In the fat and happy 1990s, retailers, e-tailers, and wholesalers were frequently unwilling to contract the services of third-party logistics providers. America’s love affair with technology was still smoldering, and many companies, flush with cash, were hot on the idea of acquiring their own material handling equipment and software. Though 3PL providers were not new, many were untried. To companies just getting into the brave new world of e-commerce, outsourcing presented a scary proposition, a closed door that might open to reveal a beauteous lady ready to answer their every request — or a hungry tiger ready to devour and destroy. Some companies balked at the idea of turning over their fulfillment to strangers, since it was arguably their most important function. Times have changed, and so has that attitude: Today fulfillment outsourcing is advancing all across the board.
This shift in attitude has been money-motivated. Corporate management is now under constant pressure to feed the bottom line, a trend that has only picked up speed with the decline of the U.S. economy. Merchants have come to recognize that third-party logistics providers can save an operation pain and money. The state of 3PL service has dramatically improved, and because there are more providers in business today, prices have dropped sharply. Operations large and small are outsourcing fulfillment and many other functions because they find it cheaper and more efficient than doing it themselves.
“Outsourcing has become more conspicuous for a couple of reasons,” says Frank J. Casale, founder and CEO of The Outsourcing Institute, a professional association of outsourcers headquartered in Jericho, NY. “Reason one is the continuing pressure on management to make more money by reducing operating costs. Reason two — there are more outsource companies now, and they’ve become much better at what they do. The companies provide broader service menus and a wider range of pricing and delivery models, and offer more experience under one roof. Thanks to these improvements and the greater need for outsourcing in general, the industry has been growing at a rate of 15%-20% per year.”
What should an e-business look for in a warehousing outsourcer? According to Dr. C. John Langley Jr., professor of supply chain management at the Georgia Institute of Technology, the following capabilities are basic requirements:
- The company should have a proven set of abilities and experience in the industry.
- It should offer efficient and effective supply chain services at a reasonable price.
- A 3PL provider should have ties to 4PL providers or subcontractors that offer services it does not. The primary provider should also be equipped to interact seamlessly with all secondary providers in its chain of operation.
- The company should have access to all necessary technologies, such as systems for warehouse management, reverse logistics, and transportation management.
- The 3PL should have a verifiable work history reflective of good relationships with past and current business partners and their customers. (Take nothing for granted. Check references.)
“When and why do you need to outsource?” Langley asks. “One reason could be that you lack some required expertise within your organization. This certainly applies to e-commerce companies, and to brick-and-mortar operations that do e-commerce.”
Langley also cites lack of strategic fit as a reason for hiring another organization to handle logistics. “In a traditional retail environment, for example, key strategic decisions might involve store format, location, and product line assortment. Logistics may take a back seat to all of that, so it might make sense to farm it out to an expert.” Finances are another reason that using an external contractor arises, Langley says. “The third question to consider is whether doing your own logistics will bring a good return on investment. If the answer is no, an external alternative probably makes sense.”
SHARPER FOCUS
In the old days, if you were soft in some area of business, you invested in the appropriate hardware and software and hired a team of experts to run your new department. This was equally true of warehousing and fulfillment, an incredibly expensive undertaking in which mistakes could bring on grave consequences down the road. The current cruel economy has forced many companies to put the practice of “do everything yourself” on hold, at least for the time being. With competition on the increase, business on the decrease, and costs rising on all fronts, businesses are choosing to remain focused on their core competencies rather than dabble in areas where they lack infrastructure, experience, or expertise. Doing everything yourself whenever possible no longer makes good business sense. Today it seems more practical to contract some functions out whole hog, even if it means surrendering a measure of control.
“No one wants to build and own non-core infrastructures anymore,” says Casale of The Outsourcing Institute. “When you take on a long-term commitment involving big capital expenditure, you increase risk while limiting options and flexibility. When we started the institute ten years ago, the common wisdom was that if you were really in trouble, maybe you should think about outsourcing. Since then it’s moved on to ‘When and where?’” In addition, Casale says, technology, especially Web-based technology, is helping 3PLs provide increasingly sophisticated and seamless logistics services. “Internet access to a 3PL provider lends reality to virtuality, and in the future it’s possible that with an outsourced partner you’ll get better and more real-time data than you ever got on your own.”
