From Tactical to Strategic: The 3PL Continuum
Outsourcing operational functions is often the first step for companies testing the 3PL waters. As they gain more confidence, however, these outsourcers move further along the 3PL continuum, shifting from tactical to strategic relationships. Here’s a look at how companies travel the 3PL continuum, and optimize their outsourcing relationships.
Companies often start small in their first third-party logistics initiative, outsourcing operational functions. Over time, as they gain confidence in outsourcing and trust in their providers, many companies move further along the outsourcing continuum, transitioning from tactical to strategic relationships.
Take BMW Manufacturing Co., which began working with TNT Logistics North America in 1993 to prepare for the opening of the BMW manufacturing plant in Spartanburg County, S.C.
“TNT initially handled basic delivery of parts to line-side,” says Bunny Richardson, spokesperson for BMW. “As we grew, and as our needs grew, the relationship with TNT grew.”
In 2002, BMW tapped TNT to provide inbound supply chain management for the plant, including inbound material control as well as transportation from suppliers to the plant. This spring, BMW expanded the relationship again, turning over to TNT management of finished parts from BMW’s supplier network to its parts distribution centers throughout the United States.
“Now TNT is our partner, managing the supply chain for us,” Richardson says.
BMW’s expansion of the relationship with its third-party logistics provider is not unusual, notes C. John Langley Jr., professor of supply chain management at Georgia Institute of Technology, Atlanta, and co-author of the soon-to-be published Ninth Annual Third-Party Logistics Study, sponsored by Capgemini and FedEx.
“Our data supports the suggestion that companies tend to start outsourcing in a limited, focused way,” Langley says. “Then, once they gain experience and have some success with outsourcing, they expand their use of the services their third-party logistics providers offer.”
Survey results indicate that companies are most likely to outsource operational activities, such as warehousing or transportation. In addition, Langley notes, “there’s some evidence that companies are beginning to outsource activities that are more strategic in nature or that are more related to the customer.” These activities include supply chain planning, information technology, order management, or customer service.
“The conclusion we’ve drawn is that companies that are using third-party logistics services appear to be more interested in outsourcing a broader range of activities than previously,” Langley says.
Moving along the outsourcing continuum from tactical to strategic may require shifting providers. It certainly will require modifying the way the 3PL is managed. Here’s a look at how some companies are optimizing their outsourcing relationships.
IKOR Finds Single-Source Provider
As a contract manufacturer of specialized industrial filtration products, IKOR Industries Inc. is in a unique position to recognize the value of outsourcing. “We’re an outsourcing manufacturer, and we’re comfortable with the concept of outsourcing,” notes Paul Lesniak, president and CEO.
IKOR, which is headquartered in Wilmington, Del., and operates a manufacturing facility in Costa Rica, has grown significantly since it was founded in 1999. Two full-time employees out of the company’s 50-person staff were dedicated to interfacing with customers and suppliers as well as coordinating the activities of a variety of customs brokers, airfreight carriers, warehouse facilities, shipping lines, and trucking companies.
When a client suggested that IKOR consider outsourcing aspects of its logistics operations, Lesniak was largely open to the suggestion—especially after delivery problems arose. “We had a little anxiety about outsourcing—our reputation is directly tied to the delivery of our product,” he says.
After considering the move for six months, however, IKOR turned to UPS Supply Chain Solutions, which today serves as the company’s single-source logistics provider. UPS SCS handles all the steps involved in the import of raw materials and delivery to the factory, pickup of finished products from the factory and shipment to customers, plus customs brokerage and ground, air, and ocean transport.
Before working with UPS SCS, IKOR shipped its finished goods from Costa Rica to a DC in the United States, where they were packed and labeled to customer specifications, then shipped to customers.
Today, finished goods are picked up at the IKOR factory and transported by truck to UPS SCS’s bonded import-export facility at the San Jose airport where they are packed and labeled, then shipped direct to customers.
This new approach has cut one to three weeks out of the order cycle time. In addition, IKOR recently began using the Miami UPS SCS warehouse as a consolidation point.
“We want our customers to think of us as strategic partners,” Lesniak says. And, less than two years after establishing the relationship, that’s just how IKOR thinks of its third-party logistics provider, Lesniak says. “We entrust UPS SCS with the most precious asset we have—our customers.”
The 3PL provider is not only taking good care of IKOR’s customers, it’s also serving as a consultant, helping IKOR find news ways to streamline operations while improving service.
