Inbound supply managers ask 3PL providers: Got technology?
David Hannon, News and Transportation Editor -- Purchasing, 4/15/2004 2:00:00 AM
Historically, logistics outsourcing has been much more prevalent on the outbound side than the inbound. For many buyers, inbound freight is handled by suppliers and not accessible to outsource. Even for those buyers that have control of inbound logistics, outsourcing may present issues of control in what is typically a more complicated set of processes than outbound distribution. But the increased emphasis many third-party logistics providers (3PLs) are putting on visibility, tracking and optimization tools has helped them win over more confidence in handling inbound logistics.
"When you look at the beginning of the typical supply chain, it is very complex and specialized and as you moved down through there is more commonality," says Chuck Moffett, director of production and logistics at Horizon Organic in Longmont, Colo. "Once you get to the finished goods distribution, you can build better loads and coordinate more. For example, in our case, you can move organic milk with any other refrigerated product going to the same customers. But on the inbound side shippers are working with different ingredients and suppliers, different schedules, moving supplies into the plant, and the process is much more complicated."
Bringing in a technology-savvy 3PL can help improve visibility and performance in the more complicated inbound processes. A 2003 survey by Georgia Tech found that 95% of logistics professionals surveyed felt that having the right software would give a 3PL provider a competitive edge in the marketplace. And high-tech 3PLs are heeding the call, bringing visibility tools to the table that can help a supply chain organization not only track shipments coming into warehouses and manufacturing plants, but confirm that what is being shipped is what was ordered, a key to the just-in-time inventory models in automotive and high-tech firms concerned with component obsolescence.
"Inbound is a very fast-growing aspect of outsourced logistics," says Don Maltby, executive vice president of Hub Group Logistics, an Illinois-based 3PL. "Through Web-enabled products, 3PLs can help put some more discipline into the supply chain and provide full visibility and improved management, and help with supplier compliance. The 3PL helps bring technology in which a customer may not want to invest in addition to its logistics-specific experience. The 3PL can use technology to look holistically at the entire network and route shipments in the most effective way through optimization models and load consolidations."
Richard Armstrong of Armstrong & Associates says the dramatically increased volume of supplies and finished goods inbound to U.S. facilities from China has increased the amount of outsourced inbound logistics in the U.S. and 3PLs with dashboard visibility programs are in high demand for managing these supply lines.
"3PLs have bought the software to supply people with landed costs, which is very useful because you can separate the inbound cost from cost of goods," says Armstrong.
Milking the benefits
One of the most common methods of outsourcing inbound flow of parts is to use a third-party provider on regular group pickup routes. Armstrong explains that in the late 1980s, U.S. automotive makers with strong domestic supply bases started using 3PLs to set up and manage regular trucking routes to pick up parts and bring them to manufacturing sites.
"Essentially the 3PLs plan milk runs out to suppliers, pick up parts that are going to be used for assembly, then bring them into locations close to the manufacturing plants, cross-dock them and bring them into the plants," Armstrong explains.
When Yamaha set up a plant in the U.S. in 1987 to build all-terrain vehicles (ATVs), it signed on a 3PL for its inbound logistics, but viewed the 3PL as a "necessary evil," according to Patrick Cavanaugh, logistics planning supervisor for Yamaha's plant in Newnan, Ga. He says at that time, suppliers would call the 3PL and tell them what the load was and where it had to go and Yamaha would blindly receive what it was the supplier was sending in.
But an initiative three years ago aimed at controlling the level of materials in the warehouse and pipeline drove Yamaha to start looking for a 3PL that could bring more to the table for its inbound freight optimization.
"We started looking at 3PLs that offered not only standard transportation, but also the IT infrastructure that would help us manage the pipeline inventory and make sure the correct material was picked up from the supplier to begin with," says Cavanaugh. The main concern for Yamaha in finding a suitable 3PL was its dynamic production model. At the same time, Yamaha wanted to maintain its direct relationship with carriers to negotiate price and service levels without the third party intervening. Yamaha also managed a fleet of trucks for local shipments under 500 miles and wanted to maintain control of that fleet.
Yamaha brought in a technology-heavy 3PL to manage its inbound carriers and supply. Transfreight had worked with several automotive companies and gained some experience in dynamic production models similar to Yamaha's. The new technology provided visibility into the order chain that followed Yamaha's production flow and provided point-of-pickup verification. Yamaha's MRP system is connected directly into the 3PL's network and pickup sheets are dispatched to drivers for cross reference.
As part of its move to a more streamlined inventory and manufacturing model, Yamaha began focusing on consolidating some of its LTL shipping into truckloads. But using a spreadsheet to plan truckload milk runs for the million parts flowing into the manufacturing operations every day was simply not realistic. The technology for load planning and optimization available from the 3PL allowed integration with the company's MRP system.
And it worked for Yamaha. Three years ago, 70% of Yamaha's inbound freight came on LTL. Today, 75% of it comes on truckload. The success of Yamaha's outsourcing on the inbound side has led the company to consider outsourcing some outbound freight.
"Truckload is just cheaper than LTL," Cavanaugh says. "We were getting rate increases from LTL carriers and there was no way to check that the supplier shipped what they had agreed to. And when you're running a JIT inventory system that is a risky operation."
Cavanaugh says outsourcing in-bound freight requires a much closer relationship with a 3PL than outsourcing outbound. To that end, Transfreight has employees working side-by-side with internal logistics staff within Yamaha's plant.
"If you told me three years ago that we'd have this relationship with a logistics provider, I would have said you were crazy," he says.
That emphasis on information sharing goes for setting up the request for proposal when selecting a 3PL to manage inbound freight. Armstrong says it is important to pull the information together at the front end so the 3PLs bidding can make a good run at providing the most meaningful proposals.
"I have seen RFPs just fall apart because a company is not trusting enough to give the 3PL information such as individual transportation shipment costs. You have to give that to 3PLs to get proper models on your supply chains."
Virtual milk
Most people who hear the term "virtual company" would be thinking high tech and not organic milk products. But that's just what Horizon Organic is—a virtual company producing organic milk. As such, it outsources all of its inbound logistics work. The unique nature of its product and the regional nature of its industry means Horizon uses about a dozen "milk haulers" to bring its raw materials into processing plants to be made into finished products (organic milk, cheese, yogurt, etc.). Because its inbound logistics is so specialized, Horizon has been unable to find a true 3PL to handle its end-to-end logistics and continues to manage its outsourcing partners internally.
"We looked into bringing on a broader 3PL a couple years ago, but there did not seem to be a good fit," says Moffett. "Most 3PLs focused more on the finished goods distribution piece and a little on the inbound side. Bringing milk in from the farm is fairly specialized and the distribution to customers, makes it a broad scope of responsibilities. We could not find a 3PL ready to handle that."
Tracking the inbound shipments and carriers is getting more complicated and Moffett says the company is developing a more advanced database program that will integrate with its ERP system for shipment tracking and carrier analysis. The database is a step up from the Excel spreadsheets Horizon used in the past.
Conversely, the outbound distribution of its finished products is much less regional and specialized and allows Horizon to use more household names in the truckload industry like C.H. Robinson and Marten Transport. Horizon was acquired by Dallas-based Dean Foods in January and is now looking at where the two can combine shipments and leverage resources.
"The finished goods is a higher-volume national business, so we use national carriers," says Moffett. "It is more customer-driven because you are going to the customer or distributor so schedules are tight. We do some full truckloads, but most are multiple stops from a distribution center. On the inbound side there is more flexibility. You still have to keep your plant running, but the plant can work with you more on scheduling trucks in and has more flexibility. Customers for finished goods have fixed delivery windows."
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