Switched On: Bringing The 3pl Machine To Life
WAREHOUSING AGED TO PERFECTION
Like any well-oiled, multi-articulated machine, today’s supply chain comprises many inter-related parts that alone serve specific needs and together function as a finely calibrated mechanism for consuming raw materials and spitting out finished goods. Its complexity is borne by countless factors: demand and supply, product differentiation, business process strategy, mode utilization, distribution planning, geographic scope, and working capital, among others. Its efficiency is bounded by various speeds, torques, frictions, and trajectories, internally and externally driven, that impact inventory flow.
As a microcosm for this complexity, the third-party logistics (3PL) industry is an exploding dynamo within an equally mercurial supply chain machine. It comprises a widening array of players with differing degrees of expertise—from asset-based, regional companies with vertical-centric solutions to non-asset-based global players touting 4PL capabilities.
Recurring pressures to add value to the outsourcing paradigm cast intermediaries in numerous directions, leaving manufacturers, retailers, and distributors with a dizzying variety of options to pick from. Where do you begin?
At the core of every machine is an engine that converts intent into action. In the supply chain, demand signals trigger production, which in turn harmonizes, then synchronizes, a cacophony of bells and whistles that spin warehousing and transportation gears into motion. Inside the enterprise, the 3PL serves a similar function as change agent, sparking greater supply chain efficiency and economy.
3PLS EMPOWER SUPPLY CHAINS
Outsourcing begins with an input, a need. 3PLs grow by meeting a basic need in warehousing, transportation, forwarding, freight payment, truck lease, chemical, automotive, electronics, or myriad other functions. Over time, and with innovation and successful execution, this dynamic builds into something bigger.
Finding partners capable and willing to evolve with a company’s needs, that share a similar cultural makeup and show a willingness to adapt when necessary or stick to the basics where appropriate, helps craft a mold for outsourcing success. But it’s rarely static, and the ongoing challenge for 3PLs is to expand and enrich value, and cast, break, and re-cast these molds.
The outsourcing vignettes that follow expose a progression in how companies leverage transportation and logistics partnerships to empower their supply chains and their enterprises. They illustrate core tactical elements and less-tenuous strategic and consultative asides, self-interest as well as a willingness to work in concert. Then there are the intangible chances and circumstances that drive innovation and collaboration.
From decades-old partnerships to recent engagements, transactional short-term incentives to collaborative long-term designs, these case studies trace how 3PLs have grown out of their functional silos, switched track, adapted, and evolved by following and leading customers in different directions. They also reveal the unfolding value propositions logistics service providers flaunt, and customers want, as they together explore new ways to recharge the supply chain.
Collectively, these stories also present a fascinating timeline of the third-party logistics industry, how macro and micro economic trends, twists, and turns in U.S. manufacturing and retailing have shaped the course of this evolution—and will continue to do so.
Where do we begin? In the core of the machine, naturally.
TRIGGERING OUTSOURCING EXEL-ENCE
On the heels of its semi-centennial anniversary in 1988, Toledo, Ohio-based Owens Corning inaugurated a partnership with an upstart 3PL to help consolidate a network of small, locally owned facilities northeast of Columbus.
Exel, then, was still in its infancy. Only three years earlier, National Freight Consortium (NFC), a United Kingdom-based transport company, had acquired several independent warehouse and transportation management companies in the United States, which it re-branded as Exel and located in Westerville, Ohio.
“The time and effort NFC spent in acquiring these businesses, connecting different systems and cultures—the heavy lifting—is reflected in our integrated business delivery process today,” says Vince Peters, vice president, Exel.
For Owens Corning, a global glass fiber technology manufacturer with broad applications in building materials and composites, the decision to partner with Exel was in response to a particular need.
“Our relationship with Exel began as a tactical one, a specific solution for a specific problem,” shares Mike Cramer, director of logistics and customer operations, Owens Corning. “We wanted to create a centralized location in Hebron, Ohio, to handle warehousing needs for the region.”
At the outset, the 3PL focused its resources on fulfillment and distribution for the manufacturer’s insulation products, ultimately reducing order fulfillment times from nearly one week to 24 hours.
