How to maximize the potential of 3PLs

Analysis is the key to figuring out if a third-party logistics provider (3PL) should play a role in your supply chain operation. As a first step in making that decision, Scott Saunders, vice president supply chain with faucet maker Moen Inc., uses the following model to evaluate whether work or processes have the potential to be outsourced:

  • Is the process strategic to our organization?
  • Does this process give us a competitive advantage?
  • Do we want to upgrade performance to differentiate us from our competition?

"If one of these questions elicits a 'no' answer, we will consider outsourcing," states Saunders. These questions are not the entire decision-making process, but they provide the evaluation process with some structure.

"These questions help us look at effort vs. impact," he explains. "For example, in the domestic transportation planning and execution group, we looked at cost, expertise and systems. The 3PLs have the systems, but they're not enough better to justify the added cost."

However, Moen finds it cost effective to use 3PL expertise for special packaging needs. "When a big-box retailer requests a certain pallet configuration or new display, we work with a 3PL with expertise in designing and putting together the necessary packaging," says Saunders. "It's not a core competency that we need to have in-house."

Saunders' team continually evaluates the potential for outsourcing other pieces of the business.

Sun Microsystems Inc., an $11 billion provider of network computing products, has been outsourcing logistics since the early 1990s. Both the players and the way Sun manages its 3PLs have changed significantly over the years.

"We take more advantage of the 3PL's resources than in the past," says Randy Louie, director of customer fulfillment with Sun. His team prefers to use external experts to focus on non-core functions. "The investment in systems alone would cost a fortune," Louie explains.

Outsourcing also permits a dynamic cost model. As the business grows, or if it should shrink, Sun avoids high fixed costs.

"We still have to have expertise internally to manage," insists Louie. "We must understand our core content well enough to know it's being tended to properly. However, we can focus on overall supply chain rather than daily operations and managing systems."

As Moen's Saunders sees it, managing the 3PL relationship requires different skill sets than actually managing the function. "It's more like managing a purchasing or sourcing function," he says. "An operations person may not be successful at managing a 3PL relationship."

Sun has considered adding a lead logistics provider (LLP) to manage its 3PLs, but it hasn't yet found a global player with the needed level of infrastructure in all areas, according to Hugh Aitken, vice president customer fulfillment with Sun. "So we focus on logistics expertise per region."

Truck manufacturer International Truck and Engine Corp. uses an LLP to flow goods inbound to 3PLs supporting its truck plants, according to Stephen Erb, manager, logistics for truck and service parts with International.

The LLP uses dynamic routing to design a mostly truckload network, routing goods weekly from all suppliers direct to plant or through high-service-level crossdocks. The LLP shares responsibility on the tactical level while managing day-today operations. International retains responsibility for planning at the tactical level and managing strategically.

Erb believes it's a real advantage to have access to the resources an LLP offers. "The LLP brings knowledge from working with other clients as well as quality resources and project specialists who can look at our process, educate and work with our associates, and identify opportunities. The LLP places associates in our plant facilities. As these in-plants manage day-to-day operations, they also look for opportunities to improve processes," he notes.

"We expect the LLP to continue to invest in sophisticated logistics technology to provide value," Erb adds. "As we look at routing, for example, their technology must capture routing components accurately and route at the most efficient costs."

The LLP brings in specialists to look at how International's freight moves, Erb points out. "When they evaluated our truckload deliveries direct from suppliers, they found some suppliers were under-utilizing trailer cube. The LLP works with those suppliers to improve cube utilization," he explains.

International expects its LLP partner to be best-in-class in logistics processes, with processes that are documented and standardized across the operations.

"As we commit to lean concepts, we make managers responsible for putting in standardized processes. Even though we use an LLP, we require them to operate to our lean standards," insists Erb.

While International is happy with its LLP relationship, there's another side of International's business where paying the LLP management fee doesn't make sense.

"For warehousing, line-side replenishment and subassembly within our plants, we rationalized to just two 3PL providers in North America," Erb notes. "We manage-those 3PLs directly. We provide strategic direction and communicate to the 3PLs our requirements for various supply chain processes. We have monthly reviews and the 3PLs are part of the quarterly review process."

