Outsourcing and you

By Gary R. Forger -- Modern Materials Handling, 9/1/2000

It wasn't all that long ago that Ross Perot was just an entrepreneur with an idea. He thought that not every company should do its own billing. Instead, they should outsource it to Perot's company which would manage the process for them, and do a better job for less money.

Not every company took to the idea immediately. But today it's standard practice. In fact, outsourcing seems to be catching on in areas Perot never had in his business plan.

Consider something as far behind the scenes as materials handling systems maintenance. For years, many companies have relied on their suppliers to service equipment and systems. But now companies such as HK Systems are trying to change the proposition with what they call value-based outsourcing. "Contracts are now written to provide concrete deliverables like '99% uptime' or '500 transactions per hour' or '0.01% late deliveries' rather than just warm bodies over time," says the company.

Then there are the application service providers (ASPs). At a recent press briefing, Provia Software announced that it will run and maintain supply chain software and related databases at a Michigan location. Subscribers to their service access this software over the Internet to run their warehouses in California or Maine or wherever. This eliminates the need for the user to buy the software or establish a large information system infrastructure, saving money and personnel. Provia, by the way, is hardly alone on this one.

But perhaps the highest profile form of materials handling outsourcing today is the third party logistics (3PL) provider. Traditionally, these companies (Roadway, Penske, and many others) have been best known for their transportation services. But they are now making the transition to managing inventory in warehouses. In fact, industry figures show that 3PL warehousing revenues are growing more than 15% a year as the companies add warehouse capacity at a 25% annual clip.

At the same time there is emerging a somewhat different breed of 3PLs. These are companies such Ingram Micro Logistics (IML), our cover story this month. Their roots are in distribution not transportation. And in the case of IML, they use traditional carriers to deliver orders they have picked and packed.

As associate editor Dave Maloney explains in the Warehouse of the Month story , IML is the distribution arm of Ingram Micro, the world's largest wholesaler of technology products and services. From seven distribution centers, they pick and ship orders for Microsoft, 3-Com, Comp-USA, buy.com, and Egghead. com, to name a few.

Especially interesting is the fact that more than 80% of those orders are being shipped directly to end users. That's a complete reversal from a short time ago when 80% of the orders were sent to Microsoft, 3-Com, and others who then sent them on to the end user.

"What we have done is take that entire cost element out of the business," says Terry Tysseland, senior vp of U.S. operations.

And that is, ultimately, what outsourcing of anything is all about.