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OUTSOURCING LOGISTICS

“You can resist an invading enemy; you cannot resist an idea whose time has come”
Victor Hugo

Yes, “Logistics” is an idea whose time has come and ironically “Time” forms the essence of Logistics. The important point to be grasped is that instead of merely sub-contracting non-core activities, it should be realized that the company’s decision to outsource should be based on the twin dimensions of core competence and core activity. Logistics is now a very critical aspect to most organizations but at the same time not all firms are sufficiently equipped to competently manage this activity.

WHY OUTSOURCE LOGISTICS

Two truths have become apparent in today's world of warehousing and distribution. One is that companies are demanding greater performance and a more cost-effective operation, the other truth is that warehousing and distribution groups are continually fighting for limited resources. Understanding the condition of operating support system positions the firms to effectively evaluate the options for the future. The first condition is dealing with the realities of service and cost. Successful overall performance requires balancing the strategic sales plan and the sales support operation. The third party logistics option becomes viable because of the real risk of trying to do too much with too little.

The second condition deals with the law of diminishing returns. There are many points along the time line of an operation when different combinations of throughput demands will result in system response imbalances. At the same time, there may be a resistance to upgrading the facility and the operation. The third-party logistics option becomes viable because of the risk created in working with overused resources.

The third condition deals with changes in customer ordering characteristics and processing expectations. As times and conditions change, customer response programs must be adaptable. Changes in the support operation requirements test the system's reliability and flexibility. Response programs can create unpredictable behavior in any support system. Any deviation from the initial planned support system can grow to affect the system's future state, and this may upset the balance of cost and service. For all of these reasons, third-party logistics is not only a viable option, but it is inevitable. Reasons To Pursue 3rd Party Logistics Relationships:

  • Reducing overall costs, but it must be a joint effort.
  • Need for expertise not available in house
  • Realization that the 3rd party logistics provider can handle the organization’s products better than that the organization can
  • Reduce manufacturer’s cost of labor / labor diversity / labor hassles
  • Classical in house corporate logistics departments are only capable of giving "average" service to all classes of internal trade. 3rd party providers can excel in specific service to a specific internal department
  • 3rd party logistics provider can bring into the relationship "cross functional" industry experiences that the client companies do not have
  • Allows companies to focus on their core competencies
  • Company lacks the necessary skill set to drive change

"In a recent survey, practically all – 95% – of the North American manufacturers surveyed believe that a third-party logistics partner can improve costs, system performance, and customer satisfaction,” writes IWLA President and CEO Michael Jenkins. Three-fourths of third-party users plan to increase their use of outsourced logistics services, he says. Clearly, third-party logistics has the potential to deliver benefits on many counts.

STEPS TO PROCEED FOR OUTSOURCING LOGISTICS

An organization, before proceeding to outsource its logistics activities should analyze its requirements, its operating costs, its core competence areas and finally come up with the list which are to be outsourced.

Defining the Distribution and Delivery requirements

Given the alternatives as the likely starting point for revamping the distribution system, the organization need to analyze its distribution and delivery requirements as well as the costs associated with those functions.

The organization need to take the time to list as many system and operational enhancements that it would like to see. Also, the management should spend some time with its staff on this matter and allow them to assist in developing a "wish list." The employees will prove to be well qualified for this assignment. To assist further, the appropriate method of analysis should be considered whereby attention could be focused initially on "existing problem areas" such as:

  • Informational Timing Delays, batch processing?
  • Outdated System Technology, manual processes?
  • Inventory Accuracy Levels, less than 99.0%?
  • Inventory Carrying Costs, low turns?
  • Frequent Inventory Damages and Shrinkage?
  • Just In Time/Next Day Processing Requirements?
  • Driver/Delivery Status Updates, Real time?
  • Statistical Reports, Inventory/Consumer Deliveries?
  • Same Delivery Day Consumer Surveys?
  • New Customer Service Requirements?


Determining True “Day to Day” Operating Costs

The organization should become knowledgeable on the day-to-day expenses of its operation. Many organizations lose sight of the true costs associated with running a Distribution and Delivery Operation. It is important that these numbers are known. Later on in the quest for the right solution, it will be needed for like to like comparisons. The organization should answer to the question that does it know its:

  • Labor cost, overtime, and benefit?
  • Training Costs?
  • Utility Costs?
  • Facility Maintenance Costs?
  • Lease or Mortgage Costs?
  • Systems Costs?
  • Shop Repair Costs? Damages?
  • Delivery Expenses? Distribution costs?
  • All Insurance Costs?
  • All Supply Costs?

