Chemicals firms seek special attention from 3PL providers
David Hannon, News and Transportation Editor -- Purchasing, 6/3/2004 2:00:00 AM
Surveys and industry studies show outsourcing of logistics is increasing in virtually all manufacturing industries, as cost-conscious shippers seek value-adds and cost-reduction opportunities from third-party logistics (3PL) providers. But the chemicals industry is not gravitating to outsourced logistics with quite the same vigor as retail, high-tech and automotive, and few 3PL providers are targeting chemicals with their services.
According to a 2003 survey by Northeastern University and Accenture, logistics outsourcing providers are increasingly focusing on certain, more profitable industries and shying away from those with more complicated logistics, including chemicals. The report says, "[3PLs] are terminating many contracts that yield marginal returns, and focusing on customers and specific industries that generate higher yields. That would tend to reduce the size of the customer base while increasing the volume generated by their targeted customers and industries."
John Auger, vice president at Brook Warehousing Corp. (Bridgewater, N.J.) and chair of the International Warehouse Logistics Association's council of chemicals logistics providers, says the specialized nature of chemicals logistics creates two conflicting trends for shippers in the industry. On one hand, it is more difficult to find a 3PL that will handle hazardous materials or bulk chemicals. But on the other hand, the risk and cost associated with handling such loads makes outsourcing more enticing to some shippers.
Auger feels new regulatory and security issues will drive more 3PLs to stay out of chemicals in favor of more profitable industries. This trend may play into the hands of the chemicals-specific 3PLs such as Cendian, ChemLogix and Odyssey Logistics, which are working to fill in the gaps where major 3PLs fall short in chemicals.
Borden's strategy
Steve Lesser, director of global logistics at Borden Chemical in Columbus, Ohio, says the chemicals industry in North America has been slower to adopt the outsourced logistics model because the supply chain in this market is more fixed than in other regions.
Lesser provides a unique perspective on the outsourcing of logistics. Before coming to Borden Chemical, he worked for a 3PL. He says the chemicals industry overall outsources less of its logistics activity than many other industries, for several reasons, most notably the special handling requirements required for chemicals shippers and the increased security concerns since 2001.
"[Chemicals firms in North America] have fixed infrastructure so it is more beneficial to work with carriers directly and establish core carrier programs than working with 3PLs which tend to move your carrier base around, as customers and suppliers change," Lesser says.
Borden has taken a modal approach to its outsourcing, evaluating specific modes and activities to see if they would improve with outsourcing. To date, its outsourcing is limited to some warehousing, terminal activity and transportation management.
"In most cases, the companies to whom we've outsourced specific activities have particular strengths and capabilities in those specific modes, but are not broad enough to cover the entire spectrum," Lesser says.
Borden has looked into outsourcing its corporate logistics function, but found that the major 3PL players didn't have the chemicals industry experience and the chemicals-specific 3PLs did not have the size to handle Borden's supply chain.
"It's something of a risk for a chemicals shipper to turn over central logistics control to a 3PL with limited chemicals industry experience," Lesser says. "And the dedicated chemicals 3PLs we found were spun-off from large chemicals companies, so they have a background in the chemicals industry but have been dedicated to single clients. Translating that expertise to a number of customers of various size brings a level of risk."
General's strategy
The logistics staff at General Chemical's Industrial Products group (GCIP) was doing more with less as the company moved to a leaner manufacturing and operating strategy. But there were two major impacts on its freight operations as GCIP got leaner. First, its internal logistics staff was cut down to six people to control an $80 million freight spend. With regulatory work and a fleet of 2,200 rail cars to manage, much of the "project work" at GCIP was being put aside. Secondly, its volumes on the inbound side were leveling off due to maximum manufacturing capacity while outbound volumes dropped as customers took more control of freight, further reducing GCIP's leverage with its carriers.
J.Warren Casely, director-corporate supply chain for GCIP says, "We found we were no longer one of the 'big guys' for our freight partners and realized we could either continue to play in the marketplace on our own or we could look for someone with more substantial leverage. We chose the second option because our plants were at maximum capacity and more of our customers were taking control of their freight."
While these decisions were being made, General Chemical as a corporation was switching to a centralized J.D. Edwards ERP system, which the logistics group wanted to tie into. The issues of manpower, spend leverage and technology requirements made GCIP a good candidate for outsourcing, but Casely says the logistics group needed to decide what to outsource and what to keep control of internally.
