Value Proposition

How logistics and material handling service providers are extending their reach to improve service and reduce costs for their customers.

Gone are the days when companies simply asked their thirdparty logistics providers (3PLs) to do the "pallet in - pallet out" drill. More companies expect 3PLs to perform a host of complex, intricate and even strategic tasks that were once performed by the companies themselves, with never a thought that such activities, being so critical to the company's success, could ever be outsourced.

In many cases the arrangements are working out so well that not only are companies asking their 3PLs to handle more and more of these value-added tasks, but the 3PLs themselves are coming up with innovative value-adding ideas that allow companies (their customers) to focus more on their core competencies.

According to Joel Sutherland, there are five areas where value can be added in the plant, the warehouse or in transportation. These focus on how to minimize time, how to make the best use of space, how to minimize travel distances (forklift, conveyor or truck), how to minimize errors (assembly, packaging, billing, etc.) and, ultimately, how to reduce inventory while maintaining high levels of fulfillment.

"Overall efficiency in the supply chain allows companies and 3PLs to hold less inventory, which is a value-added service," says Sutherland, who is executive v.p. of Priority Distribution Inc. (East Brunswick, N.J., www.prioritydistribution.com) and managing director of the Center for Value Chain Research at Lehigh University (Bethlehem, Pa., www.lehigh.edu).

One way to minimize inventory is to provide customization at the last minute. "Xerox, for example, works on deferment of mass customization, especially in Europe," Sutherland says. "When I was running a distribution network in the Netherlands, we received the ‘big guts' of copy machines from Xerox, but we didn't do the final assembly until we received the order and knew what country it was going to." Every keyboard might be different, based on language requirements, and even the electronics of the configuration of the product might be different. "Labels, of course, would also be different based on language," he adds.

Moving Up the Food Chain
Years ago, according to Steven Simonson, a principal with Tompkins Associates (Raleigh, N.C., www.tompkinsinc.com), few 3PLs were involved with value-added services. "It was basically ‘pallet in - pallet out,' and they didn't do much else to it," he says. Among other services, Simonson's consulting firm helps companies set up relationships with 3PLs.

Things have changed in recent years, though. For example, a lot of companies that bring products in from overseas import them in bulk quantities, then have 3PLs customize the packaging in terms of kitting and building end-caps, then distribute them directly to stores. "The stores can then set them up right out of the boxes," says Simonson. "This is becoming a very popular value-added service."

"Pick and pack" is also gaining in popularity. "Pick and pack operations are very labor intensive," he says. In the not too distant past few companies performed this service very well, according to Simonson, and most of the ones that did get involved only did so because they had excess capacity that they needed to fill.

"As such, there weren't any true pick and pack providers," he says. "Now, there are a lot of 3PLs, including the mediumand large-sized ones, that are getting better at pick and pack. They are investing in the automation, including the WMSs [warehouse management systems]."

Value-added services performed by 3PLs seems to be growing as a result of better synergy between 3PLs and their customers, Simonson believes. "In terms of who comes up with the value-added ideas, there is a little of both," he says. Customers are telling 3PLs that they don't want to handle these tasks themselves anymore, and the 3PLs are happy to take on additional responsibilities because they make money on labor. "Then, as they get more involved, they start to see additional opportunities, which, in turn, they suggest to their customers," he says. "Engineering departments in 3PLs are coming up with a lot of innovative and creative ways to save time, material, labor and money for their customers."

Putting the "Value" in Value Add
Two 3PLs that emphasize value-added services to their customers are ATC Logistics & Electronics (Fort Worth, Texas, www.atcle.com) and Shippers Warehouse of Georgia (Morrow, Ga., myshipperswarehousega.com). Bill Conley, president of ATC Logistics & Electronics, recalls the "old days" when customers simply expected 3PLs to get the product out the door, for both business-to-business and business-to-consumer orders.

"These days, we are doing a lot more kit-to-order, packaging and all of the other associated services that go with pulling the kits together," he says. ATC is so involved with some customers that it purchases packaging items, including cards and plastics, and works closely with customer marketing departments to get their particular logos and designs. "Then, we source all of these for them locally, so they don't have to secure it themselves," he says.

ATC offers a full suite of packaging services. For several of its customers, ATC receives bulk products from overseas, kits the products, or packages them on-site, and then ships them to end customers. It does this while taking the required differentiation into account.

