Supply Chain Gain: Call In the Experts

Tags: 3PL, Supply Chain Management

Outsource your way to a more efficient supply chain by selecting a knowledgeable and resourceful third-party logistics provider.

When you need a job done right, it often makes sense to let someone else do it. If that’s true for a home improvement project, then it’s certainly true for many initiatives aimed at improving the corporate supply chain.

Companies worldwide gain significant improvements by outsourcing supply chain functions to third-party logistics providers (3PLs), according to the 2009 14th Annual Third-Party Logistics Study, conducted by Capgemini Consulting, Georgia Institute of Technology, Oracle, and Panalpina.

The 772 shippers surveyed report that using 3PL services helped them reduce logistics costs by an average of 12.3 percent. Outsourcing also helped reduce inventory costs by an average of 8.6 percent, cut order cycle times from an average of 10.2 days to 9.8 days, and boost order fill rate from 86 percent to 92.7 percent.

For example, by shifting transportation management functions from a less-effective 3PL to its current partner, Intertape Polymer Group of St. Laurent, Que., and Bradenton, Fla., cut freight spend by 25 percent. “And we’ve freed up resources to focus on other operational areas,” says Sheldon Ellis, the company’s vice president of supply chain.

Value Proposition

One compelling reason to outsource supply chain functions is that it allows a company to focus internal resources on the work it does best.

With money tight and top talent hard to find, a company must be careful about where it invests. “Most, if not all, of those resources need to be focused on the company’s value proposition,” says Reggie Dupré, chief executive officer at Dupré Logistics, an asset-based service provider based in Lafayette, La.

A 3PL already has the experts, the process design and management, and the technology and IT staff needed to transform a company’s supply chain into a strategic asset for delivering value, Dupré says.

For companies whose sales are picking up as the recession eases, but whose budgets don’t allow them to add employees, outsourcing logistics offers a way to handle the extra business, says Bob Heaney, senior research analyst, supply chain management at Boston-based Aberdeen Group. “Many companies have found it convenient to move some volume to 3PLs,” he says.

In any economic climate, outsourcing provides flexibility to respond quickly to changing market conditions. “It might not make sense to invest a lot of capital in building a warehouse or developing transportation expertise if the market is in transition,” says Adrian Gonzalez, director, logistics viewpoint at ARC Advisory Group in Boston.

Outsourcing also offers a way to reduce costs. By combining the freight of 30, 40, or 50 clients, 3PLs give shippers far more buying power than they would command on their own, says George Abernathy, executive vice president and chief operating officer at Transplace, a non-asset-based 3PL headquartered in Frisco, Texas. Transplace, for example, buys billions of dollars worth of transportation every year.

The winners in the future will be collaborators who understand that service providers are not the enemy.

In addition, a 3PL can gather data from multiple vendors and present it through a single interface, providing the intelligence required to make better business decisions. “The 3PL will either be able to provide the services and technologies itself, or will have the necessary relationships with other vendors,” Abernathy says.

For a company trying to improve the way it operates, a third-party provider often makes a better change agent than an internal management team. “3PLs can offer a different perspective,” Dupré says. “We see opportunities and obstacles companies sometimes don’t see; we’re able to get people to communicate who don’t normally communicate— and sometimes get them to cooperate, and even collaborate.”

And a third party partner is well-positioned to manage not just a one-time boost in performance, but a complete continuous improvement program.

An outsourcing partner can help bring improvements to many supply chain areas. One example is strategic transportation management, where all but the smallest shippers stand to make significant gains through outsourcing. “Strategic transportation management can benefit even small companies with $2 million to $5 million in transportation spend,” Abernathy says.

A 3PL can help choose the right transport modes for different kinds of moves. And because of existing relationships with carriers, and the freight volume it moves for other shippers, it can negotiate better rates than most shippers could on their own.

Shippers who negotiate contracts independently— especially if the only technology tool they bring to the process is a spreadsheet— will miss opportunities to collaborate.

“We routinely prepare bids that include two to six different customers,” Abernathy says. “We combine pieces of each of their networks to create an attractive bid that secures the highest quality service at the best price.”

small companies, big gains

Shippers of any size can gain improvements by outsourcing transportation execution, Abernathy says. 3PL employees know the ins and outs of their transportation management system and understand how to wring the most advantage from the technology. Because it manages freight every day for many customers, a 3PL can see opportunities to combine loads in order to improve service, cut costs, and decrease shippers’ carbon footprints. Even top-notch transportation technology won’t help shippers do that on their own.

