Before I attempt to answer that, let me first ask you a question. When you think of logistics and the supply chain, what is the first picture that comes into your mind? Trucks rolling down the highway? Containers being loaded onto train cars? Forklifts moving pallets of goods? Warehouses dotted across the map?
Maybe your imagination is more vivid, and you see electronic data rippling up the supply chain -- barcode, inventory, purchase orders -- all sparking their way up the stream, and triggering the flow of goods back down.
If you pictured any of these, you have missed the fundamental premise of logistics.
Now, if you pictured a purchasing manager pacing nervously on the loading dock, looking at his watch, stubbing out his cigarette, and reaching toward the phone, you would have a more accurate image of what drives the supply chain..... the customer.
As companies begin to outsource functions that they used to handle themselves, the choice of which facets of the organization to outsource and which to keep becomes more than a dollars and cents issue. It's a critical question that fundamentally redefines the organization.
Longterm outside relationships are at the heart of the streamlined organization. The question becomes, "Will this outside relationship bring value to my customer and will it bring greater productivity to the corporation itself."
Let's consider one of Atlanta's success stories -- Turner Broadcasting. Ted Turner's $8 billion empire includes several cable channels, the Atlanta Braves, the Atlanta Hawks, three motion picture companies, and a bunch more. At first glance Ted seems to be spread all over the map. But, if you look closer, all of his holdings are organized around his core competency which is programming. Everything he owns is designed to feed programming to his cable channels.
The key is to understand what business you are in, what your customers perceive as your core competencies, and how to focus those primary strengths into value for the customer.
Outsourcing enables executives to focus on the foundations of the business. It allows them to focus more on the "what" and less on the "how."
There's a big difference between "what" issues and "how" issues. "How" issues tend to siphon off huge amounts of management's attention and resources -- most logistics issues fall in this category -- while "what" issues allow the company to focus its vision on the marketplace with new products, new services, and new markets.
Let's take a look at the logistics market as a whole. Every can that sits on the shelf, every 2x4 stacked in the bin, and every garment that hangs on the rack has a bar code, a SKU number, and probably has a logistical data history.
One definition of logistics is "inventory in motion or inventory at rest." All that moving and resting inventory generated 675 billion dollars last year. That's the amount U.S. manufacturers and distributors paid for logistics services. This includes trucking, air cargo, express, warehousing, and freight forwarding.
Only a small percentage of this amount is currently outsourced to third-party logistics providers -- but this is starting to change. About 10 billion dollars of logistics services were outsourced last year. The number is expected to increase to $26 billion in 1996. By the year 2000 it will reach $70 billion -- or about 10 percent of the entire amount that the industry spends on moving and storing goods.
One survey of over 300 companies found that 66 percent outsourced their import/export services. 63 percent employed freight brokers. 48 percent outsourced warehousing. In other words, two- thirds of all companies use some form of logistics outsourcing.
There is no clear formula, though, for who will benefit the most from third-party logistics. One major manufacturer with 70,000 truck-loads a year contracts out nearly all of its logistics operations while a competitor in the same industry keeps it all in-house.
Or, it's very common for a company to use third-party logistics to deliver a single component to an assembly line customer needing Just In Time delivery.
The decision to outsource can even be made on a plant-by-plant basis. One manufacturer decided to go third-party just for its newest facility. They were able to save money by not building a logistics infrastructure into the new plant.
There are even some companies that have taken outsourcing its ultimate extreme. Topsy Tail, a start-up hair care manufacturer, has reported sales of $80 million, yet the company has only 3 full-time employees. How do they do it? Topsy Tail has a network of 20 outsourced vendors who handle everything from the manufacturing of their products to the servicing of their retail accounts. It is a virtual corporation! As I said earlier, longterm relationships are at the heart of redefining the organization for productivity.
First, there can be an improved return on assets. By reducing investment in warehouse facilities, materials handling equipment, transportation fleets, and data processing, the return on assets can be improved significantly. Cash is preserved to invest in the core business.
Outsourcing also allows the business to use its personnel more effectively. Going back to Topsy Tail, I would hazard a guess that one of the three employees knows hair care products, one knows marketing, and one knows finance. In other words, when the workforce is focused on the core business, the greatest gains in productivity are possible.
Streamlining and downsizing are becoming increasingly necessary in today's competitive market. Contracting out logistics is one of the most cost-effective ways to downsize.
Another reason for outsourcing is that as the marketplace changes, logistics needs change as well. Suppose you invest in a large, centralized distribution facility. If the marketplace demands shorter and shorter delivery times, all of a sudden you need lots of little warehouses. When logistics are contracted out, there is a reduced risk of being stuck with misplaced, outdated facilities and equipment. Or, suppose you invested in yesterday's barcode scanning system. Well, today scanning systems exist that are built right into forklift. The driver picks up his pallet and the inventory data is radioed back automatically into the central computer. If you contract it out, you don't have to invest in the latest equipment.
In addition to offering sophisticated systems and equipment, third-party providers are staffed with logistics professionals who are typically better qualified in product distribution.
