3PL Elements: Outsourcing = A Formula for Change

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When shippers mix the 3PL elements of expertise, process efficiency, and technology into their supply chain, the results are potent....Eureka! A stronger, more efficient, and cost-effective logistics operation! Step into the logistics lab for a look at how and why outsourcing can give businesses a positive charge.

As with the science of chemistry, relationships between shippers and their third-party logistics providers (3PLs) are comprised of a group of different elements that come together to form a cohesive whole.

On shippers' behalf, 3PLs perform functions such as transportation and distribution, inventory optimization, and reverse logistics to make an entire supply chain run smoothly. And like chemistry's inner workings, the behind-the-scenes operations 3PLs perform go largely unnoticed by outside observers.

Case in point: when I ordered a replacement battery for my Verizon Wireless cell phone, the FedEx package was shipped not from Verizon directly, but from New Breed, a High Point, N.C.-based 3PL.

As a seasoned supply chain writer, I surmised that New Breed was handling service parts logistics for Verizon. But the average cell phone user is unlikely to notice anything at all—which is precisely the point.

Whether companies outsource all or part of their supply chain to a 3PL, seamless customer service is a primary goal. After all, if a replacement battery arrives late or damaged, the customer will blame Verizon, not its 3PL.

To keep such customer complaints at bay, Verizon turned to New Breed to develop an automated warehouse fulfillment solution that provides same-day processing of its direct-to-consumer orders. The 3PL operates two of Verizon's three distribution centers, offering real-time visibility to orders and inventory; "cradle-to-grave" tracking of every serialized unit; and integration of outbound shipments.

New Breed ships 20,500 consumer orders daily for Verizon with 99.9 percent accuracy, while 100 percent of orders that arrive before 5 p.m. are shipped the same day. (My own experience confirms this: I called Verizon customer service on Monday afternoon and received the replacement battery early Tuesday.)

Results such as these are why many shippers prefer to stay out of the logistics "lab" and concentrate on core competencies. Let the experts handle the science of getting the right product to the right place at the right time, they say.

"3PLs introduce efficiency and effectiveness into a company's operations, allowing shippers to conserve costs and resources, while also helping to provide higher service levels," says John C. Langley, professor, supply chain management, Georgia Institute of Technology.

"In addition, capable use of a 3PL can help a company improve its competitive position in the marketplace."

How do 3PLs accomplish all this? By offering the "3PLements" of experienced people, process efficiency, and technology, 3PLs help companies discover the right formula for mixing up a better supply chain and improving their businesses.

Element 1: Experienced People

While it is a business cliche, people really do make a company what it is. 3PLs are no different. By staffing veteran supply chain managers and logistics technology experts, 3PLs offer a breadth and depth of expertise that many shippers no longer retain in-house.

"Once companies decide to outsource their supply chain needs, they lose the people and expertise, and stop investing in the required technology," explains Adrian Gonzalez, an analyst with ARC Advisory Group, Boston.

Without this expertise, it can be challenging to efficiently manage the supply chain. Navigating the transportation industry, for example, can be tricky for shippers to attempt on their own.

"Freight is a top-five expense and some companies recognize that they don't know how to manage it effectively. Since deregulation, every carrier creates its own rules," says Samuel R. Polakoff, president, TBB Global Logistics, a New Freedom, Pa.-based 3PL.

TBB's account managers meet regularly with shipper clients to help them decipher freight expenses—especially essential now as fuel prices inch higher and the economy rests on shaky ground.

Shippers, for example, may not understand that although they are shipping the same products to the same customers and buying the same raw materials from the same vendors as they did last year, costs will still increase, notes Polakoff.

Also, customers and vendors may change distribution patterns from year to year—they may have closed a distribution center in the last year or might now be asking to ship directly to retail locations. "Having the right people in place to explain these types of changes is helpful," Polakoff says.

Indeed, having the right people in place is one reason Cardinal Health, a global manufacturer and distributor of medical and surgical supplies and technologies, recently selected Reading, Pa.-based 3PL Penske Logistics to manage its private fleet for the delivery of medical supplies to customers in the continental United States.

As part of the dedicated fleet agreement, Cardinal Health is transitioning about 700 truck drivers and related transportation support staff to become Penske employees.

"With each year, transportation becomes more complicated, regulated, technology-rich, and asset-intensive. We wanted to be sure Cardinal was best structured and equipped to deliver medical supply services to customers while at the same time better managing costs," says Mike Duffy, Cardinal's executive vice president of operations, healthcare supply chain services.

The people factor played a large role in Cardinal's decision. Choosing a 3PL whose employees understood its corporate culture ensured Cardinal's staff would be happy working for the new provider and safeguard relationships with customers during the transition.

Managing a transition of this magnitude required both companies to collaborate closely to keep employees and customers happy, and the supply chain running smoothly.

