Big Box or Scatter Shot? 3PL's Can Help Both

Companies that are considering outsourcing warehouse operations for the first time should keep several issues in mind. Most important is ensuring that customer service is enhanced, rather than diminished.

Another important consideration is what logisticians call Optimized Network Design -- or, more simply, "Where should I locate my outsourced warehouse, how many should I have, and how will this impact the flow of my products?"

Won't I Lose Control? An important psychological barrier that any first-time outsourcer must cross is the fear of losing control if internal employees are not running the warehouse.

Let's analyze the "control" issue. If you don't outsource, and it's a slow time at the warehouse, your employees are drinking coffee on your dime. Not so in a cross-utilized third-party logistics (3PL) environment, where labor can be shifted to other contracts during periods of slower activity.

If a major screw-up occurs, you can do two things with your own warehouse employees: scream at them, and fire them.

In an outsourced environment, however, you can still scream at the 3PL and fire them but you also have the option of building penalty clauses and gainsharing programs into your contract to ensure that the 3PL pays you if anything out of the ordinary happens. That option is not available using your own labor. In fact, most companies that outsource warehousing operations find they gain more control than they ever had.

What Kind of Warehousing Should I Outsource? Warehouses come in many shapes and differ in their design and operation. Some common warehouse operations include:

Finished goods
Raw materials
Direct to Consumer fulfillment (often for catalogues and web sites)
Vendor-Managed Inventory (VMI)
Returns (Reverse logistics)

Inbound Flow Center Products (seasonal or slow movers)

Each type of warehouse is fundamentally different from the next, but in most cases, companies can consolidate several of these functions into one location, rather than operate numerous warehouses around the country.

Although every company's requirements are different, many opt for the "warehouse-within-a-warehouse" function -- replenish across the aisle, rather than across the country -- to keep customer satisfaction high while avoiding ballooning facility costs.

And remember, there is a fundamental difference between "public" (multi-client) warehousing for small footprint and/or short-term users, and contract (single-client) warehousing for larger companies with multi-year demand.

Costs vs. Client Happiness

Two standard examples of the types of companies ripe for outsourcing warehouse operations for the first time.

1. Big Box: These companies operate one or more large warehouses or distribution centers, but don't realize they are using more labor than they need. Big box companies often use order picking, rather than more efficient zone or wave picking algorithms typically employed by 3PLs to dramatically cut down the required head count.

These companies are delighted to discover that the 3PL needs only 80 workers, instead of the 100 workers the company employed, and that the 3PL will hire their best 80 people. These big box companies get the best of both worlds: they significantly reduce costs and maintain a trained and right-sized warehouse team.

2. Scatter Shot: These companies scatter inventory around the United States with impunity -- placing inventory in a small, public warehouse every time they get a new customer. Then 20 years go by, and now they operate 30 warehouses.

Sound familiar? Sales has told corporate management that they'll lose customers if they don't operate this way. Operations hasn't realized that with the advent of modern logistics concepts, customers can still receive one- to two-day delivery service with a consolidated, optimized small warehouse footprint.

30 warehouses can be consolidated into five without disrupting customer deliveries, and costs can be rationalized.

Will Freight Costs Rise?

Companies now often handle will-call demand with a "hold for pickup" option at the local truck terminal, at a fraction of the cost of expensive public warehousing. Customers are just as happy to go to Address A instead of Address B.

Third-party logistics providers are standing by to help both big box and scatter shot organizations. Remember, they do this for a living.

Frequently those considering outsourcing will ask: "If I consolidate my warehousing network, won't my freight costs rise because some customers will now be farther away from a warehouse?" Yes, some costs will rise, but others will fall.

Remember, three costs are involved: the freight, of course, but also the capital warehouse expenses, and the labor component to move merchandise to your customers.

Third-party logistics providers are trained to combine all three costs, rather than look at only the cost of transportation, to give you a lower total distribution cost than before you outsourced.
For companies trapped in the "we've always done it this way" mindset, a whole new world of cost-avoidance opportunities are waiting for you.

And your customers will be right there with you...so will your 3PL...good luck!

Panama Canal - What next?

Speculation about the Panama Canal's future continues to stir dialogue between the Panamanian government, The Panama Canal Authority (ACP), and local economists.

But for the time being, the 20th-century anachronism is capably and safely meeting the capacity demands of its most important constituents -- global shippers.