3PL Integral to Bosch’s Supply Chain
What began as a basic pallet-in/pallet-out warehousing arrangement has grown into a full-service logistics outsourcing relationship between Robert Bosch Corporation and Standard Corporation, a UTi Worldwide company. Bosch is a global manufacturer of automotive systems and components, consumer goods, and industrial equipment. It operates a major automotive manufacturing facility in Charleston, S.C.
Bosch began working with Standard in 1993, according to Barry Emerson, director of customer service and planning for the global tier one auto supplier. Emerson described the growth of Bosch’s outsourcing relationship with Standard at the Warehousing Education and Research Council’s 2004 annual conference.
Bosch began its relationship with Standard when it outsourced management of a warehouse in Ladson, S.C., eight miles from the Bosch manufacturing facility. To help support Bosch’s growth, and reduce the cost of space, Standard acquired a larger facility in Moncks Corner, S.C., for Bosch in 1994. Originally a pallet-in/pallet-out operation, in 1995 the facility began building shipments for automobile manufacturers who wanted less-than-pallet quantities.
As its business grew and the economy became more global, Bosch assessed its supply chain and warehouse operations in South Carolina, determining that it needed a larger warehouse closer to its manufacturing facility. Standard constructed the 157,000-square-foot Appian Way facility, which today houses manufacturing components in 47,000 square feet and imported finished goods in the remaining space.
Two years later, Bosch asked the 3PL to provide repack services, removing product from shipping containers and putting it into customer-specific returnable packaging for automotive manufacturers. Initially, only two items were involved; today, Standard repacks about 70 items.
Over time, Standard began inspecting the inbound material and feeding information into Bosch’s quality system. Then Standard began extensive quality testing. For example, MP3 players from Portugal involved 52 tests, such as checking buttons and channels, and even hitting the top of the player with a hammer.
Other steps Bosch took along the 3PL continuum included:
- Designating the Appian Way facility as a Foreign Trade Zone, which enables Bosch to postpone paying duty taxes until products are shipped to customers, resulting in significant cost savings.
- Having Standard manage part of the implementation of Bosch’s new enterprise resource planning (ERP) system in the Appian Way facility.
- Providing line-side delivery to six of the 20 assembly lines in the manufacturing plant, allowing the Bosch Charleston facility to maximize plant floor space for manufacturing.
- Creating a minority-certified joint venture, Key Logistics Solutions LLC, that purchases and manages inventory for Bosch. This joint venture between Standard and ARD Logistics supports Bosch’s supplier diversity initiative. Members of the Key Logistics team have made joint calls with Bosch on a major U.S. automobile manufacturer.
The next step in the evolution of Bosch’s relationship with its 3PL is implementing the Bosch Production System (BPS). Under this lean production model, Bosch and its 3PL are no longer concerned about delivering the right part at the right time—they now focus on delivering at the right moment, says William Church, president of Standard’s Distribution Group.
As Bosch focuses on the value stream, “we have to figure out flow,” Barry Emerson notes. Key Logistics is now learning about BPS and how to flow materials, people, and information.
The Bosch-Standard-Key relationship is a strong and productive one, with the partners working together to address the challenges of the future. It’s a dynamic and evolving relationship that requires significant change.
Because of Bosch’s emphasis on lean production and improvement of flow, “our vision is to eliminate the warehouse,” Bill Church says, “and to make the warehouse a moving one.” If the 3PL had stayed focused only on its original role of running a warehouse, he says, “we wouldn’t still be doing business with Bosch.”
Monsanto Expands 3PL’s Role
Monsanto Company’s relationship with third-party provider Logistics Management Solutions (LMS) has grown from tactical to strategic over an eight-year period.
“LMS began by executing package transportation for our agricultural chemicals unit,” recalls Mark S. Baxa, U.S. package logistics operations manager for the agricultural products and solutions provider based in St. Louis, Mo. This relationship grew over time, expanding into other businesses in Monsanto’s seed and agricultural chemical sectors.
LMS’s initial on-site team of three transportation professionals grew in just a few years to 23 on-site transportation and administration people who supported Monsanto’s logistics team. As Monsanto improved its systems and beefed up its logistics execution capability, the LMS team was scaled down. Today, Monsanto’s 35 logisticians are supplemented with 15 LMS on-site staff.
In the beginning, the 3PL’s role was restricted to performing transactional activity. “Now, in the strategic sense, LMS is involved everywhere,” Baxa says, “from the budget to metric management and systems integration within Monsanto.”
Three years ago, Monsanto began looking for systems to automate management of its continuous move process, and considered several vendors’ transportation management systems (TMS). LMS proposed that Monsanto automate the process using its proprietary TMS, called TOTAL.
“We negotiated a contract with LMS to automate our continuous move process, which involves a higher level of relationship,” Baxa says. “Strategically, LMS became more of an integral part of the overall process.”
