Its Your Supply Chain; Its Your Business

May 24, 2007
Companies are sending the wrong message about outsourcing if their decision suggests the outsourced processes or functions are not core to their business,

Companies are sending the wrong message about outsourcing if their decision suggests the outsourced processes or functions are not core to their business, says John Madrid, executive vice president for strategy, knowledge and services at Procuri Inc. (Atlanta, Ga. “People in the company and the people they hire [including third party logistics firms--3PLs] all get that message,” says Madrid.

Madrid, who spent 25 years with Procter & Gamble, offers a contrasting view to the popular advice, “If it isn’t a core function, outsource it.” Most companies are in very competitive markets, he explains. Every point of market share counts. “And having an effective supply management system is critical to your success.”

Adding fuel to Madrid’s argument, Peter Scott, vice president of marketing and corporate development for Exostar (Herndon, Va., suggests outsourcing actually carries many risks that can cripple a business if not handled properly.

Sole sourcing, says Scott, offers better leverage in negotiations that can result in some price advantages, but it also creates single points of failure, whether the sourcing arrangement is for materials and components or for logistics services.

Both Madrid and Scott suggest setting key performance indicators and then measuring performance against them. “If I’m a [3PL] provider, it gives me a different mindset if I’m expected to deliver core-like quality,” Madrid points out, adding that outsourcing should provide critical skills that don’t exist in the organization or can’t be built in time. That raises the stakes for outsourcing and it needs a corresponding upgrade in attitude that recognizes the importance of the function that was outsourced and sets key performance metrics for the 3PL.

Managing a domestic logistics network is challenging enough for many companies, says Cliff Lynch in his latest book, The Role of Outsourcing in the Retail Supply Chain. “Combine these issues with customs and foreign cultures, currency, security, language, erratic transit times and possible port congestion and the task becomes formidable indeed.”

Not long ago, Lynch notes, the client often brought as much expertise to the outsourcing arrangement as the 3PL. Exostar’s Scott expands the argument, noting that in many organizations that have outsourced, this has led to workforce reductions. Whether by downsizing or attrition (as through retirements), the organization is left with fewer people to address problems when they arise, a possible skill gap and less institutional memory. Reinforcing Madrid’s point, the reliance is on the 3PL to keep things moving or recover when there is a failure.

The industry has matured, and today’s logistics service providers are no longer characterized as small, unsophisticated companies, says Lynch. But as the level of capability has risen with 3PLs, the complexity of the challenge has been increasing also.

Despite the rise of the 3PL industry, says Mario Hegewald, director of global logistics for Eaton Corp. (Cleveland, Ohio, no single logistics provider is capable of delivering all services in all areas at a consistent level. The only company he saw with that capability was his previous employer, a major global manufacturer that invested in a global transportation management system and essentially built the tool its 3PLs would use to manage their portion of that company’s supply chain..

For Eaton today, “Freight management is where 3PLs shine,” says Hegewald. But even in this, Eaton has multiple suppliers.

The previous “build your own” implementation Hegewald participated in took five years and it wasn’t always the most efficient way to operate, he admits. At Eaton, corporate culture tends towards “buy” rather than “build” and Hegewald relies on six different 3PLs for their functional expertise and regional knowledge and capabilities. In describing his current undertaking, Hegewald would likely admit it isn’t less challenging, it’s just a different set of challenges.

Eaton’s stable of providers includes some competitors, and here, Hegewald adds a general observation that 3PLs and companies providing lead logistics provider (LLP) services are still struggling with the concept of true partnership. Hegewald is moving Eaton towards appointing one lead logistics provider and having the other 3PLs communicate through that company’s systems. He says one of the current challenges is the hand offs between carriers and 3PLs. That’s where he loses visibility in the network, and it’s something that should take a big step forward as the 3PLs begin to integrate under a lead logistics provider.

The area of visibility is another of the risks Exostar’s Scott highlights. In effect, outsourcing can trade better control over costs and reduced capital overhead for less of the granular visibility and control of what’s happening in the supply chain. International moves are more complex and can be frustrating, agrees Procuri’s Madrid, even when you think you have it all set up properly. He offers the example of one high-tech company that shipped product from an overseas source. The goods arrived at the dock for export and were validated by a government inspector. At some time after the receipt had been validated, the goods were stolen from the dock. Even when you think you have things set up properly, he says, there is more complexity on the foreign side to get your goods to the right places, secure them and get them delivered in a timely manner. The local knowledge and presence of the 3PL can help ensure problems are minimized and disruptions are immediately communicated. In an extended, global supply chain, even with the visibility to see that a failure has occurred, there is less recovery time, says Scott. Inventories are typically low and lead times and transit times can be long.