CHOOSE ONE
The process of selecting a third-party fulfillment provider should be question-driven and narrowly focused on critical aspects of supply chain management, according to Richard D. Armstrong, president of Armstrong & Associates Inc., a supply chain management consulting firm based in Stoughton, WI. The company specializes in market research, mergers, acquisitions, and outsourcing, and is publisher of “Who’s Who in Logistics? Armstrong’s Guide to Supply Chain Management.” In Armstrong’s view, it is imperative that the outsourcer have the ability to run a fully automated throughput warehouse. “What, if any, are his RF capabilities? Does he have transportation management abilities that allow him to mode-convert from package to LTL, and LTL to truckload? This is very important in cases where you have multiple shiploads and vendors. Some retailers have hundreds of stores, and they allow their vendors to ship directly to each outlet. You need to be able to control that process, because mode-converting smaller shipments into larger ones earns you significant savings. If you ship packages direct, especially overnight packages, premium services will cost you four or five times more per pound than they would if you converted them to non-premium packages or LTL shipments.”
| North America | Western Europe | |
|---|---|---|
| Logistics cost reduction | 7% | 10% |
| Fixed logistics asset reduction | 16% | n/a |
| Avg. order cycle length changed | 6.5 to 4.3 days | 4.4 to 3.5 days |
| Overall inventories reduced by | 9% | 8% |
| Cash-to-cash cycle reduced | 20.4 to 16.4 days | 27.3 to 20.0 days |
| Service improvement | 63% yes | 40% yes |
| Source: Third-Party Logistics Study 2002, Georgia Tech, Cap Gemini Ernst & Young, Ryder System Inc. | ||
Those are two big issues to bear in mind, Armstrong continues. A third is visibility. Complete visibility is a must with regard to anything moving in or out of the distribution center. The Internet makes it possible to obtain that information, and the outsourcer should be up to speed in all technologies relevant to that goal.
20/20 VISION
Armstrong’s vision of the “perfect third-party warehousing operation in a nutshell” features a 3PL that has automated warehouse capacity, a transportation management system, and the ability to provide clear visibility into the supply chain process. “What you don’t need,” Armstrong says, “is someone who does not have sophisticated transportation management software capability. You want a guy who will optimize your transportation movements on a daily basis.”
The retailer who does contract with a third-party logistics provider must issue clear performance indicators about which the 3PL must supply regular reports. Armstrong also recommends that the provider have “enough accumulated activity-based costing experience to properly price each segment of activity.”
An important element that largely determines the success of an outsourcing relationship, says Anderson, is the contract. “Make sure you draft a complete contract with clear, measurable performance standards, with penalties stipulated for non-performance. This is a matter of practicality. The more thoroughly the expectations and responsibilities of both parties in the relationship are outlined on paper, the more trouble-free that relationship will be.”
D. Douglas Graham is a freelance writer based in St. Louis, MO. He can be reached by e-mail at [email protected].
Red Dresses in China
Standard Corporation, a full-service 3PL provider headquartered in Columbia, SC, has 3,000 employees in 51 warehouses across the country. Clients include DuPont, Bosch Corporation, International Paper, Dow Chemical, and Georgia Pacific. “Systems integration is the key to success in this business,” says distribution group president Bill Church.
“Visibility is everything,” Church adds. “Retailers, for example, want and need to track inventory throughout the supply chain. If a retailer is producing red dresses in China it’s vital that he know where those dresses are as they travel along the chain. Systems integration links all parties in the relationship to mission-critical areas of the operation such as warehousing and transportation. Information is instantaneously available to anyone in the chain who needs it, at any time. That’s what it takes to keep a program like this on track.”
There are other criteria to consider as well. It’s quite important, for example, that the corporate cultures of both parties in the relationship be compatible. Some companies are cost- or profit-driven, while others are motivated primarily by quality considerations. When cultures clash, problems follow, and in the worst cases, business grinds to a halt.
“A provider should also be equipped to work globally,” Church adds. “More business is international now, and it’s not at all uncommon to ship from the U.S. to the U.K. and from there to Africa or Asia. Most companies are looking to have one provider manage their entire logistics chain. A huge percentage of the goods sold here are made elsewhere, and possibly sold in other countries as well. A guy in Maine might make lobster bibs in China and sell them in Japan. That’s just one example of the concept we’re talking about. Few American companies are fully American now. Most have some kind of presence overseas. We have to be set up to accommodate them because their business is what keeps us in business.”
— DDG