Outsourcing Distribution: More Flexibility, Less Risk

July 1, 2009
Global sourcing and manufacturing compels companies to rethink U.S. distribution networks.

During better economic times and possibly in the future as conditions improve, companies may face a new conundrum arising from one or more of the following situations:

  • They built a centralized distribution center (DC) network 10 to 15 years ago based on sourcing in U.S. or NAFTA countries;

  • They've moved production offshore to multiple regions and now are shipping product across the country to old DCs, often to ship it back again to customers;

  • Suppliers can't provide the value-added services needed to meet customer requirements;

  • In House or Outsourced?

    Ports and the areas around them become congested;

  • Transportation costs are out of control due to limited capacity and escalating fuel costs.

When times get better, these conditions are not going to change; in fact, the complexity of the global supply chain will likely increase. “In reviewing all of these issues, we decided it made the most sense to outsource the DC to a third-party logistics provider,” says Richard Space, senior vice president for logistics and sourcing for Anchor Blue, manufacturer of denim apparel. “It was clearly not this company's core competency, and it was costing us a lot.”

Flexibility Is Key

In this era of spiraling costs and customized configurations, flexible logistics management is strategically critical to the bottom line, but often management doesn't grasp the effect poor logistics has on profit margins.

Under the old model in which goods were sourced primarily in NAFTA countries, shipping goods to one or two DCs to be bundled and labeled then shipped to customers wasn't all that inefficient. But now, with sources of goods shifting continuously, using a traditional DC network doesn't make sense.

If your company needs to modernize its DC network, there are two options: build your own or outsource. The build-your-own option is ideal if logistics is a core competency and you have time and capital.

For most companies, however, outsourcing logistics and warehouse/DC operations makes the most sense. With an outsourced solution, you get:

Value-Added Services

  • Best-in-class logistics/DC operations;
  • DCs that are closer to ports and customers;
  • Operations that are up and running in a few months;
  • The ability to add short- or long-term capabilities;
  • Integration of WMS data to internal systems;
  • Value-added services (labeling, bundling, kitting);
  • Lower costs and improved customer service.

The real cost of old DC networks is not the overhead; it's the lack of flexibility to respond nimbly to changes in the market, customer requirements or unforeseen shifts in the supply chain. Having DCs close to customers allows companies to be more responsive and deliver goods faster, cheaper and exactly the way the customer requests.

A Nimble Supply Chain

“Companies are turning to 3PLs to act as warehouses for them,” says Walter Byrd, managing director at Transwestern. “They're saying, ‘I want 15,000 to 20,000 square feet dedicated to me.’ Many of the 3PLs occupy three or four buildings each at about 500,000 to 600,000 square feet.”

3PLs operate several shared, multi-client DCs, which enables companies to extend their operations within short-haul ranges. As business grows and changes, 3PLs can adapt by adding locations and services, giving their clients significant competitive advantage.

And, while outsourcing cuts costs, an often-overlooked benefit is an increase in sales due to supply chain agility. For example, Anchor Blue saw its cost of processing drop from 33 cents to 19 cents per unit when it switched to an outsourced DC operation. The company also was able to increase shipments from 19 million to 26 million pieces annually. Delivery to stores improved, and with its more streamlined product flow, the company's buyers could gauge consumer reaction and adjust orders accordingly.

Value-Added Services

Because 3PLs are focused on logistics management, they can deliver a range of capabilities. When Philips Consumer Electronics wanted to improve its logistics and DC operations, Ryder used its in-house engineering staff and proprietary software to analyze Philips' customer locations and freight volumes. The result was a new DC in Dallas/Ft. Worth that put product within two days of 80% of customers, reducing transportation costs and improving customer service.

Ryder also manages Philips' cross-border operation, which was previously run in house, and provides load optimization of Philips' product line, which includes electronic equipment as small as handheld devices and as large as flat-screen TVs. Because 3PLs work with a variety of companies, they've developed best-in-breed logistics/DC operational practices, which directly benefit customers.

A Nimble Supply Chain

Outsourcing also opens options for providing new products to customers. A typical scenario might look like this: A company sells shower curtain/curtain ring sets to retailers across the country. It has been sourcing its goods for years from a supplier in Mexico and processing shipments in its Dallas/Ft. Worth DC. Now, its largest customer, based in California, wants a special curtain set it can private label.

The company finds the ideal item from a supplier in South Korea. Not only is it exactly what the customer wants, this premium item is less expensive than the company's usual sets. The South Korean supplier doesn't manufacture curtain rings, but a supplier is found in China that sells them for a fraction of the cost. The shipment from South Korea enters the country through the Port of Tacoma and the Chinese goods through the Port of Long Beach.

In the old, centralized DC network, the company would:

  • Hire carriers to transport the goods from Tacoma and Long Beach to its DC in Dallas/Ft. Worth;

  • Bundle and label the goods;

  • Ship the finished goods back to the customer's warehouse in Los Angeles. By the time it reaches the customer, the cost of transportation has made the premium product less profitable than the standard sets.

    Under the outsourced DC scenario:

  • Short-haul carriers would transport the goods from Tacoma and Long Beach to a DC in Sacramento;

  • There, the sets would be assembled and compliance labeled;

  • Finished goods would be shipped to the customer's Los Angeles warehouse. The new product now retains its healthy profit margin, and the goods reach the customer in a fraction of the time.

Stephen F. Dean is senior vice president of sales and marketing for Ryder Supply Chain Solutions. Visit the company's Web site at www.ryder.com.

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