"For example, a product going to WalMart may have a different message on it than a product going to Circuit City, Best Buy or Target," says Conley. "As such, we can kit products to particular customers or groups of customers." Previously, products would be packaged overseas. Then, when they arrived in the United States, they had to be reconfigured or repackaged for specific customers' requirements.

As with most successful 3PL providers, ATC works closely with customers to come up with value-added ideas. In some cases, customers come to ATC and ask it to perform certain services. In others, ATC comes up with services and makes them available to customers.

"By design, we are fairly proactive with our customers, so we are always looking for ways to help them improve their supply chain," Conley says. He personally spends a lot of time in front of customers and potential customers. "I try to help them focus on their core competencies—what they do best," he says. Once ATC is able to assure them, that it can complement what they are doing, that customers won't lose control, that ATC won't compromise quality or service to their customers, and that it can potentially perform the tasks at a lower cost than it currently costs, that's when the relationship begins to evolve.

"We look at each customer and what their particular requirements are," he says. "If we think of something we can do that they haven't thought of, we will sit down with them and suggest the idea to them." In some cases, the customer mentions that it tried that particular idea several years ago and it didn't work. "In these cases, we explain that things have changed in recent years, and we do a cost-benefit analysis for them," he says. Customers may not buy into the concept the first time. Conley has found that they may just tuck it away for future reference, then come back to it later. "This happens quite often," he says.

"I think there will be even more services being offered by 3PLs in the future," says Conley. "For example, who would have thought, two years ago, that we would be negotiating on behalf of our customers for the artwork that goes into their packages?"

In fact, ATC is currently working on a couple of new value-added service ideas. "We are a niche player, focused on hightech products," he says. "As such, what we do is unique to our market." Overall, the demand for new services is making the 3PL business a lot more competitive.

"We have to hit the mark every time," says Conley. "I remember the saying from the old days when I worked at Federal Express: ‘You're only as good as your last delivery.' This still holds true today."

Among other value-added services, Shippers Warehouse of Georgia (Morrow, Ga., myshipperswarehousega.com) offers point-of-sale packaging, flexible packaging equipment, labeling and barcoding, multi-packing, shrink and stretch wrapping, customized product packaging and display module building. It also provides end-of-aisle displays for consumers in stores and warehouse clubs.

"If customers know they have to design a package and have just the conceptual thought of wanting to put it in a box and having it go on a shelf, we have a number of suppliers we can bring in to offer ideas on ways to conceptually display the product," says William Stankiewicz, v.p. and general manager. For example, Shippers Warehouse works with a shampoo manufacturer that is selling its product to 700 or 800 different stores. Instead of the manufacturer just putting the shampoo in a box, Shippers Warehouse arranged for special packaging that included a large bottle and a small bottle. It also affixed the UPC information, then arranged for packaging with a piece of cardboard and stretchwrap to provide a good presentation to customers so they could see what they were getting.

One of Shippers Warehouse's most impressive value-added services is its "clean room," where assembling and filling of food and non-food consumer products can take place. All of the company's foodgrade warehouses are certified through the American Institute of Baking.

"There are a lot of scares these days about foreign matter in food products," says Stankiewicz. "Manufacturers want to make sure that environments are free of foreign matter, not only in the manufacturing area, but also the distribution area."

Shippers Warehouse goes beyond having people wear hairnets. The whole purpose of the special clean rooms is to remove all foreign matter that workers may be carrying. Workers are allowed to carry wallets and a set of car keys. "We make sure they don't have shirt pockets, jewelry, or anything else dangling," he says. "We also have lockers for them to put things they're carrying, such as cell phones."

They must wash with hot water, soap and disinfectants. Mirrors allow them to check themselves to make sure they don't have anything on them. Next, they pass through metal detectors. The company has a "three strikes and you're out" policy for people who do not pass the metal detectors successfully. Workers then use lint brushes, don their hairnets and then enter the clean room.

"In the room, they are bending over, stretching and lifting, so it is very easy for things to fall into the products, such as pens, pencils, penknives, etc.," says Stankiewicz. "This is why we take all of these precautions." Prior to instituting the program, there was one incident where an employee's check fell out of his pocket and ended up on a consumer's dinner table. "We don't want that happening again," says Stankiewicz.