The quick turn-around is more than a nice gesture by the computer company -- it's the result of a strategic marketing decision. What's happened is whether you go to Gateway 2000, or go to Dell, or go to whomever, the service level that used to set them apart has now become the norm.
Competitive marketing is requiring faster filling of orders and more demanding inventory management. And, as companies are being forced to track these costs, third-party specialists have the expertise to lower the costs of remaining competitive.
In just the last five years, the percent of product shipped Just In Time and Quick Response has jumped from 18 percent to 28 percent.
This "zero days early and a zero days late," expectation has moved shipping from a line item on the bill to a strategic marketing tool.
When companies can't get their products delivered on time, they lose shelf space and market share. Retailers won't order the product again if they open floor space or shelf space for a product and it doesn't arrive on time.
I hope I don't shoot myself in the foot using this example in Memphis, but suppose you have a two-pound package that has to be in Chicago in two days. The FedEx driver will come to your door and see that the package gets to its destination for about $14.00. The U.S. Postal Service will do the same for $3.00. Looking at those numbers, Federal Express should be out of business by tomorrow, but obviously they are not. They must be doing something right -- there must be value added for the extra $11.00.
If you break it down, FedEx lets you schedule the pick-up, the shipment is tracked every step of the way, and they will absolutely guarantee that it will get there when promised. Is it worth the extra $11.00? Sometimes yes, sometimes no.
The value that third-party logistics providers bring to the table also has to be looked at on a case-by-case basis.
Some of the logistics firms serving the automotive industry have the ability to pull parts from 360 vendors, bring them into one warehouse, process the orders across the dock, and deliver the parts to destination plants within two-hour time windows.
The parts are never warehoused or inventoried at the plants. Chrysler's JIT delivery system schedules their parts arrival 15 to 30 minutes prior to when they are needed for manufacturing.
It is estimated that by the year 2000, 39 percent of all domestic shipments will be in a JIT or Quick Response mode.
These consolidation programs can reduce transportation costs for the manufacturer by 30 to 50 percent.
For some time, manufacturers and distributors have been looking for ways to reengineer the production process for greater efficiency. Consequently, they have been outsourcing more and more of the peripheral assembly to logistics providers.
For example. A GE plant that produces electrical products for overseas markets needs to adapt the power supply for each country's voltage. They use a warehouse service to install the supply before it gets shipped out.
Or, suppose Wal Mart wants three tubes of toothpaste shrink-wrapped together, K-Mart wants two tubes and Target wants a toothbrush thrown in. Three different promotions, but the manufacturer is only tooled up to put 2 dozen tubes in a case.
At a third-party distribution center, the original cases are opened and repackaged according to each customer's needs, then shipped out.
In the garment industry, logistics providers may sew in garment labels with a particular store's brand name.
In the copier industry, many leading manufacturers use third-party providers for the entire logistics cycle. The logistics provider warehouses the copiers, makes the delivery, installs and sets up the machine at the customer site, trains the user, and removes the old machine for salvage or resale.
Even more, through In-Transit Merge, the warehouse facility may receive various components of that copier -- the feeder, the sorter, the color module, etc., then do the final sub-assembly to fill the specific order.
In-Transit Merge is not limited to manufactured products. Suppose a Red Lobster or Marriott is constructing a new facility. By receiving all the furniture, fixtures, and equipment at a third-party staging warehouse, delivery to the site for final installation can occur with precise timing.
Outsourced warehousing offers companies flexibility. They want to keep that flexibility without having to commit large capital expenditures outside of their core areas of interest.
In places like Asia and South America, there is now a growing middle class that is fueling growth in the imports market beyond the international logistics abilities of many businesses.
International logistics services and freight forwarding can reduce the costs of doing business overseas. One consumer products manufacturer who uses third-party logistics only for their international shipments was able to cut costs by 17 percent.
While some companies have spent millions developing their own EDI systems, others have decided to outsource some or all of their systems. One of the major trends in EDI systems is a movement from transaction-based systems to more interactive, planning-based systems that can manage the entire product cycle from raw materials to end markets.
The information side of logistics will continue to expand as it puts more and more power into the hands of end users.
What about the third-party you are entering into a relationship with? Has it focused on its core competency as well?
Within the industry there are large numbers of companies hanging out their logistics shingle and jumping into the ring. A lot of them are asset-based providers with fleets or warehouses pretending to be all things to all people.
As an example, several LTL carriers have gone into logistics -- where the actual aim is simply to get more freight onto their trucks. Yes, they can offer price, but do they add value?
In other words, third-party providers need to examine their core competencies as well. Do they have market-focused competency? Do they have customer-focused competency. If they don't, all they can offer is cost-cutting of individual components of service which is missing the real point of value. This is a new industry. Customers must examine the capability of the logistics providers to think beyond wheels and sheds and consider the entire supply chain.
Otherwise, there is a clear danger of a mismatch between the customer's expectations and what is delivered. Especially if these new players in the logistics arena are learning on the backs of their customers.