July 2006 | Commentary | 3PL Line

First-Time Outsourcers Can Keep Customers Happy

Tags: 3PL

Companies that are considering outsourcing warehouse operations for the first time should keep several issues in mind. Most important is ensuring that customer service is enhanced, rather than diminished, in the process.

Another important consideration is what logisticians call Optimized Network Design—or, more simply, "Where should I locate my outsourced warehouse, and how many should I have?"

Won't I Lose Control?

An important psychological barrier that any first-time outsourcer must cross is the fear of losing control if internal employees are not running the warehouse.

Let's analyze the "control" issue. If you don't outsource, and it's a slow time at the warehouse, your employees are drinking coffee on your nickel. Not so in a cross-utilized third-party logistics (3PL) environment, where labor can be shifted to other contracts during periods of slower activity.

If a major screw-up occurs, you can do two things with your own warehouse employees: scream at them, and fire them.

In an outsourced environment, however, you can still scream at the 3PL and fire them but you also have the option of building penalty clauses and gainsharing programs into your contract to ensure that the 3PL pays you if anything out of the ordinary happens. That option is not available using your own labor.

In fact, most companies that outsource warehousing operations find they gain more control than they ever had.

What Kind of Warehousing Should I Outsource?

Warehouses come in many flavors and differ in their design and operation. Some common warehouse operations include:

  1. Finished goods
  2. Raw materials
  3. Consumer fulfillment (often for catalogues and web sites)
  4. Vendor-Managed Inventory
  5. Returns

Each type of warehouse is fundamentally different from the next, but in most cases, companies can consolidate several of these functions into one location, rather than operate numerous warehouses around the country.

Although every company's requirements are different, many opt for the "warehouse-within-a-warehouse" function—replenish across the aisle, rather than across the country—to keep customer satisfaction high while avoiding ballooning facility costs.

And remember, there is a fundamental difference between "public" (multi-client) warehousing for small footprint and/or short-term users, and contract (single-client) warehousing for larger companies with multi-year demand.

My Costs vs. My Customer's Happiness

Let me provide two standard examples of the types of companies ripe for outsourcing warehouse operations for the first time.

1. Big Boxers. These companies operate one or more large warehouses or distribution centers, but don't realize they are using more labor than they need.

Big box companies often use order picking, rather than more efficient zone or wave picking algorithms typically employed by 3PLs to dramatically cut down the required head count.

These companies are delighted to discover that the 3PL needs only 80 workers, instead of the 100 workers the company employed, and that the 3PL will hire their best 80 people. These big box companies get the best of both worlds: they significantly reduce costs and maintain a trained and right-sized warehouse team.

2. Sprinklers. These companies sprinkle inventory around the United States with impunity—placing inventory in a small, public warehouse every time they get a new customer. Then 20 years go by, and now they operate 50 warehouses.

Sound familiar? Sales has told corporate management that they'll lose customers if they don't operate this way. Operations hasn't realized that with the advent of modern logistics concepts, customers can still receive one- to two-day delivery service with a consolidated, optimized small warehouse footprint.

Fifty warehouses can be consolidated into five without disrupting customer deliveries, and costs can be rationalized.

Won't Freight Costs Rise?

Companies now often handle will-call demand with a "hold for pickup" option at the local truck terminal, at a fraction of the cost of expensive public warehousing. Customers are just as happy to go to Address A instead of Address B.

Third-party logistics providers are standing by to help both big boxers and sprinklers. They do this for a living.

Frequently those considering outsourcing will ask: "If I consolidate my warehousing network, won't my freight costs rise because some customers will now be farther away from a warehouse?" Yes, some costs will rise, but some will fall.

Remember, three costs are involved: the freight, of course, but also the warehouses themselves, and the labor component to move merchandise to your customers.

Third-party logistics providers are trained to combine all three costs, rather than look at only the cost of transportation, to give you a lower total distribution cost than before you outsourced.

For companies trapped in the "we've always done it this way" mindset, a whole new world of cost-avoidance opportunities are waiting for you. And your customers will be right there with you.