"We decided to maintain part of our calcium chloride business because that business is extremely seasonal with a high concentration of freight moves in a short period of time," he says. "When we interviewed 3PLs and showed them the business model for calcium chloride, we could see they were overwhelmed by it, so we decided not to outsource that."
After a thorough evaluation of the 3PL players available, GCIP decided to partner with Atlanta-based Cendian Chemical Logistics. Casely says its chemicals-specific business model made Cendian a top pick, as well as the $1.1 billion in freight spend it brought to leverage with carriers.
"We looked at all the larger 3PLs and we found they fit into two major categories," says Casely. "Most did a lot of good work with packaged goods, distribution centers and LTL/truckload shipments, but not a lot with big bulk rail and trucking shipments. That took us away from the major 3PLs with great distribution centers because we don't use them. We focused on the ones that were 'chemically committed' and understood our business and had a good relationship with railroads in the U.S. and Canada."
Casely says there are so many products and services available from 3PLs today, it is smart to go into a partnership with a clear idea of what needs to be improved and what improvements are not as high on the priority list. To ensure that process, Cendian started by gradually taking over existing logistics functions within GCIP and just keeping them flowing smoothly before focusing on making major improvements. Casely says it takes a 3PL some time to really understand how an individual company does business and what specific improvements are best. If a 3PL comes to a shipper with a list of expected improvements right out of the gate, it may be more of a sales pitch than a business case.
To make the transition to Cendian as smooth as possible, GCIP broke its logistics operations down by mode and by product line. For example, the first area of responsibility transferred to Cendian early this year was its transport of soda ash by rail, which had high volume, but limited complexity and offered a good savings target. By the fall, GCIP hopes to have converted all of its soda ash over to Cendian and move onto its calcium chloride and start the process over again based on volume and mode. Cedian will get calcium chloride rail and packaged and bulk truck volume, which is roughly 30% of the total calcium chloride distribution activity. GCIP will keep the vessel movements, terminal facilities and distributor applicator network side of calcium chloride in-house. Cendian will also get the magnesium hydroxide distribution business.
On the personnel side, Casely says any logistics organization moving to a 3PL should make sure it has buy-in from both top-level execs and ground-level employees. A top-down directive can't be force fed to employees while a new strategy from the ground level needs executive backing to get funding and growth.
Getting techy
Many 3PLs are also playing up their technology offerings as part of the benefits to outsourcing, which Lesser says appeals less to chemicals shippers than those in some other industries, again due to the fixed infrastructure of the chemicals industry. Shippers looking to optimize a transportation planning or management system tend to be more willing to switch carriers, modes or routes than the typical chemicals shipper.
Lesser feels the chemicals industry has focused much more on process engineering and the systems associated with it, and less on systems that support business processes, like a transportation or warehouse management system.
"But depending on the company and what part of the chemicals industry they work in, these systems might be very beneficial. Shippers might be able to take the systems that have been developed in other industries like high-tech and adopt them for their business."
Auger also feels the chemicals industry "is a bit behind in terms of technology," when compared with other industries such as grocery or retail. "There have been occasions where the 3PLs have tried to lead the chemicals firm down the path and introduce technology to them," he says. "But there has not been much interest from chemicals manufacturers in investing in technology with 3PL partners. It tends to be more reactive when a chemical company suggests something to a 3PL and they react."
GCIP, however, is one of those exceptions. Casely says the technology infrastructure offered by Cendian was a major selling point in its decision to outsource, calling it the most user-friendly technology he came across in his 3PL search.
The increasing globalization of the chemicals manufacturing base is also driving some interest in outsourced logistics. Third-party logistics service providers can help manufacturers move into new markets, a growing trend in almost every industry today, including chemicals.
"We are looking at new markets because we've got stable products with flat growth in North America," says Casely. "We have to seek out new markets to grow. We have a joint venture in China for calcium chloride. That was important in selecting a 3PL, as we wanted to make sure they could participate in that joint venture."
The risk of outsourcing internationally, according to Lesser, is having all your eggs in one 3PL basket. Aligning an entire overseas operation around a single outsourcing provider could backfire if there are issues with that 3PL (service levels, acquisition, out of business, etc.) in that particular region.
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