Special Delivery

Dec. 21, 2004
Logistics service providers want to manage your supply chain. Are they ready?

With sales of $177 billion in 2001, General Motors Corp. (GM) is the second-largest manufacturing company in the world (as ranked on the IW1000). At No. 4 and $162 billion, Ford Motor Co. is not far behind. As large as they are, both companies have increasingly turned to outsourcing to better optimize their logistics networks. Which begs the question, if such mega-corporations can't leverage the resources and fully capitalize on economies of scale, then who can? The answer, in one area at least, is Schneider Logistics. The Green Bay, Wis.-based company is one of a growing group of logistics service providers striving to do more than simply oversee their clients' transportation and warehousing needs. In this case Schneider coordinates the entire delivery of aftermarket parts to the North American dealerships of both GM and Ford. The GM relationship in particular began as an effort to move the company from worst among its peers in this area to best-in-class, recalls Rodger Mullen, president of Schneider Logistics. From "1996 to 2001 the concentration was more on service to the dealers, optimizing transportation, optimizing the network for the supply chain. Much of that optimization has been done," he says. "Now the focus is more on visibility, so GM really understands what is moving, what is coming from their suppliers, so they can have the least amount of inventory in their system and still serve their end customer." Bolstered by such collaborative efforts, Schneider and other logistics companies say they're now able to strategically manage their clients' supply chains from end-to-end. To do this they're leveraging their network optimization expertise and the capabilities of new IT applications that offer real-time shipment visibility to apply just-in-time principles to the supply chain. The ultimate promise: increased supply-chain predictability, which leads to reduced safety stocks (inventory in motion as well as in storage). And as inventory carrying costs fall, so does customers' cost of capital. According to an annual study by the Georgia Institute of Technology, Ryder and Cap-Gemini Ernst & Young (CGE&Y), the most widely outsourced logistics function today is outbound transportation, followed by warehousing, inbound transportation, freight bill auditing/payment, customs brokerage, freight forwarding and customs clearance. Survey respondents noted that 43% of their current logistics expenditures are for outsourced services, and they expect that proportion to grow to 60% by 2005-2007. Over the five-year period from 1996 to 2001, gross revenues of contract logistics providers almost doubled to $60.8 billion, reports Armstrong & Associates Inc., a research and consulting firm. Driving this growth are the same factors underlying many outsourcing decisions. As the complexity level increases with global supply chains, coupled with a need to upgrade IT systems, companies are shedding activities that they've decided aren't core competencies. As various logistic functions have been spun off to third parties, demand has grown for broader organizations that can effectively monitor and orchestrate all of these regional and functional contractors. To provide such services, these so-called "lead logistics providers" have been rapidly expanding their scope through technology investment and consolidation. "What's going on is classically what's occurred in a number of other businesses and industries," observes Alan Montgomery, a vice president in the logistics consulting practice of CGE&Y. "What happened to trucking after trucking deregulation -- and even railroads after railroad deregulation -- is that the big get bigger, the small go into niches, and the mid-sized companies don't survive in the market because they have trouble defining their specific market-segment focus. The strategy is to become seamless global providers -- same access, same level of service -- anywhere in the world." Aspirations aside, Montgomery notes that the benefits of outsourcing logistics -- improved service, lower costs, enhanced transparency -- haven't always been easy to come by. There are the typical problems associated with transitioning to an outside supplier. Another challenge lies in translating regional or industry-specific expertise to a broader area. The logistics service providers also have varying levels of technological expertise; some are further along in their efforts to integrate the software applications for managing warehousing, multi-modal transportation and supply-chain optimization. For manufacturers, outsourcing the day-to-day oversight of their logistics activities is a big risk. But like all risks, it's one that can be managed. The key is to identify and not sacrifice a critical level of control. At Ford, the company approaches such relationships by first posing a simple question: "What