Outsourcing is allowing consumer packaged goods companies to focus on their core competencies and let logistics be handled by best-of-breed logistics providers

Consumer packaged goods companies (CPGs) are heeding the following advice: Focus on what you do best, and outsource the rest. It may sound trite, but manufacturers are learning that this is the way to go in today's increasingly complex logistics world.

Outsourcing logistics allows CPGs the ability to focus on such areas as research and development, manufacturing, and marketing, and to then reap the benefits of handing over logistics to third-party logistics providers (3pls).

James W. Moore, associate partner for Andersen Consulting (Chicago, IL), says the deregulation of the 1980s made it easier for companies to outsource. The next decade marked the rise of third-party firms with hundreds of millions of dollars and dozens of contracts.

The model for the 2000s has evolved to become Fourth Party Logistics (TM--Andersen Consulting) and the emergence of fourth-party logistics providers (4pls), who provide operating responsibility beyond that of the traditional third-party arrangement.

In addition, e-commerce is driving outsourcing and alliances between 3pls and 4pls.

In a survey of CEO perspectives on the logistics industry, conducted by Northeastern University College of Business Administration along with Benchmarking Partners, CEOs of 3pls surveyed identified e-commerce related business as the most significant opportunity in the 3pl marketplace.

The report also says that many 3pls have formed alliances with information technology companies to provide support in database management, software development, middle ware, warehouse management systems, transportation management systems, EDI and e-commerce applications.

According to Craig Sommerville, director of industry strategy, third-party logistics for McHugh Software International (Waukesha, WI), e-commerce "put a whole new set of logistics requirements out there that most manufacturers aren't ready to handle just yet. To pick, pack and ship eaches requires a warehouse or part of your warehouse that's different, and two different technologies to handle bulk picks vs. single picks."

Starting an outsourcing relationship doesn't come cheaply or rapidly: Providers and consultants interviewed mentioned price tags from about $150,000 up into the multi-million dollar range and schedules that run from under a month to about a year, depending on the number of users, volume of operation and technology.

Yet the time and effort involved apparently improve performance and reduce costs.

CEOs of 3pls surveyed by Northeastern University and Benchmarking Partners said that their typical customers averaged a 5.9% average percentage revenue improvement, an 11% average improvement in gross margin, and a 12% average expense reduction.

"The number-one benefit is lower logistics costs," says Sommerville. "as well as a 20% increase in on-time deliveries. Then there are things like client-retention, which is more difficult to put a price on."

Contracts are a necessity in the outsourcing world in general, and logistics is no different.

The most typical is the three to five year contract with renewable options. However, Richard Armstrong, president of Armstrong & Associates, Inc. (Stoughton, WI) notes that "As 3pls migrate offerings to the Web, we see more cases of transaction-based pricing for a 3pl rather than cost-plus long-term contract."

At QRS Corporation (Richmond, CA), Adam Messinger, vice president of hosted application services, explains that customers aren't charged for a software license, they pay a monthly fee for access to the QRS infrastructure and are then charged based on the amount of traffic based on a per document framework.

Jeff Baum, senior vice president of international operations for Manhattan Associates (Atlanta, GA), says contracts are usually built around key performance indicators (KPI), such as shipping accuracy, order turnaround windows, and presentation of goods shipped. "Logistics providers are usually under the gun to provide operational excellence year to year," he says.

Can We Talk?

Lack of communication between systems is a common problem encountered when two organizations work together. However, miscommunication between client and 3pl is cited as the factor most likely to make the outsourcing relationship turn sour.

"A big frustration for the 3pl is that they will price one way, expecting certain volumes, and once the manufacturer is up and running, they'll find that model is completely different than what they priced for," says Sommerville.

McHugh is planning to offer the ability through their system to track the difference between what was expected between the two parties and what is actually occurring. "Then the 3pl will have hard evidence when they go into negotiations," he says.

Jeff Baum says that Manhattan Associates' Manager's Workbench allows 3pls to measure their performance in such areas as efficiency, labor, and inventory handling.

"You absolutely have to do your homework," says Armstrong. "You have to look at the capabilities of service providers, talk to them and make sure they can handle what you want them to do. It's a lot like being married; you work and evolve a partnership over time."

"We are very people-focused,' says Debby Bosselman, director of e-commerce strategy and strategic alliances for PFSweb, Inc. (Plano, TX). The company does quarterly business reviews that involve both PFSweb and its clients.

"We want to know where you're going with your business," she explains. "If you sell teen apparel and you signed contracts with eight major magazines and are going to be on leading TV shows, we need to know that, because I guarantee it will impact your sales."

Future Fallout

The logistics industry in the future is likely to be one of the fewer and the bigger. With the proliferating number of 3pls, an industry shakeout is very much a possibility, with the survivors being those who can provide global services.

"We're seeing a lot of consolidation amongst companies," adds Sommerville. "As we move into more global arenas, a lot of companies are consolidating to gain presence in areas where they don't currently have a footprint."

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