It Takes Two to Tango

It Takes Two to Tango

How to make 3PLs dance to your tune.

Third-party logistics is a complicated dance in which no one wants to get their toes stepped on, and everyone wants to go home happy. Getting to the dance, however, is more than just answering the door when someone knocks. Here are some tips on how to go from first date to long-term relationship.

Bob Gaughan, group general manager, APL Logistics (Atlanta, www.apllogistics.com) has worked with more than 100 client companies in his career. One of the changes he's noticed is that clients are getting better at qualifying service providers, and that's the start of a rewarding partnership.

"Managers are doing their homework and are more knowledgeable about the functions of a 3PL, and that's a good thing," says Gaughan, who has been in this business close to 30 years.

He says inventory managers should look at the big logistics picture before focusing on the details of a 3PL's services. By starting with a 3PL's client list at the beginning of the qualifying process, a manager can learn a lot. To quickly determine if the service provider might be a good fit, managers should see if it already has clients in the same industry sector. The next step is to review a 3PL's geographic locations and staffing potential.

"The 3PL business now uses a kind of reverse Field of Dreams approach," says Gaughan. "Nowadays we say, ‘If they come we will build it.' It's not about selling space anymore."

A company that seeks the services of a 3PL also has to ask questions about itself, says Gaughan. The return to core competencies is the reason given most often when companies are asked why they would want to outsource such an important part of their business.

Serving the big box boys
Doing logistics with the big box stores is not easy, which is why it's part of the order fulfillment chain that many companies are handing over to 3PLs on a regular basis. Requirements that differ from one retailer to the next can seem daunting, says Gaughan.

Cost problems, in the form of chargebacks and fines associated with late and missing shipments, arise because many managers don't know what their real distribution costs are, or what they're being charged for by the big retailers. Logistics providers do know the costs, and how to avoid them, because it's their business to know.

Gaughan offers a classic example of asking the right questions and understanding the intricacies of the supply chain, that transformed a small account into a major client: Springs Global, Fort Mill, S.C. Springs is a manufacturer of textiles and home furnishings with brand names that include Wamsutta, Springmaid, Nanik, Graber and Bali. Its products are found in all the big box stores.

"Springs brought us in to handle some of its overflow distribution business and it grew from there," says Gaughan. "Soon we were taking care of its seconds business, then the bath and bedding divisions."

Doug Tatum is in charge of the Springs business for APL. While some 3PL managers are viewed as caretakers, Tatum views himself as more of a caregiver. At his weekly staff meetings Tatum talks about all of the typical things: safety, budgets, and customer service, then he puts a twist on it. "I ask my people to come up with a single idea that will impact any of those areas of business and create a better way of living, for us or for our customer."

Many of these suggestions save the client money. They all add value. Eventually he sits down with the client and reviews the suggestions, which may be simple things like changing configurations of boxes on a pallet to better use the space, consolidating purchase orders, or eliminating excess labels.

When asked for an example, Tatum pulls up a big one: "Springs was using a single carton size for two products, bath and face towels," explains Tatum. "The box really didn't fit either." They redesigned the carton and saved the client $1 million in corrugated expenses.

Still thinking inside the box, Tatum and his team noticed that Springs had its corrugated shipping cartons delivered in larger cartons that were then thrown away. By setting up a reusable container program, the large boxes used to bring fresh cartons to the Springs' manufacturing and distribution points are now being used, on average, 10 times, thus cutting the bill even more.

Then there are the chargebacks. Non-compliance with big-box store requirements has many hidden costs. The charges go by many names: damages, overs, unders, non-conformities. When Tatum took over the distribution of many of Springs products, he looked at a penalty charge of more than a half-million dollars that the company had from one retailer alone. Through the process of building better pallet loads, documenting damages and shortages, etc., that penalty charge dropped to about $70,000 the next year.

Too often, says Tatum, companies don't ask for a list of specifics when they get the bill for non-conformance and penalties. "They just pay the bill as part of doing business with the big boys. It's our job to question everything," he says.

And along the way, Tatum and his team taught their counterparts at Springs a lot about product security, putting seals on trucks and how to check counts when working with a common carrier. Tatum's advises managers to be open and allow the 3PL inside to see how it does business. Typically, a value-added service that could save one of his client's thousands, if not millions of dollars, may be readily visible to someone looking in, rather than to those looking out.

"We have to know every facet of the client's business," says Gaughan, "to build a level of expertise that will make us an extension of the client's business. When business is going good we push even harder. The client has to know if it is successful the 3PL will be successful."

Learning and knowing the client's business was at the top of the to-do list several years ago when APL landed the distribution business for Yamaha Motor Corp. (www.yamaha-motor.com), which manufactures motorcycles, all-terrain vehicles and personal watercraft. APL managers traveled to Yamaha dealers to see which ones had receiving docks and could handle motorcycles delivered in steel carriers. It needed to know which dealers were closed on Mondays to schedule delivery routing, and which dealers might want freight delivered on Friday so they could have fresh merchandise in the store on Saturday.