This is evident in ACP's second quarter 2006 metrics:
Panama Canal/Universal Measurement System tonnage increased 5.7 percent to 75 million tons from 70.9 million tons in 2005.

Total Canal transits increased 3.5 percent to 3,862 transits.

Despite tonnage and traffic growth, accidents dropped 3.4 percent to 1.04 accidents per 1,000 transits. In 2005 there were 1.07 accidents per 1,000 transits.

Still, one ominous sign of future capacity constraints persists: Canal Waters Time (CWT) -- the average time it takes a vessel to transit the Canal including waiting time for passage -- increased 15.8 percent to 30.08 hours.

In 2005, the average dwell period was four hours shorter. CWT for booked vessels (ships holding reservations) also increased 3.4 percent to 16.85 hours from 16.3 hours.

Three factors contribute to this anomaly, first, world trade is booming and demand for the Canal's services has increased.

Second, grain exports through Gulf Coast ports to Asia have increased significantly since infrastructure in the New Orleans area has begun recovery from Hurricane Katrina.

Third, the additional surge in traffic occurred during the Canal's peak season, creating a backlog.

Global growth trends, however, indicate this problem will likely worsen before it gets better. The Canal is currently operating at 85 percent capacity and will potentially reach its threshold as early as 2009, economists predict.

To accommodate increasing container volume between Asia and the United States, the ACP and Panamanian government are floating a $5.3-billion expansion plan -- which Panama's citizens will vote on later this year -- that would add a third lane to the Canal. The expansion project would dig two new channels and larger locks on both ends of the canal, capable of carrying larger post-Panamax vessels.

Some officials are skeptical of the proposed cost and scope of the plans. They argue that the numbers are too conservative while also questioning whether future profits would be directed to the welfare of the country or to foreign enterprises.

But both global ocean carriers and shippers -- who will ultimately foot the bill through scaled toll increases and pass-along surcharges -- are positive about the proposed plans.

The expansion will enable more ships to utilize the Panama Canal. It will strengthen Panama financially by bringing considerable revenues, promote development of Panama's maritime industry, and ensure Panama's position as a regional maritime center. It would also benefit the growth of regional and world trade.

If the referendum passes, the ACP anticipates starting the dig in 2007 and completing the expansion in time for the Canal's centennial in 2014.

Intelligent Logistics or Just Good Old Common Sense?

What does the word ‘Intelligent’ suggest when used in conjunction with Logistics? It connotes “smart,” foresight-driven, sensory, responsive, and adaptive Logistics.

How can one equip Logistics to have foresight, be able to sense changes, respond to those changes and be adaptive to changes in the environment? These are hot topics in the Supply chain and Logistics world today. This article does not profess to address all components of creating ‘Intelligent Logistics’. However, it provides an introduction to the logisticians of the current thoughts and trends in the arena and opens avenues for enthusiasts to explore further.

The Four Pillars of Intelligent Logistics

Embedding “intelligence” into Logistics processes and systems involve building four robust pillars of Integrated planning and execution, Visibility, Collaboration and Analytics.

Intelligence in Planning and Execution

The foresight and responsiveness are essentials at all levels of the logistics – strategic planning, tactical planning, operational planning as well as execution. It is equally important to build strong linkages between planning and execution processes and systems to embed “smartness” into Logistics.

The strategic planning addresses such issues as network design in terms of plant, warehouse, partner facility locations and capacity planning based on the customer demand, supplier positions, transportation and other fulfillment costs. The periodicity may range from six months to five years. By its very name, strategic planning is supposed to be intelligent. However, in reality most strategic planning exercises neither embed foresight, nor create responsive networks. In the dynamic world of constantly escalating oil-prices (and hence fuel and transportation costs) and increasing demand-side and supply-side pressures, network planning needs to be almost continual; and create an adaptive network that can quickly respond to market changes.

Tactical planning addresses how best to use the existing facilities and assets for optimal customer service at least cost. It also includes ‘what-if’ sensitivity analysis and simulation techniques to sense the effects of delta changes in demand, supply, or network and helps respond better to changes.

Operational planning generates realistic inventory and shipment plans either based on constrained-optimization or heuristics. Historically, most operational planning engines have been batch-oriented. Then the transactional systems execute the plans generated by the batch engines. However, in the real world, orders keep changing, carriers reject tenders, inventory is not found in the warehouse due to discrepancies, or equipment breaks down on the road and so on. The uncertainties in the Logistics network are increasing both on the demand side and the supply side. On the demand side, orders would change more dynamically based on the real customer demand. On the supply side, Logistics networks are also lengthening with global supply chains.