“Operating as a silo deprives the shipper of day-to-day transportation execution visibility and collaboration opportunities,” Abernathy notes.

Many customers gain improvements from Dupré Logistics’ help in operating just-in-time (JIT) inventory programs. Dupré’s services include purchasing raw materials, maintaining inventory at correct levels, and doing the actual restocking.

Dupré offers a “best buy” program to support JIT. “Our clients tell us which vendors have the best prices,” Dupré says. “They give us the inventory levels they want in their stores or warehouses. We’re responsible for keeping products in stock, but not overstocked.”

Working with a 3PL to execute a JIT strategy helps Dupré’s customers reduce the capital tied up in inventory, and makes them more flexible. “Being able to purchase on a spot basis more frequently allows shippers to respond to the marketplace and increases their purchasing power,” says Dupré. It also helps them respond more quickly to fluctuations in customer demand.

Dupré has helped shippers gain improvements through reverse logistics programs, as well. One customer, for example, sells its product in totes made of stainless steel or aluminum.

“The company owns hundreds of thousands of totes, and each one costs around $10,000,” Dupré says. Through its reverse logistics program, Dupré Logistics brings the totes back from customer locations to the shipper’s facilities to be refilled.

It might not make sense to invest a lot of capital in building a warehouse or developing transportation expertise if the market is in transition.

“We minimize transportation costs because we consolidate the totes and move them using intermodal and full truckloads,” Dupré says. Because the totes spend less time idling at customer locations, and more time carrying product, the shipper uses fewer units, thus tying up less capital.

Working with a logistics partner also allows a company to modify strategies as changing conditions require— for example, when introducing a new product. “A company might want to build a new product in the United States or Mexico to speed time-to-market,” Gonzalez says. “But once the product is mature and in volume production, it might want to shift manufacturing overseas to save money.” A company can easily make that shift by taking advantage of a 3PL’s distribution infrastructure.

turning to collaboration

When using outsourcing to improve supply chain operations, one key principle shippers should keep in mind is collaboration. Old-style, adversarial relationships between shippers and service providers no longer work in an era where companies are vying for the best employees, equipment, and technology expertise. “The winners in the future will be collaborators,” Dupré says. “And they will understand that service providers are not the enemy.”

Collaboration among all supply chain parties is a growing trend, due in part to the proliferation of increasingly sophisticated information technology. “The systems allow robust IT collaboration, provide visibility into 3PL operations, and share data among suppliers, trading partners, and shippers,” says Heaney.

Traditional outsourcing relationships are based on short-term contracts, generally with one- to three-year terms. They focus on specific statements of work and on transactions, with payments based on the number of pallets handled, truckloads moved, or some similar measure. They provide no incentives for the outsourcing partner to take creative risks or make additional investments, Gonzalez says.

ARC advocates a more collaborative approach called “Performance-Based Outsourcing,” or “Vested Outsourcing,” which establishes a longer, deeper relationship between shipper and 3PL.

“They approach the contract as a partnership, and try to create a joint business plan,” Gonzalez says. The shipper sets a strategic corporate goal, which might have a larger focus than just the supply chain. “Then they explore the ways logistics can impact that goal,” he adds.

Gonzalez cites the relationship between Unipart Logistics and Jaguar as an example of Performance-Based Outsourcing. In the course of their relationship, Jaguar defined a series of strategic goals, one of which was to earn a #1 ranking from J.D. Power and Associates. One tactic for reaching that goal was to improve customer service in Jaguar’s aftermarket parts business.

“Logistics plays a key role in making sure that the right part is in the right place at the right time,” Gonzalez says. The effort to improve parts distribution was just one of many projects that Jaguar and Unipart worked on together to increase end-customer satisfaction.

Along with judging a potential partner’s ability to collaborate, it’s important to learn what kinds of work a 3PL is already doing in your vertical market. “A CPG company, for example, can ask what the provider is doing in CPG beyond the basics,” Abernathy says.

Many 3PLs can deliver short-term improvements through load consolidation and other standard tactics. “The question is, how will you save money in year two, three, and 15?” Abernathy says. “A continued quest for improvement will make you satisfied about your outsourcing decision for years to come.”