Exel’s one-dimensional operation gradually grew beyond warehousing as it became more familiar with Owens Corning’s needs and demonstrated the acumen necessary to expand the scope of its services—for example, spotting local transportation. The 3PL took control of the shuttle service between a nearby manufacturing plant and the Hebron distribution center, using fewer assets more efficiently. Consequently, Owens Corning’s local transportation costs dropped by 26 percent.
“A mix of product was shipping to the customer, so we started looking at kitting, bringing product together as a single source,” adds Peters. “This was indicative of Exel’s continuous improvement ideology—taking out cost and improving service.”
What emerged over time was a budding partnership anchored by a shared vision between the two companies. “It evolved from a simple transactional relationship, building a mutual trust to expand beyond warehousing. Exel was active and engaged in the business and wouldn’t commit to something it couldn’t deliver,” says Cramer.
In turn, Owens Corning’s willingness to share its business strategy and needs with Exel opened a line of communication that allowed both companies to grow and streamline their respective businesses.
“We have a seat at their table,” says Peters. “Finding out how we can help them be successful sometimes creates new business opportunities for Exel. Other times, the relationship is more consultative, with less self-interest.”
Such reciprocity between 3PLs and customers is not uncommon. But finding logistics service providers that know their limitations and embrace a customer’s best interests to the point of turning away new business is a compelling example of outsourcing altruism and the value of partnership.
THE PERFECT FIT: HOW SWEDE IT IS
When BabyBjörn, a Swedish baby products manufacturer, looked to make inroads into the North American market with a new sales operation in 2005, Exel was presented with a problem. As the company’s primary freight forwarder of record, it was challenged with helping the Swedish company get a distribution network up and running to hold imported product in consignment, then release it to BabySwede, the new startup.
Exel had the opportunity to internalize this new business, but did not have the warehouse management protocol to properly support it. Instead it referred BabySwede to D+S Distribution, an Ohio-based 3PL.
“We had a location in Cleveland, the appropriate warehouse management system, and the IT capabilities to link with BabySwede’s Oracle protocol,” says Jon Ansel, president of D+S Distribution. “We could deliver this as part of our overhead.”
The core outsourcing arrangement included warehousing; container receiving and unloading; picking, packing, labeling, and shipping orders; and re-packing products for retail, reports Niklas Gerborg, president and CEO for Cleveland-headquartered BabySwede.
In contrast to Exel and Owens Corning’s rather modest beginnings, BabySwede was looking for a third-party logistics provider it could grow with—a collaborative effort with strategic underpinnings.
“We always knew we did not want to handle logistics in-house. We wanted to partner with a company that specialized in logistics services,” adds Gerborg. “We also wanted to work with a company that could handle future tasks we had not even thought of yet.”
Since the partnership began, D+S has helped BabySwede become leaner and more efficient, improving the layout of its distribution center, and revamping its pick, production, and repacking lines with new machinery to improve product flow. Currently, BabySwede and BabyBjörn lease about 45,000 square feet of dedicated space at the D+S facility in Cleveland. The 3PL helps the company manage 500 SKUs and distribute product to 3,700 customer locations in North America.
“We handle consignment inventory management and import de-containerization,” Ansel notes. “As BabySwede receives customer orders, we populate the warehouse, pick, pack, and ship, then invoice the customer.”
BabySwede now also relies on D+S to perform quality inspections on direct deliveries from factories, as well as provide product rework if necessary.
“The relationship between the two companies continues to be interactive,” adds Gerborg. “D+S is like an extension of our company; it handles much of our back-end business.”
That D+S has become such an integral part of BabySwede’s corporate fold is little surprise. The company cut its teeth in 1986 with three tractors and trailers, hauling product exclusively for Rubbermaid’s Wooster, Ohio, distribution facility (see timeline, page 76). Bill DeRodes, CEO and owner of D+S, found an unlikely business prospect in 1990 when Ansel, then purchasing manager for Volvo GM Heavy Trucks, engaged him to take on some of the manufacturer’s warehousing business in addition to transportation.