The management should be sure that the final decision for a Distribution Solution positions the company to take advantage of new technology on an ongoing basis. New technology will not only allow greater operational efficiencies, but also offer direct access to emerging global economy.

IMPLEMENTING THIRD PARTY LOGISTICS

How to go about in outsourcing logistics - Day 1 is critical

On Day One, there will be a new restructuring of the hand-offs between functions. For example, the people in an affected shipping department may be facing new faces to work with, new operating procedures, new forms to fill out and perhaps new attitudes to work through.

The first transaction will set the stage for all subsequent transactions. If that transaction is flawlessly planned, and meticulously executed, then all of the downstream operations will benefit. If things are going wrong, it can suck up all the resources that have been spent to fight fires.

Planning With the Partner

The customer's Request for Proposal (RFP) process should focus on finding the best fitting logistics provider. This implies that to get a maximum return, the customer will need to leverage off the provider's knowledge and experience. Too often the customer focuses on specifying the details of the processes that the provider will follow rather than focusing on defining the outputs of the effort and allowing the provider to develop their brand of solutions.

Plotting the Processes - Look At the Entire Supply Chain

Both provider and customer need to map out the processes that support functional needs. A complete flowchart of the operation will help all parties level set and ensure that there is a hand-off plan between functions. One of the common flowchart mistakes to avoid is in neglecting to focus between the boxes on a flowchart. It is a natural tendency to work well on each of the functions within a box. The functions in each box on the flowchart are carefully crafted, but there is a huge opportunity if the focus is on the hand-offs between the functions.

 

 

 

SELECTING A THIRD PARTY LOGISTICS PARTNER

While selecting a "third-party logistics partner", the company may find itself being a little apprehensive about the path it should pursue for the right solution. In today's market place, there are several options available to the Retailer and/or Vendor. Typically, these options fall into three categories:

·         In-house Systems Development

  • Outside Systems Integrator
  • Distribution Service Companies

If the organization has an existing systems staff that is available for a full time project, its first stop should be to discuss this undertaking with them. Perhaps enhancing its existing system is a likely consideration. However in many cases, the in-house systems staff tends not to be completely knowledgeable on the functional aspects of warehouse systems. Also, they may not have any in-depth experience with the latest technologies being used in today's Distribution and Delivery environments.

A second option would be to contact an outside Systems Integrator. As a consultant, the Integrator can help the organization in the analysis and design of a "systems solution" for its distribution needs.

Another alternative that is becoming more and more popular is the use of Third-Party Distribution Service Companies. Organizations such as SAFEXPRESS offer a "total solution approach" for 3PL Management Distribution and Delivery needs.

ROLE OF Logistics Service Providers (LSPs) IN THE SUPPLY CHAIN – The path ahead

As business fragments and as physical information and financial activities get reassigned among the various supply chain entities, higher levels of coordination and integration are being achieved through tiers of providers and naming of lead providers. One perspective is encapsulated in the concept of "Fourth Party Logistics". Fourth Party Logistics considers how "4PL providers" should organize and align with other providers to work with a customer to deliver and manage a comprehensive supply chain solution, ranging from innovation through execution. A 4PL provider is a combination of a Solutions Provider and a Supply Chain Innovator, as they have been described above.

This issue of whether the Innovator and Solutions Provider can (or should) be the same entity is an interesting one. On the one hand, there is the possibility that a traditional Innovator (say, a consulting firm) will extend its service offering to include management of service providers to provide a solution. The Innovator may not have the skills and business perspective to manage ongoing supply chain activities in a cost-effective manner, and customers may perceive that this will be an expensive solution and so may resist it, regardless of the Innovator’s actual capabilities. On the other hand, a traditional Solutions Provider (LSP) may extend its service offering to include consulting services. This is what precisely SAFEXPRESS does with the strength of the Alliance with Panalpinna World Transport and Miebach Consulting group providing a single window solution for International, Domestic Distribution and 3PL Management backed by the Technical advisory expertise of Miebach.

CONCLUSION

It is an exciting time for the Third Party Logistics Industry, as technological progress enables providers to offer new services, including coordination and integration services that are necessary to support the complex new business processes that are being demanded. As shippers consider provider selection and how they will structure their logistics activities, they must evaluate carefully the roles and activities that they will assign to LSPs and to other types of Solution Providers. One critical decision will be how to organize for innovation. In support of these strategies they must carefully consider the investments they will make in operational assets, IT capabilities, and knowledge processes to effectively compete in this rapidly changing world.
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