Manufacturing and Logistics Join Forces

Oct. 1, 2003
The worlds of third party logistics and manufacturing (3PL and 3PM) are getting closer. They may not be on a collision course, but their proximity is resulting in more seamless supply chain solutions for companies like yours.

Improved information access in this age of globalization is leading to a partnership between logistics and manufacturing service providers. Doing business in Asia? It is there, especially, where a logistics manager must be much more closely involved with manufacturing than was traditionally the case. That’s especially noticeable in high-tech industries. Dick Armstrong, publisher of Armstrong’s Guide to Global Supply Chain Management, notes that in the computer industry, for example, standard products are being completed at the last minute to customer specifications. The automotive industry is also working with third parties to do much the same thing.

“The detailing work that TNT Logistics does happens primarily in automotive,” Armstrong explains. “When you get into food level stuff, you actually have 3PLs who do things the way Snapple does: they bottle it, label it and distribute it. You even have distributors who have set up 3PL operations. Owens and Minor has set one up for pharmaceuticals, and IM logistics has set up a 3PL fulfillment operation for high tech, as part of Ingram Micro.”

Starting with packaging

Business demands like time-to-market, flexibility, configurability and responsiveness have made packaging the ideal place to start for 3PLs getting into contract manufacturing. In fact, it’s also the ideal setting for postponement strategies.

“With packaging, you get the demand information in to see whether you should bottle product in the 16 oz or 32 oz sizes,” says Adrian Gonzales, director of the ARC Advisory Group. “You postpone that decision until you get the demand information, then you quickly package it and save the cost of inventory. We’ll see more strategic relationships where the customer will align himself with a single partner that will be able to synchronize all those business processes.”

It used to be that manufacturers would ship product in bulk to a packaging partner, which would package it then ship it to a 3PL, who would then manage the distribution. The customer was not only paying twice, but losing time as well.

“It makes more sense to ship product once from the factory to one entity that can do both,” Gonzales believes. “You must ask yourself, ‘Are we wasting time and money on transport because we have two processes separated by distance and time?’ Look for those processes that fit well together and then look for an entity, whether it’s you or a partner, that can combine those processes.”

Material handling consolidation

Material handling systems are being designed to do just that — combine both the product and information flows to form a virtual enterprise. The flexibility of the newer material handling equipment, plus the inter-enterprise connectivity of the software make working with a 3PL partner for manufacturing easier to cost justify. Even the 3PLs are benefiting from material handling technology’s newest design efficiencies.

“We invest more in conveyor and assembly line equipment on the contract manufacturing side, and those are easily manipulated and not attached to the floor,” says Juergen Rahtz, solutions engineering vice president, USCO Logistics. “We see advancements there, especially in regard to integration with warehouse management systems.”

Rahtz adds that some clients shy away from investing in material handling automation and look to them to test the technology for them. 3PLs couldn’t afford to do this if the technology weren’t applicable to other client requirements.

“We have one large customer for whom we invested in excess of $50 million to get a long term contract,” he explains. “In contract manufacturing, you hardly get a contract for more than a year for certain products, so material handling systems need to be re-usable in other areas.”

The manufacturing side of a 3PL’s business is much more demanding of these systems. Assembly lines need to be kept running to meet the two to four-hour order timelines.

“The integration with the customer is much closer on the manufacturing side than it is for distribution of finished product,” Rahtz explains. “From a system perspective, you don’t get a batch of orders, you get constant pulls, so you need IT integration with the ERP system for product visibility. That’s a challenge.”

He tells of one of his biggest clients, a computer/printer manufacturer with global manufacturing operations. USCO runs final assembly and kitting for them.

“We operate in 15 locations around the world, delivering to our manufacturing clients,” he concludes. “The trick is to interface with 25 to 30 different systems from these big manufacturing companies because there are multiple divisions involved and various groups within the company. Often they come to us when consolidating several plants and they need one location to supply all these plants.”

Closer to the line

One of the best examples of how a supplier’s proximity to the assembly line is critical can be found in the automotive industry. That’s where 3PLs can make a major contribution to manufacturing productivity.

“From a manufacturing standpoint, we’re taking on more responsibility for component assembly and moving to collect suppliers into supplier parks,” says Mark Morrison, senior vice president of logistics business development for TNT Logistics. “The automotive sector is a leading indicator of what might be happening in other manufacturing sectors. The Big Three are on the edge of supplier parks and they’re trying to get the component suppliers closer to the point of manufacturing. We’ve seen it with GM in Lansing and the new Ford Heritage plant.”

TNT’s role in manufacturing is at the subcomponent level. For Isuzu’s Flint, Michigan plant, it receives “naked” cabs from Japan and builds out the instrumentation, seating and interior of that cab. It then delivers the cab on a platform trolley to the assembly plant.

“That set of activities is critically important to the manufacture of the light duty truck for Isuzu, and they found we can be very competitive in those processes,” Morrison explains. “3PLs can be very competitive from design, solution and quality processes because of their process focus. The marriage of technology and hardware is happening inside value-added facilities. Scanning isn’t new, but the ability of the technology to direct and help us make good decisions and improve productivity will help customers justify a change in the way they do things.”