Charged by his general manager at Volvo to green-light an outsourced just-in-time (JIT) vendor-managed inventory program illustrated in an industry trade publication, Ansel eschewed more costly business proposals from the likes of powerhouses Penske and Leaseway in favor of setting up a new operation with D+S Distribution.
“I told Bill we were going to put him in the warehousing business,” recalls Ansel.
D+S CASTS A NEW MOLD
Volvo set up D+S as an offsite crossdock provider that picked, packed, tagged, and delivered automotive parts to the manufacturer’s Orrville, Ohio, facility in a quasi-lean, JIT fashion.
“As we expanded our production capacity at the plant, we outsourced more of the business to D+S, and it, in turn, grew exponentially. We were able to quadruple our Class A production capacity without any brick-and-mortar setup,” says Ansel.
For D+S, the growth was equally transparent. In more than three years, it grew its warehousing footprint from zero to 500,000 square feet across three facilities and two states. More importantly, it gave the 3PL a new core competency that has become a hallmark of its success.
With the majority of its business tied up in two customers—Rubbermaid and Volvo—the writing was inside the four walls that D+S needed to diversify its operational scope and customer base, ultimately paving the way for Ansel to come on board as president and co-owner of the company in 1995.
Bringing his perspective as a purchasing manager to the other side of the outsourcing coin, Ansel was able to identify opportunities for the company to expand its value-added services.
“I became very involved with Rubbermaid’s purchasing department and was able to generate interest in a JIT replenishment model for its corrugated business,” says Ansel.
D+S brought a level of detail into Rubbermaid’s corrugated warehouse operation—which, at the time, was running inefficiently and at a high cost—that persuaded the company to modify its fulfillment strategy. Ansel helped engineer a kanban replenishment system that enabled the manufacturer to eliminate warehousing and materials handling costs while reducing on-demand inventory and expediting turns.
“This success gave us a gospel to take to other companies and show them how we could eliminate non-value-added costs from their operations,” he adds.
D+S preached its strategy to Rubbermaid suppliers, organically cross-selling its business, while also expanding into new consumer product verticals with companies such as Toys”R”Us.
It’s a gospel that John Hewer, president of Columbus, Ohio-based packaging manufacturer Resource Packaging, took to heart as well. He’s had an up-close- and-personal audience with D+S as it evolved from a simple contract carrier to a full-service 3PL—beginning in 1994 when he was with Gaylord Container, outsourcing freight transportation and warehousing, to his recent position where he uses the 3PL for contract packaging and inventory management.
“My relationship with D+S has been continuously evolving through the years as it constantly adds value to its offerings—starting as a transportation supplier for a company I worked with more than 15 years ago to its current role as a 3PL provider,” Hewer says. “I have always been impressed with its ability to solve a problem by using an innovative approach, whether it is value-added packaging, warehousing, or inventory management.”
GREASING THE WHEELS OF INNOVATION
The mutual understanding and trust engendered by outsourcing mind share inevitably creates incentive for both the 3PL and customer to expand partnerships beyond core functions. Occasionally it’s a radical shift initiated by the customer, as the Volvo/D+S partnership illustrates. It can also be a subtle progression that builds over time.
Service providers have a vested interest in selling the outsourcing concept by bundling more value around their core services. Customers, in turn, often welcome occasions where they can leverage the resources and expertise of trusted partners to grow the relationship naturally.
For example, when Owens Corning launched a basement wall-finishing product aimed at a new market—contractors—in the late 1990s, it turned to Exel. Introducing a new item with unconventional dimensions to a previously untapped audience presented packaging, fulfillment, and distribution challenges.
“Owens Corning shared with us this product launch, knowing we had the knowledge and experience to store, handle, and transport these types of goods,” says Exel’s Peters. “Using our new loading technique, we could figure out how to fit different products together to gain more efficient cube utilization and support the new venture.”
Exel was able to provide flexible services outside the customary 3PL solution set, creating packaging that both protected the product and increased storage and distribution efficiency. The effort was so well-received that Owens Corning eventually adopted the packaging protocol as part of its finished goods manufacturing process. Consequently, this particular product line has grown exponentially since 2000.
Beyond expanding its scope of services with Exel, Owens Corning has also been able to ride the tide of the 3PL’s surging global footprint.