Another value-added service that in growing demand, according to Stankiewicz, is expanding lean manufacturing concepts to the logistics area. "This involves building-to-order and getting things ready for stock for the customer, while reducing any additional packaging cost," he says. One example is end-of-aisle displays, so that, when they come off the truck, all the retailer has to do is cut some stretch film, and they are ready for floor display.

Customers of Shippers Warehouse are also looking for more transportationrelated expertise. "For example, we get customers who may not have good negotiated discounts with carriers," says Stankiewicz. "Because of all the carriers we use, we are able to take their shipments, set up cross docks, and turn lessthan-truckload shipments into full truckloads."

Speaking of Transportation
Advantage Freight Network (AFN, Deerfield, Ill., www.afnww.com) is a brokerage service for 3PLs that helps them solve freight management issues. "The big 3PLs come to us, because we work with about 8,000 carriers," says Chris Liberty, v.p. of sales and marketing. Besides making things easier for its 3PL customers, AFN also looks for ways to cut costs for the customers of 3PLs, as well as take over some of the basic services that 3PLs have traditionally provided, thus allowing them to focus more of their attention on providing other value-added services.

AFN can eliminate freight management fees from the freight management program, which provides 3PL customers with cost containment opportunities, which they can then pass on to their customers. "Our customers can tender the domestic surface transportation requirements in one e-mail or EDI message," he says. "We book all of the loads for them and price them at one time. We bill them in one stream, and they pay us in one stream. It turns something that once took four hours into four minutes."

AFN negotiates rates with its 8,000 carriers every day, which allows 3PLs to take advantage of downward-fluctuating pricing as it occurs. AFN also provides value-added services in the area of security, something else that many 3PL customers are seeking.

"Since 9/11, and with the increase in organized crime targeting truck shipments, customers expect us to provide enhanced security in domestic surface transportation arena," says Liberty. AFN uses satellite tracking, and it installs GPS devices in the shipments themselves to track where the shipments are at all times. "If the truck deviates from the anticipated route, we instantly know this and advise law enforcement to intercept," he says. "This is especially critical near the Mexican border."

Many of AFN's customers expect the company to take on more non-core product offerings. "For example, some customers not only want us to handle their trucking requirements, but also to run their warehouses," says Liberty. "They want us to do their international forwarding, in addition to domestic forwarding."

In sum, as customers expect more of their 3PLs in terms of value-added services, many 3PLs expect more from their freight brokerage providers, which, in turn, expect more from their carriers. Ultimately, the winner is the manufacturer and shipper, which can focus more attention and resources on what they do best.

Some of the More Popular Value-Added Services Offered by 3PLs Today

  • E-commerce fulfillment
  • Pick & pack fulfillment
  • Labeling/ticketing
  • Point-of-sale displays
  • Assembly/kitting
  • Product inspections
  • Bundling
  • Refrigerated space
  • International import/export logistics services
  • Special product handling
  • Packaging
  • Specialized material handling equipment
  • Returns processing
  • Bar code processing
  • Pooled distribution
  • Crossdocking
  • Customs bonded
  • Build to order
  • Literature fulfillment
  • Credit processing
  • Network design
  • Logistics needs analysis
  • Shrink-wrap bundle pack
  • Custom pallet displays
  • Pick-to-light
  • Gift wrapping
  • Store-ready packaging
  • Freight bill auditing
  • Supply chain planning

Keys to Working Well with 3PLs
Cooperation and communication are paramount to make things work between companies and third-party logistics providers, says Steven Simonson, a principal with Tompkins Associates (Raleigh, N.C., www.tompkinsinc.com). While he believes that most 3PLs do a very good job in terms of service and quality in general, customers can't just "throw the requirements over the wall" and expect 3PLs to perform as expected.

"They have to help the 3PLs understand what they are doing already and how they are doing it," says Simonson. "Then, once the 3PLs get to that point in terms of performance themselves, they can begin to find ways to do it even better."

Bill Conley, president of ATC Logistics & Electronics (Fort Worth, Texas, www.atcle. com), a 3PL provider, has found that the most successful relationships with customers—in terms of bringing value-added services online—are ones in which the customers have a clear understanding of what they're looking for.

"To do this, they first have to have a good working knowledge and understanding of their own internal operations and requirements," he says. "Next, they need to have an idea of where they want to go." Third, they must work with his company to make sure that everyone has an agreedupon set of metrics or performance standards that will be reported on during a specific timeframe.

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