A key ingredient of “smart” Logistics is to have a tightly integrated planning and execution. Batch-oriented optimization and transaction-oriented execution must be give way to ‘real-time optimization’ and ‘responsive execution’ with a closed loop feedback linking planning and execution.

Visibility

Visibility refers to true understanding of the customer demand, real-time track and trace of inventory at item level, and track and trace of shipments as well as alerting when events deviate from expectations. This visibility into orders (demand), inventory and shipments (supply) help sense the changes in demand and supply in near real-time and respond quickly to these changes. This will help reduce safety stocks and hence costs, improve customer service and make the Logistics network more adaptive. They will also help execute such best practices as cross—docking, in transit inventory merging, and delayed allocation strategies.

The key tools of visibility are

• Track and trace within the enterprise through event monitoring engines

• Track and trace across partner network by receiving partner messages through EDI, XML or Web.

• Integration Hubs manage connections among heterogeneous systems located in multiple enterprises.

• Exception Detection and Alerting compares status messages with predefined metrics and workflows, sending alerts when pre-defined tolerances are violated.

Collaboration

Intra-enterprise and inter-enterprise Collaboration is closely related to visibility. It also extends beyond visibility into multiple levels of Collaboration, particularly for inter-enterprise collaborations.

At the lowest level of Transaction Automation, inter-enterprise Collaboration involves data and document exchange through EDI or Web. They will help automate no of otherwise manual transactions reducing the administrative costs, errors etc. Coupled with track and trace functions, these can help introduce some intelligence into the network by monitoring events and generating alerts.

At the next level of Collaboration, demand, inventory, schedules etc are shared, enabling better planning. This can help make all the parties “smarter” through better decision making.

True Collaboration involves re-engineered business processes across the partner network with closed loop planning and execution.

The integration of systems, processes and people across the network creates high velocity network that is lean, agile and adaptable to respond quickly to the changes in the environment. The cost of this true collaboration is falling dramatically with the advent of new web-based tools.
Retail and Consumer goods industries undertook a number of initiatives like CPFR (Collaborative Planning, Forecasting and Replenishment), QR (Quick Response), ECR (Efficient Consumer Response), CRP (Continuous Replenishment Programs), VMI (Vendor Managed Inventory), CMI (Co-Managed Inventory) etc in the last ten years or so to leverage inter-enterprise collaboration for creating responsive networks.

Analytics

Metrics are critical to an Intelligent Logistics Network. Real-time capturing of logistics metrics enables a performance-driven, responsive logistics network. 360 degree score cards, logistics dashboards, performance reporting, and ad hoc queries are some of the tools in this category. Six Sigma methodologies are also increasingly used in the supply chain and logistics domain creating goal oriented, performance driven, intelligent networks.

Near real-time analytical tools that provide incisive service and cost metrics help intelligent decision making. Analytics combined with six sigma methodologies also enable root cause analyses to address the core issues. Last month’s feature article talked about ‘Information Factory’. The logistics information factory provides an excellent infrastructure to enable Logistics analytics.

Conclusion

Injecting intelligence at all levels of the Logistics network has never been more critical than in today’s Demand-driven, Globalized supply networks. Affordable tools are available today for making the logistics networks “smarter” through Collaboration, Visibility and Analytics. There are still challenges in tightly integrating the planning and execution processes in a closed-loop, but that is clearly the direction for the Logistics industry.

Emma Maersk - The Grand "Dane" of the Sea

World's Largest Container Ship Named "Emma Maersk"


A.P. Moller-Maersk Saturday named the world's largest container ship, the 11,000-TEU declared capacity "Emma Maersk," at the group's Odense Steel Shipyard in Denmark.

Traditionally secretive about its ships, A.P. Moller-Maersk is known to underplay its declared capacity and the "Emma Maersk" is thought to have a capacity ranging from 13,000 TEUs to 15,000 TEUs, based on a reported length of 399 meters (1,310 feet) and 53 meters (174 feet), eclipsing Korean shipyard Hyundai Heavy Industries' yet to be built 13,000-TEU design.

The new vessel was named after A.P. Moller-Maersk's Senior Partner Maersk Mc-Kinney Moller's late wife Emma, who died last December.

A.P. Moller-Maersk said that environmentally friendly silicone paint covering the below waterline hull of the vessel will help to reduce water resistance and cut the ship's fuel consumption by 1,200 tons per year.

