How to find the right 3PL for the job

Third-party logistics providers (3PLs) have become popular because they'll do a job a company would rather not do itself. Focus on your core competencies, the mantra goes, and have a 3PL take care of non-core tasks. Scanavo's (www.scanavo.com) core competency, for instance, is selling and marketing a line of audio/video products. "Our business model is not based on building an infrastructure by ourselves. We have no desire to become a trucking and distribution company," says Kim Sorensen, Scanavo's president of North American operations. "We steer the manufacturing, but we don't own the factories."

Scanavo's entire product line is manufactured in China, outside of a few minor production facilities in Sweden and Mexico. Product is packaged in cartons or in bulk pallets, based on customer requirements. If it's not specified, it comes in cartons. From China, product is shipped in freight containers directly to Scanavo's final customers or into its warehouses based in California, Texas, Alabama, and Indiana. The company has a warehouse in Mexico City, as well, but if product is sold beyond that point, it has to be a full container going in directly.

For its storage, ocean freight and distribution capabilities, Scanavo chose a Seko (www.sekoworldwide.com) facility in Indiana to serve as its 3PL for the East Coast, which allows the company to position its inventory near a major customer. This allows the customer to have a short lead time to receive Scanavo's product, which allows the customer to keep inventory off its books until it is ordered. Many times product just crosses Seko's dock and moves directly to Scanavo's client.

Seko's put-away strategies include stock locators to control everything by product type and SKU, explains Mark Sell, principal with Seko. "Via a secure login, we give Scanavo the ability to view the inventory once it hits our four walls. They can place orders manually, via e-mail or electronically." Seko then picks, packs and releases the order through the best option for trucking.

There are no established key performance indicators (KPIs) between Scanavo and Seko. "We receive monthly reports from Seko as far as inventory goes," says Sorensen. "Shipments are done individually and we get bills of lading and individual reports. We receive monthly reconciling of what goes in and what goes out and it must balance."

Seko and Scanavo meet face-to-face at least twice a year, but they are talking to each other continually on a day-to-day basis. Together they review customer perceptions of each other, the growth picture and where demand seems to be growing.

By contrast, Chad Spencer, logistics/transportation manager for Ferro Corp. (www.ferro.com), a manufacturer of industrial performance materials for industry, keeps tight rein on operations, outsourcing only the execution of the company's transportation to Logistics Management Solutions (LMS) (www.lmslogistics.com).

Ferro has always had control of its contracts and negotiations. In the past, transportation operations were decentralized, with 19 plants calling and doing all load dispatching to carriers. The most recent change is to a centralized approach, where LMS does all of the carrier selection for each shipment based on Ferro's contracts. As Spencer, who handles all carrier negotiations, explains, "LMS goes into the system and assigns the most appropriate carrier from our core group, based on cost and service."

At least once each quarter Spencer meets with carriers to address any corrective actions or delivery issues. Contracts are negotiated annually. Spencer has been trying to reduce Ferro's carrier base so it will be more manageable. At present the company has 50 to 60 carriers.

Last year was the first time Ferro issued a request for proposals (RFP) for less-than-truckload (LTL) and truckload carriers. When Spencer wrote the RFP, he tried to list all of the company's negotiated point-to-point rates, so carriers would know what they were. Volumes were derived from historical data.

"We don't have a transportation management system," notes Spencer. "That's exactly why we turned to LMS to do the execution piece, using our system so they can properly identify our low cost carriers per shipment and also meet the service-needs of the customers. LMS handles individual LTL shipments, works with customer service for mode shifting and doing aggregations within different plants."

According to John McHugh, coowner, COO and CFO of LMS, "We manage all our programs on required, requested delivery dates. We tell our customers that they have to give us leeway to manage the ship date. Your customer service reps may say to ship Tuesday, but we may ship Wednesday and save you money and still hit the delivery date."

Spencer notes, "For us, service is of the utmost importance because we live in a just-in-time environment. All of our shipments have specific transit times built into them. The delivery date is the delivery date. It has to deliver then. There's no fluff time."

The initial step for LMS is planning. "The first bite of the apple is running our optimization software engine to do load builds," states McHugh. "That's where you can divert and mode shift away from LTL into truckload. Regardless of what rates Ferro negotiates, the greatest savings is to change modes." At times, says McHugh, maybe 10 of 100 orders get consolidated.

After planning comes execution. Spencer notes that LMS is tied into Ferro's system, finding orders, assigning carriers and pulling reports that show ship and delivery dates. There is visibility into all shipment activity, from order through shipment.

"Execution goes to the customer's low cost carrier so they can realize the gains from their strategy," notes McHugh.

"After execution, we manage the service side. After execution we track and trace shipments to push them along, expedite them and then populate our system to build service reports."

LMS furnishes Spencer with a monthly activity report. "I determine the format and they basically fill in the blanks," he explains. "It talks about KPIs, what can be done to improve LMS operations, what worked well, what we can do better."

LMS puts KPIs into its contracts as a guarantee of services. "Essentially we're saying that if we don't perform better than you do in-house, then we'll pay for it," says McHugh. "If we produce savings against benchmarks by doing consolidations, that's one measure of our performance." To that end, he explains, LMS provides Ferro with a compliance report of actual costs that says, "This is what we should have paid, this is what we did pay, what happened, what's the variance, and what is LMS doing about it?"

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