To 3PL or not to 3PL

That is the question as many consider partnering with third-party logistics providers to manage their warehousing and distribution operations.

By -- Modern Materials Handling, 8/1/2000

Should you outsource warehousing? Can a third-party logistics (3PL) company provide equal, or perhaps better, competency in this area of your business than what in-house operations already deliver?

Questions such as these were addressed and answered at this year's Warehousing Education and Research Council (WERC) annual conference in San Antonio, Texas. Speakers from 3PLs and end user companies presented insights and case histories to WERC members from both the private and public warehousing and logistics sectors.

To begin, there is no question-outsourcing clearly works well for some companies. Nabisco, for example, with annual sales of $9 billion, spends more than $200 million a year on third-party warehousing and transportation services, says Rick Blasgen, vice president, supply chain. Nabisco has formal links with more than 100 third-party firms, he adds.

Why does Nabisco outsource? To leverage 3PL capabilities to improve total supply chain performance, says Blasgen. Outsourcing allows his internal logistics organization to provide greater value. It also increases flexibility and customer service. It creates organizational agility. It is more cost effective. And Nabisco can focus on its core competencies, he concludes.

A successful 3PL transition

Changing the culture of a company long accustomed to running its own warehouse operations is one of the major challenges to transitioning to a 3PL, however. So observes David Brouse, general manager, distribution, Carpenter Technology. A newcomer to Carpenter, he also faced the personal challenge of being new to the company's industry, which involves making and distributing specialty alloys.

Moreover, Brouse was tasked with not just paving the way to 3PL operations, but implementing a complete redesign of its logistics network. The 3PL chosen would have to build and then operate new facilities within a year. Old warehouse buildings would need be closed.

Carpenter, a 110-year-old company had conservative roots. It also had an 80 year history behind its distribution network. To be right for Carpenter, a 3PL would have to have a similar mentality. The 3PL also would have to focus on driving value into the new network and be willing to tailor its approach, says Brouse.

Kenco Logistics Services became that 3PL. A family owned and operated firm with a 50-year history, Kenco has helped Carpenter achieve a major gain in order cycle time. Next day shipments now are at 92%, up from 71% under the private distribution network. Although reducing costs "wasn't the key driver" behind the transition to a 3PL, Carpenter has experienced cost avoidance savings of about 28%. And inventory is down 20%, says Brouse.

Managing demand peaks

Turning to a 3PL is sometimes seen as a means of dealing with seasonality in demand. The alternative, keeping this peak business in house, has its drawbacks, as Harry Drajpuch, an executive vice president with USCO Logistics points out. There are people issues, for example. "Short-term, reactive strategies leave you vulnerable," he argues. "Can you find, train, and effectively manage a temporary work force?" he asks. These workers are likely to be less reliable. And there's more turnover.

Significantly, relying on an in-house, peak volume strategy then leaves the company most exposed at a time when customer service is most critical, Drajpuch says.

Other in-house issues include making advance plans to access additional equipment-forklifts, for example. The price tag for this extra equipment on a short-term lease will be "hard to swallow," he suggests.

Building enough in-house capacity to handle peaks also could push distribution costs disproportionately high, he continues. Companies leasing outside warehouse space on an as-needed basis may find it's difficult to forecast all their spikes in demand, and then difficult to find short-term leases.

And for those who would try to "shoehorn more in-house activity into existing space," Drajpuch asks, "Do pilots serve coffee on your airplane?"

Instead, companies might consider using 3PLs that are operating in a multi-client, variable cost environment. Contracts with these third-party providers are flexible. "You pay only for the space and labor you use," says the USCO exec.

Some control is given over to a 3PL. But USCO's client firm, through Internet links to the 3PL, can have visibility to its warehousing data. The client can check inventory, confirm receipts, and track inventory-all over the Internet.

Even Wal-Mart, as Drajpuch points out, supplants its own DCs with 3PLs for seasonal overflows and for forward buys. Nortel partners with 3PLs when it must move into and get out of markets over a two-week period for special offers.

Outsourcing warehousing has proven to benefit L.E. Mason, a maker of electrical construction, outdoor weatherproofing, and lighting products. Over a 5-year period the company consolidated its warehousing from 25 to 5 DCs while improving its order fill rate. A shared warehouse partner has expanded along with L.E. Mason, supporting its 30% growth rate.

Minimal capital outlay in buildings and systems was necessary, notes L.E. Mason vice president Ralph Smith. Instead, investments were focused on sales/marketing and on product development.

Designing in flexibility into its distribution, he continues, has allowed L.E. Mason to:

• Focus on its core business

• Manage varying demand levels efficiently

• Adapt with agility to marketplace changes and requirements.

Peaking or still growing?

During a WERC panel discussion, moderator Tom Freese, principal with Freese & Associates, posed this question to panelists: Outsourcing "took off like a rocket" some years back, he says. "But has it reached its peak?"

Not necessarily, replied the panelists. But outsourcing is evolving. "The game is changing," says Doug Christensen, president and CEO, USF Logistics. "The price of entry [to becoming a 3PL provider] has gone up significantly." Another change is that a 3PL is not just a vendor to the user of its services. "We're a strategic partner," he says, in more instances now.

Outsourcing still has growth potential, suggests Miami University of Ohio professor Tom Speh, director of the school's Warehousing Research Center. Growth is unlimited, he believes, so long as 3PLs and their customers work out issues in their relationships with one another and the 3PLs can solve problems stemming from labor supply and training matters.

Finally, whether outsourced or not, warehousing is moving from "a liability to be managed," says Nabisco's Blasgen, to "a competitive advantage" in one's business.

Is your warehousing beating the competition's DCs? Or is it holding your company back from greater sales, higher profits? Is a 3PL in your future?

Web-based 3PL matchmaker service debuts

If third-party warehousing sounds like it might work for your company, one very practical matter is finding the right 3PL provider. But now there's a new way to search out 3PLs on the Internet. A web-based service has just been launched by the International Warehouse Logistics Association (IWLA) .

The service is a virtual, on-line ordering mechanism for 3PL customers, says Joel Holland, president and CEO, IWLA. And it offers a daily, 24-hour source of leads for association members.

On its web site, www.iwla.com , IWLA recently added the Logistics Service Locator feature. The goal is to match more of IWLA's members to more of their customers-end user firms that want to turn over some or all of their warehousing needs to a 3PL.

The new locator service upgrades IWLA's prior capabilities to create user/3PL matches. Now it will be more than just a list of customer leads and a list of members.

Previously, a site search engine simply listed association member companies. But now customers can submit inquiries with details of their outsourcing needs. They can provide information on locations, products, value-added services, square feet of space required, and the like. Customers can post their service requests anonymously. Or they can post directly, and ask for immediate contacts by 3PLs.