Monsanto today is expanding its continuous move process, working with a significant 3PL partner whose distribution network was brought under Monsanto’s continuous move umbrella. The TMS strings multiple truckload shipments of seed from both companies into efficient truck runs that have cut transportation costs significantly.
Baxa expects that LMS will bring a collaborative flavor to the continuous move process in the future. “I can see LMS being more strategic in finding partners that fit our business,” he says, drawing on its knowledge and understanding of Monsanto’s business to find a good match.
As LMS has moved from a tactical to strategic partner, “we’ve brought the 3PL closer to our overall business metrics,” Baxa says. “Our performance is their performance and vice versa.”
As a result of LMS’s integration into Monsanto’s operations, “the 3PL is involved in conversations it would not have been eight years ago so that we can get to the required level of efficiency and results.” Today, LMS is intimately involved in developing Monsanto’s business and go-to-market plans.
Where the relationship will go in the future has yet to be defined, but Baxa expects it will continue to expand, especially in the truckload transportation and systems execution areas.
Hendrickson Travels from TMS to Lean
A few years ago, Hendrickson International had limited experience with outsourcing of any type. The company, which manufactures truck, tractor, and trailer suspensions, axles, bumpers, and steel leaf springs, had used a third-party freight payment company as well as a 3PL that did carrier contract maintenance work for some Hendrickson locations.
“We had some decentralized and non-integrated outsourcing initiatives,” recalls Kelly J. Ingersoll, freight and logistics manager for Hendrickson, headquartered in Woodridge, Ill.
Then, about four years ago, a cross-functional team analyzing Hendrickson’s supply chain recommended implementing a transportation management system to optimize inbound transportation.
When Ingersoll began working for Hendrickson, he became part of the cross-functional team, and recommended that the company consider outsourcing inbound transportation as part of the solution. So the team evaluated 3PL provider options at the same time that it evaluated various transportation management systems.
“We considered 12 to 20 transportation management system options and at least one dozen 3PLs,” Ingersoll recalls.
After a thorough investigation of systems and providers, the team recommended to corporate leadership a solution that included outsourcing inbound transportation to Ryder System Inc., and using i2’s Optimizer Engine.
he suggestion was met with some resistance initially, but the team eventually won support from the company’s divisional presidents and general managers. “We signed the contract in May 2001 and went live in July 2001,” Ingersoll says.
“Ryder delivered a solution that included freight bill audit and payment, contract management, procurement, and shipment planning and execution, handled from our Dallas Transportation Management Center,” says Tom Kretschmer, Ryder’s group logistics manager. The 3PL provided a centralized method to view orders, optimize shipments and scheduling, generally with three to five days advance notice.
To ensure the move to outsourcing was fully supported, Ingersoll invested significant time working with division presidents and others within the company to demonstrate the benefits and gain buy-in.
With outsourcing plus optimization achieving the desired results, resistance to the new model faded away. “By the first quarter of 2002, we started looking at other modes and areas not addressed in the initial launch,” Ingersoll notes.
Management of small package transportation was outsourced, then international transportation. Hendrickson saw a 12.8-percent improvement in overall transportation in 2002, and 14.4 percent in 2003.
With the new model a demonstrated success, Ingersoll wanted to move to the next level. “Our initial implementation is dynamic optimization,” he explains. “Every day, our suppliers and plants send shipments to Ryder, who optimizes transportation that day and executes to it the next day. That’s very labor intensive.”
So he and Ryder began looking at ways to move to preplanned optimization—putting routes together to optimize inbound and interplant transportation, as well as any premium shipments going outbound. The model will be much more strategic than the current one, with the 3PL serving more as a materials manager and less as a manager of motor carriers.
Once the plans are built—in Ryder’s Logistics Solution Center in Farmington Hills, Mich., the 3PL’s logistics engineers will continually review and modify the design to optimize dollars for Hendrickson.
Making the move to this lean logistics model has required intensive collecting of information. “The network modeling work we needed to do required precise information such as number of parts per package, weight of the part, packages per skid or drum, dimensions and stackability of the package,” Ingersoll says. “All those details have to be figured out down to the part level.”
Hendrickson and Ryder expect to go live with the lean logistics model this summer. “We’re trying to map some of the KPIs (Key Performance Indicators) now,” Ingersoll says. These include metrics such as on-time performance as well as savings in procurement, transportation, and inventory costs.
In addition, the two partners are conducting a total cost analysis for each route. “The analysis will factor in not only transportation costs, but also how much this effort will drive down inventory carrying costs and improve plant space,” Ingersoll says.
