Outsourcing: When It Works and When It Doesn't

Think warehousing is a dying art, not worthy of analysis in this day of business process re-engineering? Then you should talk to people who outsource their warehousing functions. That's just what attendees of the Northeast Ohio WERCouncil's recent panel discussion on that topic did. The panelists, two who outsource warehousing functions and one who does not, were unanimous about the value that warehousing professionals can add to any manufacturer's offerings. But going into an outsourcing relationship without preparation can make your logistics problems worse.

Greg Gierhart, distribution manager for Advanced Elastomer Systems, said he felt lucky to be in a healthy outsourcing relationship because he wouldn't want to be in the warehousing business.

"Our customer service expectations are extremely high," he explained. "We serve the automotive industry so we operate under QS 9000 standards, which is a step above ISO 9000. Trying to hire, motivate and maintain a workforce in the warehousing business meeting those requirements is difficult. Even the providers we use are challenged by that."

ISO 9001 is an international standard intended for quality management system assessment and registration. QS-9000 is the shorthand name for "Quality System Requirements QS-9000." It is the common supplier quality standard for The Big Three auto makers, and is based on the 1994 edition of ISO 9001.

AES outsources warehouse labor in its Pensacola, Florida, distribution center. Gierhart doesn't think he'll see the day when warehousing and safety stock will be eliminated.

"We ship around the world, and there's a lot of transit time when you're moving by ocean," he continued, "so we'll never get to the point where we're down to a nominal amount of inventory. We'll always have warehouses and safety stock."

But to make best use of those assets when putting them in the hands of a third-party service provider, he suggests establishing measurable goals and outcomes for the relationship. And don't expect to be problem-free. Instead, hold periodic meetings with your provider to identify and talk through problems before they grow.

Rich Wilson, corporate manager of warehousing for the J.M. Smucker Co., represented the non-outsourcing perspective -- but not because he was against the concept. Only because, for Smucker, logistics is a core competency.

"If you have more control over the supply chain you have more control over delivery to your customers," he explained. "The collaboration we have within the company allows us to deliver right to the customer store. Until there are economics to justify outsourcing, we won't do it. For some businesses it makes sense."

But where it does make sense, the relationship must be built on solid data. If you know your costs and your operation's integration points -- automated and non-automated -- that's a great start for an outsourcing relationship. But Wilson was quick to add that if your warehouse or distribution center is in shambles, that's a bad time to start outsourcing.

For some businesses, warehousing can mean dangerous duty -- another good reason to outsource. That was the case for Ron Zagata, inside sales manager for Palmer Holland Inc. His company handles hazardous material, and for him that was always a fear factor.

"My concern was that no matter how much training I'd give to an individual, if he’d fork a drum of something that's hazardous and try to do the right thing, all of a sudden he might not be around any more," said Zagata. "With outsourcing that's one less fear I have every day."

But, especially where hazmats are concerned, you must be careful about your choice.

"That 3PL warehouse you select is an extension of your business," he concluded. "We had an audit of our warehouse and it passed with flying colors. Our providers are ISO certified and they have a full-time regulations person on staff 40 hours a week. They're responsible for all record keeping and training."

Tom Freese, principal of Freese & Associates, moderated the panel discussion and concluded it with a summary of when outsourcing works and when it doesn't.

"Outsourcing can lower your costs if you have frequent surges in activity that require you to have excess capacity," he noted. "On the other hand, it might not lower your costs if the economies of scale aren't present for the outsource provider. You won't lower your costs if the requested services are outside of the core capabilities of the 3PL. Outsourcing of one function may sometimes result in higher costs in another."

Your motivation is key to successful outsourcing. Is it financial? Safety? Head count reduction? Reduced assets?

"If you don't understand what you need, you'll have a difficult time evaluating what those third party providers tell you in their proposals," Freese concluded. "They'll tell you everything from soup to nuts and it will be hard for you to determine the best one for your real needs." One last thing: If you're already good at logistics, outsourcing probably won't improve your performance. In fact, in Freese's words:

"If logistics is your core competency, the last thing in the world you should be doing is trying to outsource it."

For more information on the Warehousing Education and Research Council or to find a WERCouncil near you, contact WERC at (630) 990-0001, or visit its Web site at www.werc.org.

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