Cardinal and Penske worked together to plan when and how to communicate the changes, "starting with a general announcement across the entire business, followed by targeted orientation meetings, all done within a tight time period so Cardinal's associates and customers heard about the transition at the same time," explains Dennis Abruzzi, senior vice president, Eastern region, for Penske.

Because of the timely nature of the medical supplies business, Penske's ability to ensure that Cardinal's products would be delivered in all conditions was also key.

"Cardinal had our assurance that we have contingencies in place to deal with weather circumstances and that getting supplies to Cardinal's end customers is an absolute given under any conditions," says Abruzzi.

While the Cardinal-Penske arrangement deals with U.S. customers only, shippers increasingly expect their 3PLs to employ people who can address global logistics concerns.

"To set up operations in emerging markets such as India, China or the Middle East, you need people on the ground who understand the local realities—infrastructure, hiring practices, and government and customs regulations," says Gonzalez. "This is where companies place a high value on 3PLs and their experienced people."

Element 2: Process Efficiency

The supply chain is, by definition, a group of processes that occur during a product's journey from supplier to manufacturer to end customer.

So it is no surprise that 3PLs are a process-driven bunch. Whether handling an entire supply chain or just certain aspects of it, 3PLs must deliver process excellence to meet shipper demands. The processes 3PLs handle for shippers run across a wide spectrum.

"Many shippers simply want to move transportation and warehousing assets off their books," says Gonzalez. "They want someone else to perform these functions."

Indeed, warehousing and transportation were the most commonly outsourced processes among the more than 1,500 logisticians who participated in Georgia Tech's 2007 annual 3PL study.(See sidebar, below, for more information on the study.)

Shippers who do outsource strategic supply chain processes often find value in using 3PLs to fine-tune niche areas of their business or to help with new product introduction. "3PLs can be particularly helpful in the case of seasonal products, where a shipper expects demand to increase and needs to set up infrastructure quickly," Gonzalez explains.

Another area where 3PLs can offer process expertise is entering new sales channels, such e-commerce, Gonzalez adds.

While process efficiency for its own sake is great, shippers are really looking for bottom-line impact. By outsourcing logistics functions to a 3PL, companies hope to gain a variety of cost savings, freeing up resources to devote to other areas of the business.

Many shippers searching for relief from fuel surcharges are turning to 3PLs. "The price of oil is top of mind for me every day," says Pat Wiegand, senior distribution manager for Music & Arts, a national music store chain based in Frederick, Md.

As a company that ships more than 200,000 musical instruments each year, Music & Arts is benefiting from a cap on LTL fuel surcharges, which was negotiated by its 3PL, TBB Global. "TBB's ability to leverage its own volumes to negotiate our fuel surcharges helped us this year," says Wiegand.

TBB serves as Music & Arts' outsourced transportation department, handling the company's shipments from its main distribution center to 16 satellite warehouses across the country, as well as inbound shipments from vendors to Music & Arts' Frederick DC, and imports coming from overseas.

TBB also manages the retailer's reverse logistics processes—crucial for the company's instrument rental service, where 60 percent of instruments rented, largely to school districts, are returned at the end of the year.

By outsourcing these processes to TBB, the company cut total freight costs by an average of 15 percent per year, reports Wiegand.

Another way that 3PL process efficiency nets cost savings for Music & Arts can be found in how the company now manages shipment details. To process shipments, Wiegand and his distribution managers use TBB's online rate quoting system, which automatically fills out bills of lading, notifies involved parties of shipment status, and allows managers to determine which carrier offers the best rate for the shipment in question.

Because Music & Arts uses a hub-and-spoke distribution model, "obtaining paperwork, cost, and process consistency is always a challenge," explains Wiegand. "But using the TBB system ensures paperwork is the same no matter which hub is sending a shipment, and it allows me to get the best price for each movement."

Element 3: Technology

Like all aspects of business these days, the supply chain has gone high-tech. While companies used to rely on handwritten routing guides and paper-based inventory tallies, automation now reigns supreme.

For many shippers, however, turning the corner from manual processes to technology solutions can be costly and challenging—and a good reason to seek out a third-party logistics provider.

"For years, a large part of the 3PL value proposition has been access to technology," notes Gonzalez. While that value has been challenged by growing access to less-expensive on-demand transportation and warehousing solutions, technology is still a major selling point for logistics outsourcers.

In addition, the ability of 3PLs to marry new transportation technology with shippers' existing solutions is key.

Whether shippers seek out a 3PL to devise a complete technology makeover or just to boost current IT capabilities, they are usually looking to tap into the 3PLs' existing applications.

"3PLs can offer technology solutions quickly and inexpensively because they have already built the infrastructure," says Mike Schoenfeld, executive vice president, business development for Fidelitone Logistics, a 3PL headquartered in Wauconda, Ill.

Centralizing and automating diverse supply chain functions and/or physical assets is another reason shippers engage 3PL technology solutions. Electronics retailer Best Buy, for example, did just that to tame its multi-vendor repair parts operation.