DC Sites - Location is key, but don't forget about the people in that location!

The decision to build a distribution center comes with expectations that it will help a company reach key markets, hire an appropriate workforce, and maximize profitability while minimizing operating costs. Finding that ideal location in a community that embraces the company's operations, however, is more difficult than merely choosing any site within a targeted region.

Location decision is crucial for a business' long-term success. Factors such as infrastructure, labor costs, proximity to customers and suppliers, and community and site characteristics need to be part of an acceptable model that supports the company's goals and objectives.

Finding the Right Site

If a company selects a less-than-optimal site, it may have labor availability problems, ongoing transportation issues, and yearly recurring costs. These issues can be resolved by paying close attention to site selection.

Companies choosing a distribution center location need to consider three key factors to site selection success:

1. Locating near delivery points cuts transportation costs. Transportation is one of the most important factors in distribution center logistics. The cost of hauling products from a distribution center to customers and consumers is based on fuel prices as well as driver and truck maintenance costs, which usually increase annually.

Being in the right location is vital for minimizing transportation costs from a distribution center to retail stores, or wherever a company's final destination is. Generally, costs are associated with shipping from the distribution center to the end user, as opposed to vendors shipping into the distribution center.

On the Rail Trail

Although truck is often the standard method for transferring goods, many companies desire a location with rail access to cut shipping costs on large volumes of heavy products that do not require precise delivery times. Businesses should be prepared for a timing trade-off, because delivery times via rail often are slower and less predictable.

An optimum distribution center location for a major retailer, for example, needs to best serve its delivery points. Analyzing its network of existing and planned distribution centers is a good way for the retailer to determine optimal location. In the retail business, on-time delivery is crucial, so proximity to clients and suppliers through highly accessible highways or rail lines saves time and cuts costs.

In addition to a site's physical location, its internal functions -- rack and conveyor systems, and pick-and-pack solutions -- are important. When designed and located effectively, these systems help increase product flow and shipping efficiency.

2. Labor and community acceptance can make or break a project. While various markets may meet a company's transportation needs, it may be harder to find a reliable and productive labor force. As such, labor force is the foremost community characteristic to identify in site selection. Firms should also analyze turnover rates because retraining employees increases operating costs.

Most communities will provide a survey outlining the area's wage and benefit rates, which are impacted by geography and the presence of organized labor. Often, incentive packages are offered to businesses that meet or exceed community wage averages.

Getting a community's support is vital. When a community is behind a project, everything from permit approvals to the plan's review processes moves faster. Selecting a pro-business community is a definite plus.

The likelihood of increased truck traffic and noise in the area are the most common concerns raised by citizens when firms build new distribution centers. Companies can mitigate these concerns by locating off an interstate and away from residential areas.

The best way to counter misperceptions is to have community leaders speak with officials in an area where the company has successfully located other operations.

3. Site characteristics impact initial investment and beyond. Carefully selecting a site location with ideal characteristics minimizes up-front development costs. A fairly flat site that is not environmentally challenged is the best location for a distribution center. Blasting large rocks and mitigating wetlands is expensive and time consuming. Choosing sites that are free of environmental issues also reduces initial site development costs.

The time it takes to study and resolve environmental issues may influence companies to search in another market. Sometimes, however, they have no choice but to build in an environmentally sensitive area to serve customers.

Companies with short development time frames need sites with existing water, sewer, power, and roadways, but these sites are usually more expensive. If businesses plan far enough in advance, they can leverage communities to provide free or discounted land, and find government incentives that deliver infrastructure at no cost to the company -- and can potentially benefit the community.

Increasingly, organizations require fiber optics to receive and transfer data. New technologies run through fiber optics allow companies to set up inventory systems that automatically order items from the distribution center when they are purchased from a store.

From available properties to workforce data to economic development incentives, the Internet has put valuable information at the fingertips of those seeking optimal distribution center locations. Yet attaining the appropriate mix of site characteristics is still complicated by time-consuming research and approvals.

The time and money spent planning and building a distribution center is accurately viewed as a major investment, but choosing the right site will reap positive business performance for years to come.

Where do you want to outsource?

I recently participated on a few panels at the EyeForTransport 3PL Summit in Atlanta that were focused on the inbound supply chain from China. In addition, the GIL's Maritime Supply Chain Council is working on a white paper about PO to PoP visibility (Purchase Order to Point-of-Purchase for your review), which I am a member. During the conference, numerous times, the statement was made that retailers should not put all of their eggs in one basket when it comes to sourcing in China. They need to mitigate their risk over a few countries...maybe even "outsource" in the USA...my statement was about the great state of West "by God" Virginia...