Because Hendrickson’s management has gained confidence in outsourcing and in the third-party logistics provider, Ingersoll is able to focus less on change management and more on the implementation itself this time around. As the relationship grows, he will explore other areas that may be appropriate for outsourcing, such as rolling the initiative out globally.
The company’s move to outsourcing has been successful on many fronts. “We have proven that outsourcing can work,” Ingersoll says. As a result, Hendrickson is much more open to outsourcing in other functional areas.
Nike Maintains Control
Entering into a strategic outsourcing relationship doesn’t require turning over logistics management to a lead logistics provider. Take Nike Inc., which ships products to 143 global destinations.
“We ship from factory origin to the receiving docks of a Nike distribution center or a customer DC,” says John Isbell, director of corporate delivery logistics for the Beaverton, Ore.-based firm.
Nike’s logistics operations are complex, involving three product lines—footwear, apparel, and equipment—and four regions managing orders through the company’s logistics service provider network. Setting up the network of providers is a collaborative process between the regions and Nike’s corporate logistics group.
“We set up the plumbing,” Isbell explains. “We work with the regions to put together a global program with our origin consolidators, ocean carriers, airfreight forwarders, and global courier.” Nike works with two global ocean consolidators, five ocean carriers, four airfreight forwarders, and one courier.
Nike started working with ocean consolidators more than 20 years ago. “We’ve had as many as six, and have worked down to two,” Isbell notes.
The two consolidators—APL Logistics and Maersk Logistics—are responsible for physically handling the cargo from the factory, receiving the freight, loading the containers, communicating to destinations in planning shipment deliveries, collecting documents from the factory and forwarding them to the destination regions, says Mike Vanderzanden, global account director inbound logistics for Nike.
Nike has chosen to manage its logistics providers in-house rather than outsourcing management to a lead (or fourth-party) logistics provider.
“We have quite a bit of supply chain management expertise within the company,” Isbell says. “We don’t feel the need to put in a middleman. We want the communications from our providers’ systems to go directly into our SAP system.”
“In the U.S. region, a large volume of our cargo is shipped to customers rather than to Nike facilities, therefore we’re in constant contact with our customers regarding need dates and freight movement,” Isbell says. With a supply chain process as complicated as Nike’s, “there’s no need to add further confusion by trying to have a company serve as a 4PL,” Isbell says.
“Successful business partnerships require a lot of work on both sides to build understanding of the business processes and the client’s service and delivery needs,” Isbell says. “It begins with well-defined standard operating procedures and holding your logistics partners accountable to performing against those procedures.
“The right service/value proposition has to exist in order for the logistics partners to invest both resources and people in the business.”
Implications for Managers
Whether your company would gain by transitioning outsourcing relationships from tactical to strategic depends on your overall corporate strategy and goals. If you decide to do so, be sure you “understand the value you want to extract by moving from tactical to strategic,” advises Monsanto’s Mark Baxa. It’s critical to identify the benefit you want to realize from the expanded relationship in order to achieve desired results.
“Third-party logistics providers work with many different kinds of parties in the supply chain,” John Langley says. As a result, “they’re in an excellent position to serve as change agents, to help introduce and refine new and improved supply chain practices that can better link supply chain participants.”
You might choose to work with a provider in a 4PL position, managing activities of other 3PLs. Or you may choose to use a strategic provider to improve management of supply chain relationships, technology, integration, knowledge and/or thought leadership, Langley says. Providers who excel at this type of work have “excellent, innovative and creative capabilities,” he says, and often have a consultative unit on which to draw.
Operational 3PLs can also successfully grow into more strategic activities, Langley says. “If you’re satisfied with your 3PLs, you may think of them in terms of more substantive types of involvement. You might even help them grow in that direction.”
As you move into a more strategic relationship, “trust must be paramount, both from a confidentiality point of view and from an assurance of performance. You have to know that the 3PL can execute what you ask it to do,” Baxa says.
He suggests building that trust by giving new partners less significant areas to explore as part of your business. “If they do well, from a confidentiality and business perspective, ratchet up the relationship over time,” he advises.
To be successful, the relationship between you and your strategic partners has to be co-dependent. “They should know that they can’t be successful without you. And you should see them as next-to-irreplaceable within your business,” Baxa says.
If you do take the strategic route, “be sure you don’t abandon your own decision-making and control,” Langley warns. “You’ve got to be careful. When you hire a third-party logistics company, it’s a little too easy to get busy with other things and think everything is being taken care of.
“No matter how good the relationship is, you have to provide your logistics provider with the latitude to do the job that you have requested, and also be able to protect your own interests at the same time,” he says.