resources, people or technology, does the outside have that we could buy more cheaply than doing internally?" asks Joe Hinrichs, Ford's executive director of material planning and logistics. The answer is balanced against the core level of expertise the company wants to maintain in house. "We try to maintain oversight of logistics network design because we know -- from a Ford program-planning standpoint -- what's happening as far as products, sourcing patterns," says Hinrichs. The company also maintains close control of supplier relationships. That leaves a lot of opportunities. "As we over time continue to grow together and become better partners, which we've seen a lot of this year, some things naturally surface that could be done better by the LLP [lead logistics provider]," he says. Penske Logistics is one of Ford's LLPs where the level of engagement has increased. Penske handles all inbound parts to Ford's 21 North American assembly plants. It's a big task. Jim Erdman, vice president of operations for Penske Logistics' automotive division, says the company handles 30,000 freight bills per week for Ford. From January through the first week of December of 2002, Penske had adjusted Ford's inbound logistics network in response to 7,000 sourcing changes, as the company switched from one supplier or one state to another. "Logistics has evolved so much in the last 10 to 15 years that we're looking for ways now to use logistics as a competitive advantage rather than just a cost center," says Erdman. As an analogy, he likens it to a retail outlet. If Penske Logistics allows such a business to carry less inventory, that increases available shelf space, allowing the outlet to carry a greater assortment of products and increase sales. "The major thing we've been able to provide [to Ford] is much greater visibility down to a part level of all of the conveyances coming into the plants, which allows them to make material decisions much more quickly than they could in the past," he says. Taking the pursuit of a competitive advantage to the extreme, third-parties might one day facilitate collaborative efforts between market competitors. In automotive for example, multiple OEMs could lower mutual costs in certain, well-defined areas using a common logistics service provider and network resources. "There are a lot of things that we do that the customer doesn't ever see, so it's not a differentiation when it comes to the marketplace. It's just a matter of cost," says an open-minded Hinrichs. Referring to the southeast Michigan region in particular, he continues, "This is a worldwide marketplace here. If there are some things regionally that can be done that lower costs in areas that don't effect the customer, we owe it to our business to take a look at it." Underlying all of these logistics industry trends is a drive toward end-to-end visibility of parts, materials and products as they move through the value chain. In another recent study by CGE&Y, this one in conjunction with the University of Tennessee and Georgia Southern University, visibility is singled out as the key factor driving supply-chain collaboration, optimization, connectivity execution and speed. "When we talk about visibility, we talk about shipment visibility, order visibility, inventory visibility, a broad network of connectivity across the value chain, linking carriers to distributors to manufacturers," explains Montgomery. Such visibility offers suppliers better demand signals, allowing them to use their resources more efficiently, and it can also give instant order-status to customers. But the line of sight must extend across borders, continents and modes of transportation. Seamless integration of all of the players is still a few years off. "This is very much an early-adopter stage of a new way of managing because the technology is just coming into the market," notes Montgomery. For a recent project his group identified more than 40 different software providers offering supply-chain visibility or event management tools. "So much that is articulated is vision. The reality is that people aren't running fast races here, they're just learning to walk." North American Third-Party Logistics Companies

Name Net Logistics Revenue
($ millions)
Danzas AEI Intercontinental 3,965
Exel plc-Americas 1,633
UPS Supply Chain Solutions 1,479
Penske Logistics 1,036
Ryder 1,022
Schneider National 1,013
Tibbett & Britten Group North America Inc. 846
National Traffic Service Inc. 800
Menlo Worldwide Logistics 708
EGL Eagle Global Logistics 644
TNT Logistics North America 634
Expeditors International of Washington Inc. 607
AmeriCold Logistics 550
J.B. Hunt Dedicated Contract Services 549
USF Logistics 542
northAmerican Logistics 525
Caterpillar Logistics Services Inc. 484
Ruan Transportation Management Systems 460
C.H. Robinson Worldwide Inc. 457
APL Logistics 420
Source: Armstrong & Associates Inc., 2002

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