3PLs Advantages & Disadvantages

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  • 8/7/2019 3PLs Advantages & Disadvantages


    Several years ago, a leading automotivesupplier decided to close its network ofI 5 distribution centers and turn over itsorder fulfillment activities to a third-party logis-tics provider (3PE). On paper, the strategy madesense. Manulactudng, and not distribution, wasthe supplier's core competency.

    Unfortunately, the relationship fell apart fasterthan a celebrity marriage, with hoth sides playingthe blame game.What went wrong? "The parts manufacturerthought they could just hand-off their businessand forget about it,'" says John Sid dd l, principalwith TranSystems | ESYNG (419-842-2210, www.esync.com). "TTiey never took the time to properlydefine their requirements or establish metrics to

    Ihe result was missed deadlines, project over-runs and poor customer service. The lesson:Turning over your order fulfillment activitiesdoesn't mean you wash your hands of the man-agement of those activities. A manager may nolonger worry about whether the lift trucks are ingood working order or if enough workers showedup that morning to get product out the door. Butthe management responsibilities don't go awayJust because someone else is running tbe show.

    To outsource or not to outsourc ein tact, the best 3PL relationships are a partner-ship, according to Bruce Mantz, vice president ofoperations for ADS (864-902-0540, www.adslp.c o m ) , a 3PE with a number of large retail (www,

  • 8/7/2019 3PLs Advantages & Disadvantages


    M O D E R N B E S T P R A C T I C E S

    Whether your operation requires pallet storage, piece picking or valueadded services, the relationship you establish with your provider is themost important component to a successful 3PL strategy.want to treat your business as if its ourown," says Manl?. "Each of our cusloin-ers has an account manager who workswith the customers management andreports to our directors, and most ofour customers assign a liaison to workdirectly with us."

    The first step in building that kindof partnership is to decide at the cor-porate level whether a 3PL is right foryour company. That often comes downto a question of whether distribution isa core competency. "Companies thatoutsource usually fall into two buckets,"

    says Siddell. "In one bucket you hamanufacturers who just don't get ditribution. In the other bucket, you hacompanies with a new business un'Hiey don't have time to build out a ditribution network, so they outsource to3PL as an interim step."


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  • 8/7/2019 3PLs Advantages & Disadvantages


    M O D E R N B E S T P R A C T I C E S

    Other companies turn to a 3PL whenthey are entering a new vertical indus-try or region. "A3PL with experiencecan hring the hest practices, capabilitiesand technology specific to that industry,"says Tony Zasimovich, vice president ofinternational services for APL Logistics(510--272-800(), www.apllogistics.com).

    Those different approaches explainwhy some relationships last only a fewmonths, while others go on for years.

    Onc e a decision to outsource has heenmade, "the 3PL process has to he embracedhy all elements of a company," says Mantz."They have to get the manufacturing teamon hoard, along with the sales organizationand the executive suite."Establishing metricsWith management on hoard, the nextstep to huilding a 3PL relationship isto carefully document your processesand to benchmark your present internalcosts. The idea is to provide the 3P L with

    a history of your performance, includingthe metrics you're interested in track-ing and improving. "You're not hiringa 3PL to get worse, you're hiring themto get better," says Ron Cain, presidentand CEO for TMSi Logistics (603-422-0777, www.tmsilog.com). "To do that,we have to understand your operation."

    The prohlem is that too often com-panies looking to outsource are doingso because they don't know their costsheeause distrihution is treated like a step-child. "In those cases, we'll put an engi-neer in their operation to establish a hase-line and educate the customer on howtheyVe currently performing," says Cain.

    Once those first steps arc completed,the next step is to create a functional spec-ification document that outlines what isexpected from hoth parties, "That detailswhat kind of warehouse m anagement sys-tem will be in p lace, what type of materi-als handling equipment and systems willbe used, what type of inventory levels will

    be maintained and what type of serviclevels will beprovided," says Mantz. "we've all done our work up front preparinthat docu men t, we'll limit the surprises."What's it worth to you?3PLs are not non-profits-they chargfor their services. Several different pricinmodels are common in today's 3PL world

    The first is transactional pricing, otraditional unit pricing. The3P L anthe customer agree on a flat fee for eacservice that's going to he performed. Inwarehouse ordistribution center, thosservices will include all of the touchpoints in an operation, from receivinand putting away inventory to loadinthe truck to ship the product out tdoor. Labor-intensive operations, likreverse logistics, might u se a variation transaction-based hilling, with a chargby the piece, case or pallet, which incoporates all of the ser\'ices.

    A second model is activity-base

    STORAGE SPACE PROBLEMSIs a shor tage of storage spac e a problem in your faci l i ty? Do you: S t o r e l o a d s a t o ff s i t e l o c a t i o n s o r o u t s i de i n c o n t a i n e r s o r t r a i le r s ? T e m p o r a r i ly s t o r e l o a d s in s t a c k i n g a i s l e s ? i~ Ha v e c o n g e s t e d do c k s a n d p a s s a g e w a y s ? v.C o n s t a n tl y m o ve l o a ds a r o u n d t o m a k e r o o m f o r m o r e ? : (- H a v e s t o r a g e a i s l e s 9 ' ( 2. 7M ) o r l a r g e r ? ', H a v e t o o m a n y u n d e r u s e d s p e c i a l i z e d f o r k l if t s ? N e e d t o a d d m o r e s p a c e f o r c o n s o l i da t i o n o r i n c r e a s e d s t o r a g e n e e d s ? N e e d m o r e m a n u f a c t u r in g s p a c e ?