Madrid says selection of a 3PL has to get very granular. “You can talk to the senior vice president level people in the 3PL and, overall, that company may have excellent results,” he explains. “But when it gets down to the mechanics and the process for your company, you want a high level of ownership [of the process and the results] and that has to be there whether they have another 100 customers besides you.” That means getting close to the people who are handling the operations and being clear on your scorecard of performance measures.

Eaton’s selection of Ceva Logistics (Hoofdorp, the Netherlands, as its lead logistics provider for the Asia Pacific region took a year, according to Hegewald. Under its agreement, Ceva will manage Eaton’s supply chain in the Asia Pacific region, including warehousing, domestic road transport and global distribution.

Hegewald uses other lead logistics providers in other regions, noting that Penske Logistics (Reading, Pa., was selected for its strengths in the U.S., Mexico, South America and Europe. In addition to regional expertise, Eaton contracts for functional strengths, using Cass Information Systems (St. Louis, Mo., for freight bill payment and audits in North America and Logistics Management Solutions (St. Louis, Mo., for its North American database of preferred carriers. Other 3PLs fill roles in freight forwarding and customs brokerage.

Eaton’s hybrid network of 3PLs uses a variety of suppliers for very specific skills and capabilities. As one of those suppliers, Dennis Schoemehl, president and CEO of Logistics Management Systems, is clear about the role of LMS. “We are a North American transportation execution company,” he says. As such, LMS focuses on managing and measuring the performance of the North American transportation network for its customers. It looks for opportunities to mode shift to provide savings, moving parcel shipments to less-than-truckload (LTL) and LTL to truckload and truckload shipments to intermodal.

Commenting on the rise of 3PLs, Schoemehl acknowledges that many have expanded services, often pulled in that direction by customers. LMS has been asked to get into warehouse services, he says, but decided to stay away from it. “We have warehouse 3PLs who call on us for transportation management,” he notes, but the company has focused on growing within its area of expertise. There are anywhere from 350,000 to 400,000 truckload carriers operating in the United States, he points out, and if that isn’t enough complexity to manage and measure, there are new demands in transportation management such as transloading services that challenge 3PLs to grow and develop within their area of expertise.

Schoemehl observes that as the 3PL segment has evolved, “there are 3PLs in the warehouse side that really grew up in that business and now want to be a single-source solution, and you have those that were in transportation that now provide warehousing. If you grew up in transportation, that’s what you know,” he concludes. He suggests looking at a 3PL and asking, “What are their roots, where did they come from?”

The functions on the shipper’s side have changed and evolved as well, says Schoemehl. The development of enterprise resource planning (ERP) systems means that many of the functions that had been at the plant level are now centralized. This has expanded the role of the transportation management company to include invoicing, shipment status, claims resolution and a host of other functions. As the industry continues to evolve, Schoemehl sees more consolidation and, eventually, more of a true collaborative environment. From his transportation management perspective, this opens the door to more continuous moves, including dynamic, multi-shipper continuous moves. He also sees shippers cooperating to cross dock opportunities and “virtual truck lines.”

In this increasingly complex supply chain environment of multiple 3PLs in regions around the globe, technology is addressing communications and overcoming some of the visibility concerns. It is even helping companies gain more of the needed control over the supply chain. But on a larger scale, Exostar’s Scott suggests shared incentives among the parties, a common set of processes and metrics, more automatic processes and information flows between systems and people across the various partner companies and managing by exception will all be key factors in successful supply chain management.

“Unless you make the collaboration performance a key performance indicator,” agrees Eaton’s Hegewald, “[the 3PLs] will come back with the conventional performance measures.” With many companies that see outsourcing as a means to reduce costs, that means cost reductions. For logistics executives like Hegewald, the stakes are much larger. “The 3PLs typically want to manage functions and don’t have a willingness to learn my business and bring innovative solutions,” he says. Procuri’s Madrid, the 25-year veteran of Procter & Gamble, reiterates the role of a software company or a 3PL service is “no longer just a tactical tool for execution, it also has to provide strategic value the shipper can use to create business plans that are intended to drive improvement through the whole supply chain. I’m expected to deliver core-like quality in order to maintain this relationship.” Madrid voices his concern that he still sees companies—even very large multi-national companies—that “have not gotten the fact that total supply chain effectiveness really delivers their bottom line.”