Building a successful LLP relationship at International has led to a revised view of managing 3PLs. "Our periodic business reviews will take a more strategic look at the 3PL/LLP relationships," Erb explains. "As International does more sourcing in India and China, we need the infrastructure to deal in significant volume in those countries. We will work with the 3PLs and LLP on how to build needed infrastructure.

"Over the long term, business changes at International will affect both our LLP and 3PL partners," Erb continues. "For example, lean concepts have changed our replenishment at the plants. Instead of managing processes at one plant, we look at processes and procedures across all our plants. We make sure the 3PL is integrated with our operations so that, when we make decisions, we have their buy-in to standardize processes across the network."

A successful 3PL or LLP relationship requires organizational alignment at all levels. "Because of this need for alignment, very early on we identified the need for a dedicated general manager on the LLP side," says Erb. " Initially, our top contact at the LLP had responsibility for other accounts. With no dedicated person focusing on this account, people working on the account were not focused on us. Their objectives were not aligned with ours. We sought to correct this lack of alignment."

When the dedicated general manager came on board, International began planning to put a program in place for 2005. "We brought the LLP's in-plants and my team together for face-to-face meetings," Erb says. "We reviewed and determined mutual objectives, developed goals, and built work plans for 2005. Best of all, we spent two days with everyone in one room. We got to know our counterparts on a more personal level and understood each other's motivation and strategy."

"We can be a challenging customer," admits Sun's Louie. "If the 3PL is receptive to our demands and recognizes that meeting our needs can make them more competitive, it helps the relationship. If they don't see it, the relationship won't work."

Making the relationship work often depends on timely measurement and review. International's senior management meets with its counterpart at the LLP once a year. However, at the operations level, management teams meet monthly. While there are quarterly reviews at the plants, there is more frequent contact on an individual basis.

On the cost side, International has biweekly reviews to track progress on costreduction initiatives.

"We've set aggressive, specific, quantifiable goals for this year on cost cutting," explains Erb. "We look at initiatives to accomplish our goals. We focus on measuring and tracking performance to those goals. If we're off the goal, we look at causes. Some we cannot control; some are things we need to correct," he notes.

"Projecting into the future, there's always an opportunity to improve cost," Erb continues. "I expect to yield 3% improvement year over year. This year we set more of a stretch target and we're well on our way to accomplishing it."

A new initiative at International is voice of the customer, a qualitative measure of customer satisfaction. " Quarterly, we meet with our customers (plant management) to review key performance indicators," notes Erb. "We ask, 'How is our perfomance? What actions or additional support do you need?' Customers rate plants from one to five (lowest to highest) on various aspects of service — how we're responding, how satisfied they are with the network design for the location, etc. If we're merely satisfactory or lower, we need to take corrective action," insists Erb. "We determine who's responsible for the corrective action — International or the LLP."

Sun's scorecard for suppliers is one of the toughest in the industry, claims Aitken. "Our logistics partners know, as difficult as it would be to move to a new supplier, we will move if our needs are not met, but only after we work with our partners to improve performance."

Finding the right partner requires a rigorous selection process. "Think long term," insists Louie. "Don't go for fast dollar savings and move on. We work with the 3PL to ensure it can grow as our business needs grow and change. We interview as if it were a candidate we were going to hire. Look at their strategic direction; look at factors outside their expertise and pricing," he adds.

"Once the relationship is in place, we assess their performance and get feedback. We set targets, share information and business plans, and work on joint projects. Success requires a lot of upfront work and rigor in managing the relationship," insists Louie.

"As good as it is now, there is massive opportunity still to come in logistics," predicts Aitken. "3PLs have people with expertise in various functions. With proper investment, what they could achieve in the next 10 years is astounding. Clients like us are hungry and can't wait for them to catch up. The more a logistics company invests in supply chain, the greater the chance we will be with them for the long term."

Take a look at the appropriateness of a supply chain partner. If the numbers click for you, find a partner with growth potential.

Resources

International Truck and Engine Corp.
www.internationaltruck.com
Moen Inc.
www.moen.com
Sun Microsystems Inc.

www.sun.com

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