    I f t h e a n s w e r t o a n y o f t h e a b o v e i s YE S, L a n d o i l c a n s o l ve y o u r s p a c e p r o b l e m^, w i t h i t s Pr o v e n N a r r o w A i s l e F o r k li f t So l u t i o n s . L a n d o l t's B e n d i a n d D r e x e l" > e r y n a r r o w a i s l e f o r k l if t s s t o r e l o a d s fr o m a i s l e s a s n a r r o w a s 56 " ( 1. 4M I t o l i fth e i g h t s o f 43 3" (1 1 M ). E l e c t r i c , LP G a s a n d D i e s e l m o d e l s a r e a v a i l a b l e w i t b t b el a t e s t t e c h n o l o g y i n c o n t r o l s a n d f u e l s y s t e m s . S i n c e 1993 L a n d o l l's N a r r o w A i s l eS o lu t i o n s b a v e p a i d f o r t b e m s e l ve s w i t h s p a c e s a v in g s a n d i n c r e a s e d p r o d u c t iv it y .Lo o k to t b e P r o v e n L a n d e l l S o lu t i o n t o s o l v e y o u r s p a c e p r o b l e m s .Fo r m o r e i n f o r m a t i o n c a l l u s a t 8 0 0- 42 8-5 65 5,e - m a i l m h p s a l e s @ l a n d o ll .c o mo r v is i t o u r w e b s i t e a t w w w .l a n d o l l . c o m / m b p / .

    S e e U s A t N A 0 8B o o t h 2 6 0 0

    ^ ^ ^ ^ ^ ^ ^ _ Very n a rro w 64" (1.6M)Aisles vs wide

    ^ = s = s = s = ; s = : = s = 8O'(24M) ^ ^ = ^ ^ ^ = : = ^ 144" 13.7M) Ais le s =s = ^ ^ ^ ^ ^ 12 rows vs 8 rows =507o More Storage

  • 8/7/2019 3PLs Advantages & Disadvantages


    M O D E R N B E ST P R A C T I C E S

    costing, Usually the customer agrees topay the 3PL a flat fee to cover the fixedcosts of running a dedicated facility. Inaddition to the fixed costs, the customeralso agrees to a second fee that coversthe variable costs, like labor, fuel, pack-aging supplies atid lift trucks.

    Tbe third model is cost-plus pricing.In this model, the customer pays tbe 3PLa fee based on the actual costs for the ser-vices proxided, plus an agreed upon profitmargin. 3PLs may require cost-plus pric-ing with customers wbo can't predict tbevolume of business or wbo don't bave a

    Working witb a 3PL st i l l meanscareful ly document ing processes,benc hma rking costs and establ ishinmetr ics tc measu re success.

    good bandle on tbeir current costs.Gain-sbaring is tbe final example.

    tbis model, tbe 3PL puts tbeir Fee on tline by agreeing to be paid based on timprovements tbey can deliver in kareas tbat are important to the customGain-sharing works best in long-term retionships where the goal is to provide snificant cost and service improvem ents

    For large users of 3PL services, not uncommon to use a combination all four models, says TMSi's Gain.You stiU have to manageMany novices to tbe 3PL industry tbitbey can turn tbeir logistics over to somone else, and forget about tbe problem

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  • 8/7/2019 3PLs Advantages & Disadvantages



    The truth is that just because you'renow outsourcing warehousing or orderfulfillment to someone else doesn't m eanthat a warehouse, materials handling orlogistics professionals job goes away. Itmerely chang es.

    How thai happens varies from com-pany to company.

    Often it includes a logistics man-ager who works directly with the 3PL."In the best arrangements, there is aprimary contact who we talk to everyday. and about 75% of our customersinstall someone on site or very closeto the facility," says Cain. "Their mainrole is to be the coordinator between usand their purchasing and transportationdepartments as well as senior manage-ment." Whether that person is on siteor not, it's critical to have someone rep-resenting your company that a 3PL eanaccess on a daily basis,

    In addition to managing day-to-dayoperations, the best relationships also

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    include inlormatinn sharing in a struc-tured way. "You have to be willing tocontinually update goals, share strategyand review metrics to make sure you'reall still on the same page," says APLLogistics' Zasimovieh.

    Typically, that involves weekly, m onthlyand quarterly reviews. In the short term,those sessions are an opportunity to dis-cuss any changes in business or require-men ts, or to address any im mediate prob-lems. Other meetings are used to reviewmetrics and compare how the SPL is per-forming compared to the contract.

    "During monthly meetings, oursenior management meets with the cus-tomer's senior management to set andreview short-term objectives," says Cain.

    'During quarterly meetings, we lookwhat weVe just done and discuss whadjustments might need to be made."

    Finally, as with any other businesSPLs are expected to deliver co ntinuouimprovements and year-over-year saings. At an annual review, this year's cosavings set the baseline on which thnext year will be judg ed.

    "I'm working with a large food manfacturer now that outsources a significaportion ol their logistics," says Sidde"Ever\' year, they go back to their .-^PLand look for ways todo more with le ss.

    At the end of the day, when a 3Prelationship works best, a manufacturor retailer concentrates on what they dbest, and allows the 3P L to focus on tservices where itexcels.

    "When my team is in synch with mcustomers' requirements, we can delivreal value," says ADS's Mantz. "Thawhy we've had some customers withfor 12 years,"

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  • 8/7/2019 3PLs Advantages & Disadvantages