“As our markets and customers change, we’re looking at the location of Exel’s facilities and assets,” says Cramer.
In 2004, Owens Corning opened a manufacturing plant in Mexico, but it didn’t have a proximate U.S. facility to move product through.
“We needed a facility in Dallas to store and distribute product to the marketplace,” adds Cramer. “Our forte is not building warehouses, it’s manufacturing product.”
Responding to its customer’s need, Exel opened a Dallas warehouse to service product manufactured in Mexico and facilitate cross-border shipments. Eventually, the facility was closed due to Owens Corning’s evolving needs.
“We built the solution knowing that the market in Dallas might change. We hadthe flexibility to open up or close down when the facility was no longer needed,” says Peters.
It’s a calculated risk that 3PLs are willing to take to expand their partnerships with customers. Following demand into new locations opens up avenues to mine further business. Outsourcers, too, often find equal opportunity chasing their 3PLs around the globe.
When Exel was acquired by Deutsche Post DHL in 2005, Owens Corning was “grandfathered” into one of the world’s densest global trade networks. In addition to the added perspective—the visibility into different verticals and channels supporting both Owens Corning and its customers—the consolidation presented a new world of scope and services beyond domestic warehousing.
“The acquisition had zero impact on us, which speaks volumes,” says Cramer. “The landscape did not change. Now we’re working with DHL bringing some product in from Europe, pulling shipments directly to customers across borders, because of this link.”
DIALING INTO SUCCESS
As businesses grow more savvy in leveraging supply chain management as a competitive differentiator, their use of 3PLs follows a more strategic course. Where, in the past, service providers helped baptize initiates into the virtues of transportation and logistics, now organizations are taking greater control over how they approach outsourcing.
“The 3PL has become an extension of a company’s supply chain—integrated with selling, general, and administrative expense,” says Denis Bruncak, CEO of Hytec Automotive Group, Columbus, Ohio. He assumed control of the automotive water pump manufacturer and supplier in 2008, after inheriting what he calls a “distressed situation.”
When Bruncak arrived at Hytec in August 2008, the company was poorly managing its U.S. distribution network, including its Columbus, Ohio, DC. The situation was exacerbated by a deteriorating economy. With an extensive executive background in transportation and logistics at Odyssey Logistics and Technology, Pacer International, and Rail Van, Bruncak knew what was needed.
“We looked at our distribution costs and decided to revamp our network, including warehouse management, at our large distribution facility in Columbus,” he says.
Hytec put out RFPs to several 3PLs and was focused specifically on finding a service provider for the distribution piece. It already had plans to use a national LTL provider for the transportation part of the business.
“D+S didn’t provide the best pricing, but it did present the greatest value,” says Bruncak. “We wanted to get our distribution costs in line, and D+S helped us redesign our outbound distribution network from Columbus.”
Hytec partnered with D+S to outsource the management of its 50,000-square-foot Hilliard, Ohio, distribution facility so it could fluctuate staffing up and down to match varying business cycles—reducing staff and increasing productivity.
“We’ve gone from fixed to variable distribution costs based on sales,” he adds. “From a profit standpoint, we increased margins by double digits simply by looking at our supply chain network and outsourcing functions that needed to be outsourced.”
Previously, all inbound distribution from its Chinese manufacturing plant was coming through Columbus, which meant West Coast-bound orders had to be packaged and shipped back across the country. Hytec fixed that inefficiency by realigning its distribution network and pulling some product into a Los Angeles facility. As a result, its West Coast customer contribution margin has improved 20 percent.
From the start, Bruncak knew what he wanted. The outsourcing arrangement was based on a specific need and expectations were set. Since D+S took over Hytec’s DC, little has changed beyond what was initially scoped out—and that’s just how Bruncak wants it.
Still, D+S has left an indelible mark on the manufacturer’s warehousing footprint. “We had a warehouse approach with a flow rack system that didn’t suit our needs,” says Bruncak. “D+S crafted a process to sell off that system and better utilize space in the DC. It found a buyer for the flow rack system and designed a process that helped us be more productive.”
