Outsource with O’Byrne

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.

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?