Teamwork is key – from MHD magazine

Walter Scremin

Transport is not just a critical area of the supply chain, it’s usually a top five business cost. For efficiency’s sake, most transport divisions outsource at least some of their requirements to specialist suppliers. The trouble is, transport suppliers vary greatly regarding professionalism and care, introducing many potential pitfalls when you bring in a new team.
When done right, partnering with the right transport operator is more like ‘insourcing’ a dedicated team but without the financial liabilities of owning your own transport resources.
Ideally, you bring in a team that becomes a genuine part of your business. Through my business, I’ve known delivery drivers to be placed with businesses for up to 25 years! In these cases it’s more than just an outsourced arrangement – the driver becomes a genuine, often much-loved team member.
 Let’s consider some key transport challenges
What are you really trying to achieve?
Motivations for bringing in a transport contractor are fairly similar: take liabilities off your books; focus on core business; and tap the flexibility to make changes at short notice. What are you hoping to achieve by partnering with a specialist? If your motivations are mixed, or vague, it may be hard to measure success.
Flexibility and resourcing were front of mind for leading paper bag manufacturer the O’Kelly Group, as CEO Sarah O’Kelly explained: “We have to deliver when we are expected to, no matter what. If a driver was absent, it created problems. We would re-allocate staff from the warehouse or elsewhere to do the deliveries. But then we’d be one down and those areas of the business would be affected, so it made sense to outsource.”
Greg Welch from Welch Auto Parts said outsourcing certain risks was a motivator for outsourcing his delivery fleet. The main risks were those associated with HR and WorkCover claims: “We’re not experienced at managing HR. Our expertise is in parts. But if your transport division is growing, all of a sudden you’ve got to manage it, or hire another person to manage it.
“Hiring and firing is not really our game, and it can be difficult to find quality drivers.”
Being clear on what you are trying to achieve enables you to understand if it’s successful.
Understanding success
Success isn’t only about numbers. So how is it best measured?
Ms O’Kelly said outsourcing transport has saved costs but some benefits would be hard to quantify. “There is a saving but it was never about that for us. It was about the cost of interruption to the business, and it’s hard to quantify that.
“The flexibility would have a financial benefit, but it’s not always easy to put a number on it.
“When running your own fleet you’re dealing with vehicle costs, breakdowns, maintenance. Something could go on a truck and you’re up for $2,000. But then you don’t have access to the vehicle either, so you need to cover by short-term leasing a vehicle.”
The biggest benefit is flexibility to manage resources, according to Ms O’Kelly. She says the increase in control was an unexpected benefit and contradicted her initial worries about outsourcing.

“Cultural fit drives teamwork – at its best, both parties work toward the same goal.”

Having regular back-up drivers on standby covers absenteeism and spikes in demand.
Greg Welch said freeing his auto parts business of fleet responsibilities has made it easier to achieve his motto of ‘right part, first time, on time’: “It has improved our strike rate no doubt. I believe it has helped client loyalty. It’s important for customers to know that the part is going to be there.”
Using a fleet telematics system has cut the risk of misplaced deliveries.
Mr Welch said in general, outsourcing has assisted with business growth by providing the flexibility and freedom to try new delivery runs. “A bonus is that at the drop of a hat we can get a driver in to do another run.”
Value for money
The biggest mistake when outsourcing in any field is putting too much emphasis on price. Going for the cheapest is rarely the best, and might actually cost you more in the long run.
A key challenge is knowing what value for money looks like. Price is important, but only one part of the whole – for example, a cheap supplier won’t be much value if they can’t respond quickly to your needs.  How do you rank other values, such as reliability or professionalism? These may be critical for customer service and business continuity.
Size of commitment
Biting off more than you can chew with a transport company creates more headaches if you later find out they’re not what you expected. Sometimes the best thing to do with a supplier is to start small. Many transport companies may not like starting small, but if they are serious about taking on your business they will be happy to prove their worth before you expand resources further.
Sarah O’Kelly said starting small helped make the decision easier: “It was a big decision, because my company had managed its own transport for about 60 years. But we put one driver on and it went really well, so we gradually increased our commitment.”
Starting small is a good way to discover and remedy any teething problems in the relationship. It will help ascertain their ability to communicate and respond to your needs. But do ensure any transport supplier has the depth and breadth to grow with you.
Cultural fit
A common mistake is rushing into a decision without really getting to know the people involved. Cultural fit is surprisingly important for success, and it’s worth taking the time to try and understand the organisation with which you are considering partnering.
Cultural fit drives teamwork – at its best, both parties work toward the same goal. Consider this question: is your supplier identifying ways you can become more efficient and trying to make you better? Are they available? Good communicators?
Culture is two-way. When describing the drivers brought in to O’Kelly Group, Ms O’Kelly said: “They are part of our team. We treat them like employees. They wear our uniform, they are here every day.
“We can’t have couriers doing their role.”
Walter Scremin is general manager of Ontime Delivery Solutions. For more information visit www.ontimegroup.com.au.
 