For Best Buy's tech support gurus—known as the Geek Squad—to be able to go into a consumer's home and repair a desktop computer, they need the ability to quickly procure and return individual parts to and from the vendor community.

"Acquiring the massive volume and variety of parts required for Best Buy's repairs is a major challenge," says Dave Telschow, Best Buy director of repair service.

Seeking an IT solution that allowed it to maintain procurement and distribution flexibility while keeping costs down and maximizing timeliness and accuracy, Best Buy partnered with National Parts, a Fidelitone Logistics-affiliated company, on a technology-based virtual distribution system with centralized order processing and data management based on Best Buy's business rules.

Via this automated system, the 3PL handles both the supply chain and financial aspects of the repair parts operation.

"Ninety percent of the repair parts never hit Best Buy's docks," says Schoenfeld. "We provide an IT solution that offers end-to-end order management and addresses the entire order-to-cash cycle."

Multiple times each day, Best Buy transmits via FTP a list of needed parts to National Parts' system. The 3PL, in turn, runs the equivalent of a virtual RFP, sending this list to more than 50 vendors representing more than 80 brands and selecting the vendor whose price and delivery speed best meet Best Buy's needs.

The system then creates and transmits a purchase order to the vendor, who is expected to ship the parts the same day directly to Best Buy's repair facility or drop site.

On the reverse logistics side, National Parts operates an order management system that allows Geek Squad repair technicians to input information about the parts being returned.

After parts are shipped back to the vendor, the 3PL handles the financials on behalf of Best Buy. "The inventory hits our books, and we collect from the vendor and pay Best Buy back," explains Schoenfeld.

By embracing technology, Best Buy reduced costs in its parts supply chain and boosted customer service by offering quick repairs. And the automated system means same-day shipping from suppliers is a standard, rather than a goal.

Making the Experiment Work

By combining the elements of experienced people, process efficiency, and technology, 3PLs help shippers brew a potent potion of improvements including reduced costs, faster speed to market, improved customer service, increased global capabilities, shortened cash-to-cash cycle, competitive advantage, increased inventory turns, and the ability to adapt quickly to market changes.

Without proper care, any experiment can go awry—and the same holds true for outsourcing arrangements. To achieve the desired results and make the 3PL/shipper relationship work takes dedication and effort on both sides.

For 3PLs, that means delivering on promised cost reductions, service levels, and solutions; as well as paying close attention to shippers' needs and how changing market conditions impact their business.

"Shippers are looking for proactive continuous improvement," says Joe Gallick, senior vice president, sales, Penske Logistics. "They want 3PLs to make suggestions for business improvements before they ask."

While shippers occupy the proverbial driver's seat because they are customers, they, too, play a role in ensuring a successful outsourced logistics effort. Shippers must be willing to collaborate closely and share sensitive information with their 3PLs.

"There is a limit to how much efficiency you can gain without working hand-in-hand with supply chain partners," says Langley. "But collaborating with other companies does not come naturally to everyone."

Langley also emphasizes the importance of appreciating the strategic nature of the shipper-3PL relationship. "Logistics managers must make sure the company's top executives don't think of the 3PL as just a vendor," he notes.

For Music & Arts, communication and flexibility are the keys to a successful 3PL relationship. "Our 3PL is an extension of us as a company—if we keep the lines of communication open and work together, the end result is always better," says Wiegand.

After all, logistics is not an exact science, but rather the art of combining all the unique components that comprise each individual supply chain—and working to make them function together smoothly and cost-effectively.

Good Chemistry? What Shippers Think of Their 3PLs

Most shippers are satisfied with their outsourced logistics providers, but are somewhat unhappy with their technology capabilities.

They also want 3PLs to play a larger role in driving innovation, according to the Georgia Institute of Technology's 2007 Third-Party Logistics Study. The annual study tracks key trends and shipper views of the 3PL industry, based on responses from logistics executives in 60 countries.

Overall, 85 percent of shippers report that their logistics outsourcing efforts are successful, says John C. Langley, a supply chain management professor and producer of the study.

Many of these shippers have stuck with outsourcing the basics—transportation and warehousing—opting to keep strategic supply chain functions in-house. The basic vs. strategic gap is clearest when comparing large and small companies: large corporations are much more likely to pursue strategic relationships with 3PLs.

To get their 3PLs to deliver innovative supply chain solutions, shippers must be fully invested in the partnership.

"They need to apply professional management skills to logistics services so that the 3PL's talents and abilities can be meaningfully developed and utilized," the study notes.

The percentage of shippers satisfied with 3PL IT performance grew by seven percent in 2007, compared to the 2006 study, but 3PL IT capabilities remain a top issue.

Most prevalent among shipper complaints about 3PLs' technology are: insufficient integration between their information systems and the 3PLs' systems, and lack of order shipment and inventory visibility. Respondents are most likely to use 3PLs' warehouse and transportation management systems.

As for future IT performance, "visibility tools and Web-enabled communication are expected to become the 3PL technologies shippers most desire," says Langley.

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