The audience did not want to hear negative, derogatory, or dismissive talk about the booming China economy. The listeners were the supply chain counterparts of religious evangelists; nothing could counter their almost mystical faith in the Chinese economy's limitless power and growth.

Certainly, there is much to admire about China. Within a few generations, it has transformed itself from a primarily rural nation into an economic colossus -- a feat unparalleled in modern times. Warning signs, however, point to an economy that is turning from white-hot to red-hot to red.

The Warning Signs

The signs are plain to see, if people look at reality instead of fantasy. A few facts point to a potential slowdown in the Chinese economy:

Foreign investment in China during the first half of 2005 is level with last year. This is the first period without growth in capital investment in almost a decade.

Exports, key to the Chinese economy, have slowed. Today, you can place an airfreight shipment on the next flight out of any airport in China, including Hong Kong. One year ago, cargo shipments were backlogged for days and even weeks -- embargoed cargo sat on tarmacs at Hong Kong and Chinese mainland airports waiting to be loaded onto already full aircraft.

China's domestic economy has cooled. Car sales, particularly luxury models, have collapsed. Consumer electronics purchases for homes and businesses have also dropped appreciably.

Housing prices -- always a sensitive barometer of economic health, or lack thereof -- have declined with softened prices. (The United States is not the only nation facing a housing bubble.)

In addition to an economy that is inevitably slowing, China has an overlooked Achilles heel. Its weak spot? China relies almost totally on goods produced to others' specifications. It does almost no product manufacturing, shipping, or marketing for its own products.

As The Wall Street Journal recently commented, "The toughest challenge for China is how to transition from low- cost, often no-name manufacturers to respected global brands."

China's contrast with Japan in this area is striking. After World War II, "Japan Inc.," the informal name given to the partnership between Japan's government and private industry, was determined to produce quality goods. The shoddy merchandise that was the hallmark of Japanese manufacturing in the 1920s and 1930s was erased...they have largely succeeded.

Toyota makes great cars, and will soon surpass General Motors as the largest automaker in the world. Sony sells the best laptops of any manufacturer. Canon produces the best photocopiers. And Bridgestone tires are market leaders.

China's Fate

By contrast, it's hard to name one indigenous, homegrown Chinese product. Instead, Chinese factories seem content to churn out lingerie for Victoria's Secret, computers for Hewlett-Packard, toys for Mattel, and thousands of other products for end users in the United States and Europe.

Making unsuccessful bids for international oil companies hardly solves China's utter lack of brand identification in the West.

China is not immune to the "maquiladora syndrome." Maquiladora plants sprung up about 30 years ago along the U.S.-Mexico border to produce a wide range of low-cost components and finished products for the American market. For a number of years, these factories flourished, with laborers often working 24-hour shifts.

Then came the great sucking sound from China. U.S. manufacturers, always looking out for new, cheap production sources, moved en masse to China. Today, many of the maquiladora plants are closed; some 75,000 Mexican workers living in border cities either lost their jobs or are working part-time shifts. How many have crossed the border to find work in the US? Many of the communities are ghost towns now.

Will China suffer a similar fate? Not completely, because China's industry is far more diverse than in Mexico and other parts of Asia where outsourcing is under siege from low-cost competitors.

During the next few years, however, companies will likely start to disengage from production and distribution facilities in China. U.S. transportation companies rushing into China for the first time to create trucking networks, or establish large sorting facilities, for example, have missed the boat.

What Next?
Who will take the production reins from China? I'm betting on the Eastern European nations formerly under Communist rule. The Czech Republic...Slovakia...Hungary....Poland...and now even the Ukraine, Belarus, Croatia, and the "stans" are poised for their run!

These nations have embraced capitalism and are now hungry for work. They have skilled, experienced, yet low-cost labor forces; offer substantial tax abatements to train workers; and other inducements for U.S. and Western European companies to establish production and distribution facilities in the region.

And the similar cultural, political, and historic heritage shared by these nations and the West is an intangible, yet equally important advantage.

To keep up with the constantly evolving global market, businesses must remove the blinders that have them focused exclusively on China and open their eyes to the other five billion people on our planet.

So, like I said...get ready West Virginia, Ohio, Kentucky, etc...what goes around, comes around...