Spotlight on: Outsourcing transport and warehousing

Mal Walker

Over the last 20-25 years, outsourcing of logistics activities to third-party logistics service providers has become increasingly popular.
Key findings of the 2016 Third-Party Logistics Study: The State of Logistics Outsourcing (J Langley and Cap Gemini) indicate the following:

  • Although economic conditions vary significantly among countries and regions of the world, modest improvements have been experienced in many key areas. Armstrong & Associates reported aggregate global revenues for the 3PL sector growing by 9.9% from 2011 to 2012, 2.7% from 2012 to 2013, and by 6.5% from 2013 to 2014.
  • Users of 3PL services report an average of 50% of their total logistics expenditures are related to outsourcing compared to an average of 36% reported last year. This increase helps explain how improving economic conditions have impacted aggregate shipper spending on 3PL services as a percentage of total logistics expenditures.
  • This year’s Annual Third-Party Logistics Study reports that 73% of the shippers surveyed are increasing their use of outsourced logistics services, while 35% report a return to insourcing many of their logistics activities.

With an expanding sector, and increased expenditure on third-party logistics, why is that 35% are returning to insourcing? What have they discovered, or struggled with, to the extent that its driven them back to insourcing?

“Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm.”

In this article I will outline, firstly, the reasons why organisations outsource logistics activities, and secondly, what the key drivers are for outsourcing success.
Why do organisations outsource logistics operations?
There are many apparent motives why companies outsource, but from my experience there are four principal reasons:

  1. Warehousing and distribution management is not a ‘core’ skill.

Peters and Waterman in their best seller In Search for Excellence identify one of the eight factors of organisational success as ‘sticking to the knitting’. They warn that companies that stray from their core business risk their employees’ attention being diverted from that business to the point where they lose focus.
Many enterprises have taken heed and determined that inbound and outbound transport and warehousing are ‘consequential’ processes of their business, rather than ‘fundamental’ or ‘core’ processes. This has fuelled growth of the third-party outsourcing industry and expansion of scores of logistics service providers.
While many logistics service providers commenced as transport companies, they have diversified to engage in contract warehousing logistics, freight forwarding plus many other value adding services. On a world scale there are thousands of providers offering third-party services, yet there are only a handful of very large ones with the ability, network, systems and infrastructure needed for multinational customers. The top ten are:

Company USD Millions
DHL Supply Chain 17,748
CEVA 4,933
Kuehne + Nagel 4,047
Wincanton 3,794
CAT Logistics 3,744
Penske Logistics 3,282
UPS Supply Chain Services 2,990
FIEGE Logistik 2,684
DB Schenker Logistics 2,338
Ryder System 2,318

Source: Transport Intelligence
Choosing the right provider to use typically depends on the local and/or international scale of the customers, and alignment with the size and geographic spread of the logistic service provider.

