs and improved service for shippers and receivers. Carriers can improve asset utilization and operational expenses.

4) Transportation Marketplaces – on-line venues for transportation service procurement that use real-time matching of supply and demand to ensure cost and operational efficiencies for shippers, receivers and carriers. Using marketplaces is considered a CTM opportunity because of the cost and service benefits that all parties in the shipper-receiver-carrier triad can realize. Furthermore, the Internet-based platform of marketplaces results in process automation, which can also lead to administrative cost benefits for all entities involved.

When considering these and potentially other areas of opportunity for CTM, it is important to note that implementing CTM is not an easy task. Collaboration is not simply cooperating with other organizations. All parties must benefit for true collaboration to exist. Hence, CTM involves not only searching for opportunities to streamline processes and cut costs out of a company’s operations, it entails working together toward common objectives and sharing profits/benefits. It is easier said than done – but the potential savings make the effort one that many are gearing up to make.

The CTM sub-committee of VICS (Voluntary Interindustry Commerce Standards) has devised a five-step approach for getting started with CTM.

Step 1: Select CTM Partners – This is a very critical step in the CTM implementation process. It is important that CTM partners have a willingness and ability to pursue the potential benefits of the CTM initiative for all parties engaged. Moreover, the willingness to share critical strategic information is also important, as the risk of sharing such sensitive information should be outweighed by the potential efficiencies and cost savings of CTM. Many firms have found that selecting 3PLs during this step has also been beneficial, as they can serve as a facilitator of communication and execution amongst the parties involved in the CTM initiative.

Step 2: Engage CTM Partners – This step involves the brainstorming of potential benefits and opportunities of a CTM initiative with the partners selected in Step 1. Moreover, a course of action is established during this step, which involves segmenting responsibilities and identifying key personnel in each company that will serve as key contacts in managing the CTM initiative.

Step 3: Benchmark the Performance of the CTM Initiative – During this stage, the CTM partners establish agreed upon key metrics of performance of performance for each participant. Such performance metrics should be aligned with the potential benefits outlined in Step 2, such that the CTM partners can establish whether or not the intended benefits are being realized. Not all parties will consider the same set of key metrics; however, it is important that all parties are aware of how each CTM partner is measuring the performance of the initiative.

Step 4: Pilot Test – This stage involves the testing of the CTM initiative. It is important that procedures are clearly defined, responsibilities are clearly delegated and the pilot duration and timeframe is clearly established from the beginning.

Step 5: Determining Next Steps – The CTM partners should jointly assess the success/failure of the pilot initiative. This involves each party determining their satisfaction with the project relative to expected benefits and by using the key metrics defined in Step 3. Upon assessing the initiative, all parties should discuss the next steps of CTM and whether further continuing with the collaboration is beneficial to all parties engaged.

As more firms are looking for new ways to improve operational efficiencies and streamline processes, CTM is likely to become a key strategy for many companies. Realizing the importance of the transport function to the viability of business organizations, transportation is poised as a key area of opportunity to capitalize on. Collaborating with transportation service providers, and all entities involved with this interface, is the next logical step to streamlining transportation processes. Although CTM is becoming more widely utilized, moving to a more collaborative approach to managing transportation is not an easy undertaking. While traditional collaborative initiatives have primarily involved the buyer-seller dyad, CTM requires at least three collaborating parties. And, when 3PLs and marketplaces are involved, the number of parties engaged in CTM can be in excess of four firms. This factor in itself highlights the difficulty of implementing CTM. However, the reports to date are quite promising, as many firms have documented very substantial benefits derived from adopting CTM. Clearly, the time and effort to engage in CTM makes it a very worthwhile practice.

References:
Esper, Terry L. and Lisa R. Williams, “The Value of Collaborative Transportation Management (CTM): Its Relationship to CPFR and Information Technology,” transportation Journal, Summer 2003, pp. 55-65.

CTM Sub-Committee of CPFR, “collaborative Transportation management,” Tab document working paper, 2004.