Mr. Toad's Wild Ride

Dec. 21, 2004
Logistics outsourcing start-ups are high-stakes projects where managing change is a fine art.

When companies decide to outsource any logistics activity -- such as running a warehouse, taking over a private fleet, or even directing an entire supply chain -- to a third-party logistics firm (3PL) they want it done yesterday. Management has a specific up-and-running date in mind, and if the contract negotiations eat up most of that time -- well that's too bad. The start date stays the same. The pressure to succeed in these logistics-outsourcing projects is intense, and the risks are high. A poorly organized implementation can have serious consequences -- even going so far as to damage a company's relationships with its customers. It's no wonder then that one senior executive at a 3PL firm refers to start-ups as "Mr. Toad's Wild Ride." The phrase alludes to the antics of one of the main characters in the well-known children's book The Wind in the Willows by Kenneth Grahame. Mr. Toad, whose love of automobiles far outstrips his ability to drive, careens wildly around the landscape in his car, smashing into things and scaring his friends to death. In the case of logistics outsourcing, says Gerald Kyle, director of operations for the Elmhurst, Ill., branch of Menlo Logistics, "once the contract is signed, you usually have a massive green light with a very tight timetable." For example, Menlo, based in Redwood City, Calif., just finished setting up a network of distribution centers for Imation, the 3M Co. spinoff that makes, among other things, floppy disks. "We opened a warehouse in Oregon last December; one in Australia in January; one in Kansas City in February; one in Harrisburg, Pa., in March, one in Ontario, Calif., in August; and finally one in Mexico City in September. This was definitely a mad dash," notes Kyle. A Start-Up Case Study Not all outsourcing projects are as complex as Imation's. The Composites Div. of Owens Corning recently changed warehouse operators at its Jackson, Tenn., plant, reaping immediate improvements in efficiency and safety. The story of Owens Corning's 3PL firm changeover goes back to 1994. At that time, the construction sector began rebounding from its early '90s slump, and demand for building materials started to rise. Responding to the market, the Composites Div. reopened its production plant in Jackson, which manufactures wet-use chopped strands. The coated glass-fiber strands are chopped into 1-in. lengths and used in manufacturing roof shingles. In 1994 plant management decided to outsource management of the adjacent 200,000-sq-ft warehouse to a small 3PL service provider. By 1998 the construction industry was booming, and wet-use production had more than doubled at Jackson. Daily shipments went from 15 to 20 truckloads to 45 to 50. Unfortunately, the 3PL provider running the warehouse couldn't handle the additional volume. In December 1998 Bill Shockley, the plant's controller/administrative leader, decided it was definitely time for a change. During the next month Shockley put together an information packet describing the Jackson operation in detail. He sent the packet, complete with improvement goals and objectives, to five 3PL firms and asked them to bid on managing the warehouse. He wanted the transition to occur in 30 days, an almost unheard-of timetable. One of the 3PL firms invited to bid was Exel Logistics, headquartered in Columbus, Ohio. Exel was successfully managing a facility for another Owens Corning division, so it came highly recommended to Shockley. On Jan. 20, 1999, Shockley met with Exel for the first time. At that time Exel gave a general presentation about its capabilities and discussed the scope of the project. One week later the two parties met again, this time for Exel to present a formal proposal outlining its solution, improvement opportunities, and a detailed timetable for implementing the transition. "Exel addressed every area of our warehouse operations," Shockley remembers, "including safety and human resources, at a competitive price." "We presented our costing analysis so they understood what our labor costs would be," explains David Ganor, manager of chemical-sector business development at Exel. "This was an open-book meeting where we discussed our margins, our return on investment, and our anticipated payroll costs. We outlined exactly how we would manage the changeover from the current provider. We focused especially on the transition plan. We talked about our project-management process and got concurrence from Owens Corning that our time frame was acceptable." About mid-February, after reviewing all five bid proposals, Shockley chose Exel. "We agreed on a deal on a Wednesday or Thursday, and Exel had people here early the following week to [learn] what our needs were, what we were trying to do, and how they would help us accomplish our goals," the Owens Corning manager says. At the same time, Exel systems people met with their counterparts at Owens Corning's Toledo, Ohio, headquarters to understand the inventory-control system. Exel assigned a project manager -- Bob Wiseman -- to the start-up, giving him full responsibility for the implementation. Together with Shockley, he developed a project charter that set out what needed to get done by when. "The project manager used that to review our progress daily," Shockley notes. "He'd say, 'The timing on this is here, here's where we are, and here's what we need to do to take the next step.'" Exel began working on the start-up before the final contract was signed. "We had a basic agreement, but we knew that if we didn't get started before the final contract was signed, there was no way we could meet the timetable," says Ganor. "We were fortunate to have a national operating agreement [with Owens Corning] already in place, so all we did was develop an addendum to that." In fact, staffing the warehouse was one of Exel's biggest challenges. "Unemployment in Jackson is extremely low, so it's