Authors: Thomas Hacardiaux and Jean-Sébastien Tancrez
The sharing economy paradigm offers countless opportunities for improving the efficiency of resource utilization and the sustainability of economic activities. In logistics, it may help address prominent issues such as pollution, inefficient loading of vehicles, traffic congestion or complex last mile deliveries. In this vein, the Physical Internet brings the idea of sharing and collaboration to its edge by proposing to build a unique decentralized collaborative logistics network.
The Physical Internet aims at transforming the way physical objects are handled, moved, stored, supplied and used, aiming towards global logistics efficiency (Montreuil, 2011). The Physical Internet applies concepts from internet data transfer (interconnectivity, encapsulation and protocols) to real-world shipping processes. Three important differences with the current supply chains organization are worth highlighting (Pan et al., 2015). First, the logistics facilities in such a network are shared by all the users (e.g., suppliers, carriers, logistics service providers and retailers). Second, inventory repositioning from one warehouse to another with higher demands is allowed and leads to highly dynamic replenishment schemes. Third, the sourcing points for retailers or hubs are no longer fixed, the flows of goods are no longer predetermined, leading to a flexible interconnected network instead of a more rigid hierarchical structure.
The Physical Internet could potentially transform the current structure of logistics, improving its economic efficiency and reducing its negative impact on our environment. Montreuil et al. (2012) estimate the potential benefit at 7% to 15% improvement of the vehicle loading rate, and a decrease of the CO2 emissions by 25% to 50%. To advance towards the Physical Internet, the concept of horizontal cooperation has been explored in logistics, with theoretical studies as well as practical cases. Horizontal cooperation shares many ideas with the Physical Internet, but at a smaller scale, with a limited number of partnering companies sharing their supply network. The concept of horizontal cooperation considers the collaboration of several partners present at the same level of the supply chain, that share in particular the capacity of their vehicles and their distribution centers.
A doctoral thesis recently proposed by members of the PROSEco project (by Thomas Hacardiaux, supervised by Jean-Sébastien Tancrez, available here) deals with assessing the benefits of horizontal cooperation when partners decide to share a joint supply chain network. The long-term impact of this decision makes the accurate assessment of the benefits essential, prior to entering horizontal cooperation. The potential savings of a partnership were assessed using mathematical models in terms of costs (warehouses, transportation, inventory), CO2 emissions and service level, depending on the partners and markets characteristics, aiming to provide useful insights to companies wishing to collaborate. To the best of our knowledge, this research is the first to integrate location and inventory decisions to assess the benefits of cooperation in a joint supply network, while these two decisions
relate to two core benefits of cooperation. These two benefits are the following. First, each partner has access to more shared distribution centers while the total number of centers is lower than in the stand-alone case, reducing the facility costs. The shared distribution centers are also better distributed, reducing the distances to the retailers, and consequently the transportation cost and the lead times. Second, cooperation allows to improve the average vehicle loading rate, further reducing the transportation cost. The vehicles are better loaded, but, as they are shared, they deliver smaller shipments of each product to the retailers, reducing their inventory.
When companies decide to focus on logistics cost minimization, the average cost reduction is equal to around 22%. The results are based on a large set of numerical experiments (27.180) in which several key parameters are varied (vehicle capacity, facilities cost, inventory cost, demand variability, number of partners, etc.). It appears that cooperation is more profitable if facilities are expensive, if inventory is inexpensive, if products are small compared to vehicle capacity, if distances are long, and if demand uncertainty is low. Besides this detailed study of the cost reductions reached by sharing a supply network, the thesis also looks more deeply into the impact of the products characteristics and into the carbon footprint reduction. First, it shows that companies supplying innovative products (with high demand variability and high margin) tend to benefit more from cooperation. Regarding the carbon footprint, as a consequence to the distances reduction and the improved vehicle loading rate, the partners’ CO2 emissions are also impacted by collaboration. Even when the joint supply network is designed firstly to minimize the logistics cost, the CO2 emissions are reduced by 16% on average (in the experiments).
As we observe that the benefits of cooperation on costs and on the carbon footprint may diverge, and as partners may prioritize those objectives differently, it was then important for the viability of the collaboration to include both objectives and the multi-partner nature of horizontal cooperation in our models (see Hacardiaux et al. (2021) for details). It allows to generate Pareto fronts revealing the trade-offs between costs and emissions, and the balance among partners. Then, three approaches are proposed to identify a unique, fair and efficient network for the collaboration. Experimental results demonstrate that collaboration remains beneficial for partners in all cases, even if their preferences, sizes or geographical demand distribution are different. However, dissimilar preferences regarding costs and CO2 emissions hinder the potential benefits of a partnership. Furthermore, smaller companies will tend to benefit more than larger companies which have better economies of scale when operating individually.
References
Hacardiaux T., Defryn C., Tancrez J.-S. and Verdonck L. (2021). Balancing partner preferences for logistics costs and carbon footprint in a horizontal cooperation. OR Spectrum. https://doi.org/10.1007/s00291-021-00651-y.
Montreuil B. (2011). Towards a Physical Internet: meeting the global logistics sustainability grand challenge. Logistics Research 3, 71-87.
Montreuil B., Meller R., Thivierge C., and Montreuil Z. (2012). Functional Design of Physical Internet Facilities: A Unimodal Road-Based Crossdocking Hub. Progress in Material Handling Research, Charlotte, USA.
Pan, S., M. Nigrelli, E. Ballot, R. Sarraj, and Y. Yang (2015). Perspectives of inventory control models in the physical internet: A simulation study. Computers & Industrial Engineering 84, 122–132.