Gaughan says too often the people making the decision to use a 3PL are not the people using the services. "If we have to deal with a purchasing agent," he says, "he's only looking at space and money."

The breadth of services a 3PL can offer are lost on non-logistics people. Consequently, a material handling manager needs to ask about end-to-end services, particularly if his company is a global manufacturer.

"One of the ironies of business today," says Gaughan, "is that many manufacturers have gone global with their manufacturing, and are now in need of domestic distribution services. These are the companies that can benefit from a 3PL that has experience in international documentation procedures and ocean liners to create that end-to-end supply chain."

Another factor Gaughan thinks is underrated is the personal relationship a client has with its 3PL. "It's critical to the success of the business that customers know who their managers within the 3PL will be," he says. He cites a recent situation where his managers took on the returns business of ADT (Boca Raton, Fla., www.adt.com), a division of Tyco International (Princeton, N.J., www.tyco.com).

Shortly after beginning to sort parts that were being returned, employees in the APL warehouse found that many of the part numbers on the equipment were different from what was listed on the inventory sheets. Working with contacts within Tyco, the solution was to track down and bring in some retired ADT employees familiar with the parts by name. Using their knowledge of the parts, these retirees were able to match the parts with the numbers on the inventory sheets.

"The knowledge people have is not systematic knowledge, it's personal field knowledge," says Gaughan. "So no matter how good the systems are, you still have to rely on people."

Gaughan is a firm believer in taking care of the customer. "About 66% of my new business comes from existing customers," he says. In 1989 when he came to the Atlanta area he managed 200,000 sq. ft. of space. Now, the huge APL campus in Lithia Springs, southwest of Atlanta, consists of four major buildings covering more than two million sq. ft. And there is more space being used in overflow locations. However, big doesn't always mean better. Gaughan says anyone considering a partnership with a 3PL has to check the company's references.

"You have to call a lot of people and ask a lot of questions," he says. "You need to know how the implementation of services went, from day one. Is its IT system what you expect? That sort of detail. It's a matter of knowing that [the 3PL] does what it says it's going to do."

Part of the benchmarking process should be to closely inspect the 3PL's services that are most important to your company. "Metrics that are important to a user-company might not be of interest to the 3PL," says Gaughan. "And on the flip side of that coin, the 3PL has to track information that is important to it and maybe not to the customer."

An example Gaughan provides is another relationship his company established with another division of Tyco. The company wanted to have all of its orders shipped within 24 hours of receipt; and all orders received before 4 p.m. shipped the same day.

"If we were shipping 3,000 to 4,000 orders per day," says Gaughan, "it meant we might receive 2,000 of them the same day. So we put a limit on the number of orders Tyco could drop on us between 2 p.m. and 4 p.m. so that we could hit our 7:30 p.m. FedEx pick up."

The message here is to put key performance indicators (KPIs) into the contract from the beginning to avoid costs that might have to be added on, such as extra labor.

Share and share alike
As material handling has become more and more about information handling, the IT infrastructures of the 3PL and the client-companies have become a bigger and bigger issue. When searching for a 3PL Gaughan suggests looking for a partner that will make any IT system integration as painless as possible. Again, using the example of Tyco, Gaughan says challenges arose as the parent company made acquisitions and mergers.

"Each of its [Tyco] five operating companies had its own system and own way of doing business," he says. "We brought them altogether under a single roof." He now operates, essentially, five different companies within the same building, working off each operating company's own system. "We look at what they have then decide if we have to write any special programs around their business to do our business. Usually it's for things like report writing."

APL has people and managers dedicated to each of the five Tyco divisions. It also has a pool of about 200 temporary employees it can move to any building on its campus if need be.

"The benefit to our clients of a large pool of temporary workers," Gaughan explains, "is that we can minimize a client's overtime or seasonal business charges because we can shift people around and not have to make new hires."

Another way to avoid hidden costs, in addition to establishing the personal trust mentioned above, is to get everything up front in the contract. Gaughan says working with international customers is particularly tricky. "Often an international customer is working and thinking in transactional terms while we're trying to establish a price based on the scope of the work," he says. "There's a difference in how much it costs to handle a 3,000-cubic-foot box versus all the SKUs in that box."

7 Secrets to Successful Outsourcing
What should the potential users of a 3PL's services know and do to have a successful and profitable experience, and not get any toes stepped on? Here are seven takeaways from APL Logistics' Bob Gaughan, not necessarily in order of importance:

  • Ask for client-company references;
  • Ask about core competencies;
  • Ask about IT systems capabilities;
  • Ask for contingency plans;
  • Ask for location analysis;
  • Base the contract on information, not promises;
  • Establish personal relationships.

Bob Gaughan

Creating mixed pallet loads has become a major part of a 3PL's services as more manufacturers outsource that service.

The IT infrastructure of a 3PL is critical to the success of any relationship.

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