very hard to find good employees," Shockley notes. "I was concerned that Exel would not be able to find 'Exel-type' employees." The former warehouse operator had failed, in part, because of its inability to attract and hold quality employees. "They had trouble getting people to even show up for work because they weren't offering a very attractive wage-and-benefits package," Shockley recalls. Exel offered a better employment package. It also followed a more formalized recruitment process, aided by skills profiles it had developed for the various warehouse positions. Exel brought in its corporate human-resources manager to run a multiday job fair to staff the warehouse. Exel began training the new hires -- again before it assumed control of the Owens Corning warehouse. "We trained people off-site [in a nearby Memphis facility] so there was no impact on the in-place provider," explains Ganor. "We did the same thing with the information systems. We sent people to Owens Corning's Toledo offices to [learn] its systems. This meant that, on day one, we had fully trained forklift and information-systems people stepping into their positions." Integrating the two companies' systems was a bit more challenging than usual. The Composites Div. was in the midst of implementing an SAP enterprise-resource-planning system at other manufacturing plants. This meant that IT resources were in scarce supply. Fortunately, notes Shockley, Exel has several systems people who are well versed in SAP. Finally, Exel assigned a full-time warehouse manager -- Tammy House-Williams -- to the Jackson project early in the pre-implementation phase to work side-by-side with Wiseman, the project leader. House-Williams now runs the facility on-site. "Today she is part of our plant-support team that meets weekly to discuss production volumes, customer satisfaction, and the state of the plant," Shockley reports. "She works with us and is treated as an Owens Corning employee." At close of business on Friday, Mar. 12, the old 3PL firm vacated the Jackson warehouse. At 7 a.m. on Monday, Mar. 15, Exel assumed control. To customers, the change was invisible. Owens Corning never missed a beat. "We thought about notifying our customers about the change, but we were so confident that the week before the start date we decided not do that." This was a calculated risk because, as Shockley points out, the warehouse people are the last to touch product before it goes to Owens Corning's customers. The gamble paid off. "On the first day," reports Shockley, "we shipped over 40 truckloads, and none was loaded wrong, nothing was missed. I was impressed. I really wanted a smooth transition, and that's exactly what we had. No shipments were missed, and no production lines were shut down." Nine Keys To Success Kyle of Menlo Logistics outlines nine outsourcing best practices that helped Owens Corning achieve success: Map all flows -- "The first thing we have to know is everything about the customer's current movement of information and product," Kyle explains. "Then we develop process flow charts of both and figure out how Menlo's tools for managing warehousing and transportation can improve service response time, improve visibility of orders, and so on." Figure out the systems integration -- Menlo holds "joint-application-development sessions" with the client at which the IT teams from both companies figure out how to link information systems. Develop the project plan and timeline -- Using the information developed from the first two exercises, the implementation team (comprising both Menlo and client members) develops a detailed project plan and timeline. This is a living document that includes every step or activity that needs to occur -- from the macro to the micro level. Build the A team -- While all this analysis and systems work is going on, Menlo and the client work to select the implementation team. "You want to go in with the A team," says Kyle, "and give them the resources they need to get the job done well." Team members must be assigned accountability for their part of the project. Communicate constantly -- Clear, constant communication is critical to the implementation's success. "Without excellent communication, the mad dash will never happen," says Kyle. Find the right location -- One assumption in all this is that the 3PL provider and client have selected the best location for the facility. Sophisticated network optimization models can analyze the company's supplier and customer locations, production plants, and a host of other factors to come up with the ideal site and the best type of facility. From that point, it's a matter of finding or building the right structure. Hire good people and train them well -- As the start-up date nears, the 3PL firm starts interviewing to staff the facility, conducting all the necessary testing and background checks. Menlo looks for people it thinks will adapt well to its way of doing business. Two weeks prior to "going live," Menlo starts training the new employees. "We train them in using the warehouse-management system and actually do some receiving, putaway, picking, and shipping," notesKyle. Other training covers everything from learning about the customer's products to handling hazardous materials. Conduct test runs -- The final step before the actual start-up is to conduct test runs. "The client gives us a certain number of orders to see how we handle them all the way through the system," Kyle explains. "They try to crash the system, and we correct any problems that surface." Go live with a safety net -- Once the project goes live, the full Menlo start-up team stays close to it for the first week or two to iron our any glitches and continue any needed training. "The team meets every morning that first week to go over what we learned from yesterday's operation," Kyle says. Gradually, as operations smooth out, the start-up team backs off, and the operating team assumes complete control.

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