3PL + 3PM

Up to this point we’ve been talking about light manufacturing like subassemblies and postponement. However, there is a trend for hardcore contract manufacturers to partner with contract logistics providers to better serve their customers. That’s the case with Sanmina-SCI Corporation and UPS Supply Chain Solutions. By utilizing their worldwide networks, Sanmina-SCI and UPS will work to create significant savings through inventory reduction, rapid order delivery and the reduction/elimination of fixed expenses such as dedicated warehousing assets for its shared customers.

The first joint project for this team is to support Sanmina-SCI’s supply chain services agreement with IBM. This agreement expands Sanmina-SCI’s fulfillment flexibility and speed in the United States, Mexico, Scotland, Hungary, Holland, Dubai, China, Japan, Malaysia and Australia. Sanmina-SCI is a leading electronics contract manufacturer serving the fastest-growing segments of the $125 billion global electronics manufacturing services market. UPS, leaders in distribution and logistics, will work with Sanmina to provide order fulfillment, logistics and distribution for IBM’s Options and Visual Products. You can expect to see more of these kinds of contract manufacturing partnerships, according to Lynnette McIntire, director of UPS Supply Chain Solutions

“Contract manufacturers are reevaluating their business model,” she explains. “There are two camps. One is where they’ve decided to add some logistics services to their portfolio to expand their revenue base. Then there are the others who decided that their core competency is R&D and manufacturing. Those are the ones reaching out to find logistics partners to support them. Sanmina is an example.”

But UPS doesn’t restrict its part of the bargain to transportation alone. For another computer manufacturer, it adds software and other features to a basic computer or printer. It will also add keyboards and electrical cords to the order. For cell phone companies, it programs phones to customer orders.

“In the high-tech industry you don’t want to have a lot of pre-configured items because of the obsolescence issue,” McIntire says. “Our DCs are as likely to be subassembly, kitting and configuration centers as they are just order fulfillment centers.”

Steve Toney, vice president of global supply chain solutions for Exel Logistics, agrees. The solutions the contract manufacturers are required to put together span the entire supply chain, front- and back-end manufacturing. At the same time, today’s product life cycles are much shorter. The contract manufacturers are going from one project to the next.

“There is a greater level of inventory ownership until the product is sold to the end customer,” Toney adds. “With their owning the product, the contract manufacturers are also controlling the postponement of finished goods logistics. Rather than do it themselves, more than likely they’ll use a contract logistics company for finished goods distribution.”

With contract manufacturers joining forces with contract logistics providers, customers can enjoy the best of both worlds: affordable automated manufacturing and better product visibility throughout their supply chain. MHM

Water heaters delivered on time through postponement

Rheem makes water heaters. So do its 3PL partners. Actually, the three logistics service providers Rheem employs configure water heaters to customer order in a kind of postponement operation. This results in several money-saving efficiencies.

The 3PLs Rheem uses — USCO Logistics in North Carolina, Nationwide in New Jersey and GSC in Hayward, California — serve the manufacturer’s commercial customers throughout the U.S. Many of these, like nursing homes and restaurants, need service quickly in emergency situations, so product must be delivered same-day or next-day. Postponement, as practiced by the 3PLs, saves Rheem exorbitant inventory carrying costs and premium transportation expense.

The 3PLs stock both gas and electric products for Rheem. The gas heaters come in one configuration, but the electric models are either a 208-volt three-phase or a 480-volt one-phase. Since USCO is the only one of the 3PLs in this network that’s UL-certified, the 3PL knows how to maintain records on these products and thus keep less inventory on hand because it doesn’t have to stock every finished configuration. It can turn one heater into several other heaters by changing out the element and doing the wiring necessary to change it from a three-phase to a one-phase if the application requires that. It also changes the labels so the wiring is correct when the plumber installs the unit.

“We have increased our market share in our commercial business considerably because of our ability to make product available when the customer needs it,” says Kim Boatfield, Rheem’s inventory warehousing supervisor. She adds that using 3PLs in strategic regions of the country has saved expedited transportation costs.

“If we need to get a water heater quickly up to the Northeast from our warehouse in the Southeast, the only other way to do it would be through expedited services,” she says. “Expedited shipment for something that weighs 600 pounds would be about $1,400, whereas we can stock a water heater in a public facility for much less and still be able to configure it and get it to the customer under regular LTL shipping transit times.”

Boatfield says as Rheem’s service offerings expand the company will move from Electronic Data Interchange transactions with 3PLs to web-based inventory management.

For more information...

…on services discussed in this article, contact the following:

ARC Advisory Group:

Armstrong & Associates:

Exel Logistics:

GSC Logistics:

Nationwide Logistics:


TNT Logistics

UPS Supply Chain Solutions:

USCO Logistics:

About the Author

Tom Andel | Editor-in-Chief

Tom Andel is an award-winning editorial content creator and manager with more than 35 years of industry experience. His writing spans several industrial disciplines, including power transmission, industrial controls, material handling & logistics, and supply chain management. 

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