As with the Hytec-D+S partnership, outsourcing can be tailored to specific end-user needs. It can be structured or it can assume a more fluid, malleable role. In some cases, it reaches beyond the customer in unexpected ways.
A few years ago, Exel, Owens Corning, and a mutual retail customer were talking about movements among the three companies. Given its position, Exel offered a valuable third-party perspective.
“Because of our relationship with the retail customer, we understood its inbound transportation solution, which used cross-dock facilities to efficiently manage and consolidate inventory before delivery to various stores,” says Peters. “Owens Corning’s solution at the time included direct-store delivery, so Exel was able to share its knowledge about the inbound/cross-dock solution for Owens Corning’s consideration.”
Ultimately, Owens Corning’s cross-dock application wasn’t a strategic fit for either organization. But Exel was able to bring its expertise working in the retail space to the Owens Corning relationship.
“Sharing needs is best for both companies,” adds Peters. “We learn from our customers. Owens Corning shares information with us, which makes us a better logistics service provider.”
BUILDING AN INTUITIVE MACHINE
Today’s third-party logistics providers peddle a blanket of services that neatly wrap or fold into unique outsourcing wrinkles. A composite fabric defines the service provider’s functional excellence, but adornments are many and varied—from technology to physical assets to intellectual property. Customers can follow a specific tactical thread or swathe themselves in the full ensemble. Regardless, when 3PLs look in the mirror, they see their customer’s reflection more often than their own.
Most D+S warehouse facilities, which today comprise more than three million square feet of capacity, are user-specific likenesses of its customers’ operations and business protocol. The 3PL’s presence is a physical extension of the enterprise. “We are the customer,” says Ansel. “We’re not a 3PL.”
For many companies, the outsourcing dynamic is naturally internalized beyond the operational scope of services. Partners begin thinking in unison.
“Working with Exel feels like working with an internal department rather than another company delivering a service,” observes Cramer. “It communicates to provide insight and to find out how it can become more engaged.”
Just as process is core to manufacturing, and marketing to retail, partnership is the core of outsourcing. The gears grab when a third party can prove its value managing a certain logistics or supply chain function in a manner that benefits the customer.
It’s this level of partnership that shapes outsourcing’s arc. It’s what compels 3PLs to look beyond the status quo and seize a new opportunity when a customer wants to set up a JIT warehouse; or lures a manufacturer to adopt its service provider’s packaging process for internal use.
Some companies respect their limitations and use them as a guide for parsing out the true value third-party alliances may bring. Exel proved that axiom true by referring BabySwede to D+S. But it works both ways.
“Owens Corning has a core transportation and distribution operation,” says Cramer, “but we know our boundaries and where we can partner to augment these strengths.”
For others—outsourcers and 3PLs alike—defying the norm is necessary to shake loose nuts and bolts, tighten existing operations, and dial into new business opportunities. D+S found a niche by taking on the types of jobs that others turned away.
“If you can’t perform these functions, you become a commodity,” says Ansel. “You have to separate yourself from the competition.”
For Ansel, this shift is readily apparent in D+S’ current business model. Once a transportation service provider with value-added warehousing capabilities, it’s now a warehouse-centric 3PL towing a dedicated fleet of tractors and trailers and a full-service reputation.
This is how the concept of third-party logistics has unwound from a commoditized, transactional business model to a fluid, value-plus arrangement. As the concept of supply chain management tears down functional walls, with them come traditional expectations.
Companies attuned to the nuances of supply chain management can compartmentalize what they outsource, while integrating working parts internally as Hytec has endeavored. Or they can let value-added services accrue and build bridges between silos, organically meshing together networks as Exel and Owens Corning have done. Over time, the 3PL machine becomes less mechanical, less prescribed; it grows more intuitive, personal even.
“More than 1,000 loads go out every day,” says Cramer. “My logistics service providers touch my customers; I don’t. With Exel, we’re developing a winning relationship with our customers, too. It comes about naturally.”
To this end, keeping the outsourcing engine firing on all cylinders requires a great deal of human input, attention to detail, flexibility, and good old-fashioned work ethic—well beyond the mechanics of aligning resources to need.
