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Should
you outsource warehousing? Can a third-party logistics company (3PL)
provide equal, or perhaps better, competency in this area of your business
than what in-house operations already deliver?
Questions such as these were addressed and answered at this year's Warehousing
Education and Research Council (WERC) annual conference in San Antonio,
Texas. Speakers from 3PLs and end user companies presented insights
and case histories to WERC members from both the private and public
warehousing and logistics sectors.
To begin, there is no question, outsourcing clearly works well for many
companies. Nabisco, for example, with annual sales of $9 billion, spends
more than $200 million a year on third party warehousing and transportation
services, says Rick Blasgen, vice president, supply chain. Nabisco has
formal links with more than 100 third-party firms, he adds.
"Outsourcing
...creates organizational agility.
It is more cost effective."
Why does Nabisco
outsource? To leverage 3PL capabilities to improve total supply chain
performance, says Blasgen. Outsourcing allows his internal logistics
organization to provide greater value. It also increases flexibility
and customer service. It creates organizational agility. It is more
cost effective. And Nabisco can focus on its core competencies, he concludes.
A
successful 3PL transition
Changing the culture of a company long accustomed to running its own
warehouse operations is one of the major challenges to transitioning
to a 3PL, however. So observes David Brouse, general manager, distribution,
Carpenter Technology. A newcomer to Carpenter, he also faced the personal
challenge of being new to the company's industry, which involve making
and distributing specialty alloys.
Moreover, Brouse was tasked with not just paving the way to 3PL operations,
but implementing a complete redesign of its logistics network. The 3PL
chosen would have to build and then operate new facilities within a
year. Old warehouse buildings would need be closed.
Carpenter, a 110-year-old company had conservative roots. It also had
an 80 year history behind its distribution network. To be right for
Carpenter, a 3PL would have to have a similar mentality. The 3PL also
would have to focus on driving value on into the new network and be
willing to tailor its approach, says Brouse.
Kenco Logistics Services became that 3PL. Next day shipments are now
at 92%, up from 71% under the private distribution network. Although
reducing costs "wasn't a key driver" behind the transition
to a 3PL, Carpenter has experienced cost avoidance savings of about
28%. And inventory is down 20%, says Brouse.
Managing
demand peaks
Turning to a 3PL is sometimes seen as a means of dealing with seasonality
in demand. The alternative, keeping this peak business in house, has
its drawbacks. There are people issues, for example, "Short-term,
reactive strategies leave you vulnerable," he argues, "Can
you find, train, and effectively manage a temporary work force?"
he asks. These workers are likely to be less reliable. And there's more
turnover.
Significantly, relying on an in-house, peak volume strategy then leaves
the company most exposed at a time when customer service is most critical.
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Other in-house issues
include making advanced plans to access additional equipment –
forklifts, for example. The price tag for this extra equipment on a
short-term lease will be "hard to swallow",he suggests.
Using
3PLs ... "you pay for only the space and labor you actually use."
Building enough
in-house capacity to handle peaks also could push distribution cost
disproportionately high, he continues. Companies leasing outside space
on an as-needed basis may find it difficult to forecast all their spikes
in demand, and then difficult to find short-term leases.
And for those who would try to "shoehorn more in-house activity
into existing space," he asks, "Do pilots serve coffee on
your airplane?"
Instead companies might consider using 3PLs that are operating in a
multi-client, variable cost environment. Contracts with these third-party
providers are flexible. "You pay for only the space and labor you
actually use," he says.
Even Wal-Mart supplants its own DCs with 3PLs for seasonal overflows
and for forward buys. Nortel partners with 3PLs when it must move into
and get out of markets over a two-week period for special offers.
Due
to outsourcing, investments were able to be focused on sales/marketing
and product development, not warehousing.
Outsourcing warehousing
has proven to benefit L.E. Mason, a maker of electrical construction,
outdoor weatherproofing, and lighting products. Minimal capital outlay
in buildings and systems was necessary, notes L.E. Mason vice president
Ralph Smith. Due to outsourcing, investments were able to be focused
on sales/marketing and on product development, not warehousing.
Designing flexibility into its distribution, he continues, has allowed
L.E. Mason to:
- Focus on its
core business
- Manage varying
demand levels efficiently
- Adapt with agility
to marketplace changes and requirements.
Finally,
whether outsourced or not, warehousing is moving from a "lliability
to be managed," says Nabisco's Blasgen, to "a competitive
advantage" in one's business.
Is your warehousing beating the competition's DCs? Or is it holding
your company back from greater sales, higher profits? Is a 3PL in your
future?
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