“If people do not build trust and communication, the 3PL partnership won’t work,” cautions Peters. “There will always be rough times. But you can take it wherever you want to go. Growth is the result of trust and collaboration.”
WAREHOUSING AGED TO PERFECTION
Sometimes outsourcing partnerships are just meant to be, like cheese and crackers, wine and cheese, and WOW Logistics and Wisconsin Aging and Grading Cheese (WAG). If there’s one thing synonymous with Wisconsin, it’s cheese. The state ranks first in cheese production in the country, cranking out more than 2.5 billion pounds annually. Naturally, cheese production and distribution are an intrinsic trade for an acquired taste.
Third-party logistics company WOW Logistics has built a value proposition around aging cheddar since 1977, when it first opened a 108,000-square-foot warehouse facility in Wisconsin Rapids.
The Appleton-based company was the brainchild of two co-founders—Harold Schiferl and Don Utschig.
“Harold Schiferl had the idea, as he was a warehouse manager for a competing business; Don Utschig had the warehouse construction background; and I brought the accounting piece,” recalls Tom Oswald, current president of WOW Logistics.
The three worked together to secure financing and build a warehouse. Demand took care of the rest. The company grew its customer base around the paper industry, attracting clients such as Consolidated Paper. Cheese companies soon followed.
“It was a basic transactional warehouse arrangement,” says Oswald. “We grew with the paper and cheese industries, which are both big in Wisconsin.
“The transition from paper to cheese was natural,” he adds. “We built a refrigerated warehouse facility in Schofield specifically to distribute Parmesan cheese.”
The transportation brokerage part of the business evolved in 1998, when a customer inquired whether WOW could help manage refrigerated transportation in and out of their warehouse facility. At the same time, the 3PL devised a new value-added financing program to help customers reconcile and defer the carrying costs of aging cheese for long periods of time.
“We were already holding our customer’s cheese for three months to one year, so it made sense for us to take ownership of that stored product and remove the financing from their books,” says Oswald. “Cheese wholesalers often possess inventory for one year before they can sell it. It began with one client in 1998, and we realized we could build the service incrementally.”
This is the value proposition Ken Neumeier embraced when he decided to start his own company in May 2000.
“My vision was to be a third-party procurement company,” says Neumeier, president of Wisconsin Aging and Grading Cheese. At the time, many businesses were downsizing and eliminating that function. There was an opportunity to fill this niche—to procure, grade, warehouse, and finance cheese.”
As a Wisconsin-licensed cheese grader, Neumeier knew the industry and was looking for a partner that could help with storage and distribution.
“Ken shared his business plan, and it fit with ours,” says Oswald. “We had the facilities and warehouse space, and could secure inventory financing for him.”
Under its current arrangement, WAG buys directly from cheese factories and works with them to have product made specifically to customer orders. If cheese is purchased to be sharp, WAG cures and grades that order to meet customer’s flavor and functionality preferences. The wholesaler then stores inventory with WOW Logistics in temperature-controlled space.
WAG customers are high-end cheese users. Because the product is so valuable, its storage environment—including humidity, temperature, and security—is tightly controlled.
The cheese industry also operates on tight margins, which makes WOW’s financing program a major value-added incentive for customers.
“One truckload of fresh cheese can cost between $60,000 and $100,000,” Neumeier says. “When you buy multiple loads daily, and don’t move them frequently, that’s a lot of tied-up capital cost.”
Having a third-party partner that can manage both warehousing and financing, and shares this level of commitment and service, is critical.
“I entered this partnership thinking long-term,” says Neumeier. “I’d rather do things once than twice, and WOW met my requirements from the start.”
As times have changed, Neumeier has been able to engage and leverage his 3PL relationship to grow his business. WOW has helped WAG find storage facilities and space in other parts of Wisconsin, as well as Idaho. It also helped the wholesaler become more efficient, separating warehouse space into three different sections for different temperature controls, and created a USDA grading facility, where WAG customers can inspect cheese. Finally, it helps broker transportation capacity as necessary.
The partnership works both ways. WOW Logistics has used WAG as its in-house cheese-grading department for other customers.
Any way you slice it, WOW and WAG are aging outsourcing to perfection.