  1. Performance is sub-optimal

Related to the ‘core skill’ issue, often organisations that have a strategic focus, other than in transport or warehousing, cannot attain the desired performance levels and key performance indicators (KPI) required by their customers. For example, companies that have their own in-house vehicle fleets often struggle to deliver products on time.
For instance, a service ratio of less than 98% of deliveries delivered on time is a major issue for modern consumers as they have become far more demanding. Merely dealing with the complexity of transport networks, contractors, inventories, industrial unions, and cost control is tough enough for many enterprises, so achieving 98% on-time performance is, for some, just a dream.
On the warehousing front, checking performance against just a few industry KPI can quickly help managers determine how effective their operations are. Telling signs are low levels of inventory accuracy, low stock turns and low order output ratios per labour hour, high levels of unexplainable losses or damage to goods, high operating costs, customer performance complaints and high employee turnover. When these signs are evident firms often choose to outsource rather than waste time developing their own remedies.

  1. Reduction in asset capital

Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm. Consequently, there is a trend for firms to remove warehouse assets from the balance sheet and redirect capital gained from the sale of assets to working capital and/or core asset investments. In choosing to outsource, firms can therefore transfer all the costs of distribution to their profit and loss account. This is a blessing for third-party logistics providers that have won large amounts of new business for this reason alone.

  1. Flexibility and scalability

With the advent of e-commerce, increasing globalisation and rationalisation of industries, today’s Australian market place demands fast, flexible and efficient supply chains. Coupled with shorter strategic planning horizons, the use of logistics service providers gives organisations flexibility to expand or change their method to market and volumes handled with almost immediate effect. Enterprises will typically negotiate one- to two-year agreements with Termination for Convenience exit clauses in case they wish to change their short- to medium-term strategy to market. It is simply not possible to respond quickly to market changes if there is a fully owned or leased network of warehouse and transport assets in place.

But what about cost of service?
Surprisingly cost of service, although important, is seldom a deciding factor, or driver for outsourcing decisions.
Why? Very rarely do companies save money through merely ‘outsourcing’ warehousing and transport. They may attain savings over a period e.g. 3-5 years, but not simply from the ‘act’ of outsourcing. The reason is elementary. Third-party logistics companies must pay almost the same operating costs as other organisations (sometimes more). While they do develop purchasing power and discount rates with transport sub-contractors and other vendors, there is often little disparity between the costs of a logistics service provider and would be customers. Why? The provider must add a margin to their costs to be profitable. In my experience the profit margin can range from 7-15%. This means that if a firm is seeking to bank savings after outsourcing they may well be disappointed. As a rule of thumb, companies can expect to pay from 10-20% more than current costs for outsourcing. You will recall the four reasons for outsourcing, to which cost is subservient. However, cost is a critical factor in judging the value proposition of potential providers who are quoting to do the work and in their ultimate appointment. So, to be clear, cost is not a reason to outsource, but a means to assist the decision as to whom to outsource.

“As a rule of thumb, no more than six KPI should be used. But make sure you choose the ones that are most meaningful to your business.”

What are the key drivers for success in establishing a good customer and 3PL relationship?

  1. Strategic alignment

The outsourcing decision must align with the company’s strategic direction. This is a ‘common-sense’ statement, but unfortunately not well practiced. Amazingly, many companies have suffered after outsourcing decisions were made at an operational level, without due regard to the board’s supply chain strategy.
Alas, in some cases, there is no supply chain strategy to speak of. This can cause organisational stress and is a nightmare to remedy after contracts are established. These days, third-party providers are aware that their clients may be deficient in strategy formulation, so they include clauses in contracts that enable them to change pricing and performance mechanisms if a change in company strategy or method to market occurs.

  1. Attention to detail

When seeking third-party quotations and contracts, there is no room for intuition, or best guesses on order velocities, volumes, processes and service requirements. Very detailed specifications must be prepared by enterprises with full disclosure of all available data before a quotation from service providers is attained. There is rarely too much information that you can gather. But where there is an absence of sensible interpretation of data, this can cause major issues in the outsourcing relationship.
Surprisingly, some companies agree to pricing mechanisms that are based on Customer Cost of Goods Sold, Volume Sold or Percent of Revenue. On the surface these appear to be simple pricing gauges, but often they force one party, either the customer or logistics service provider to prosper or lose unfairly. The supply chain interactions of physical movement and electronic information is complex and overly simple charging mechanisms deserve scrutiny as they can lead to disputes if one or the other party decides that they are being ripped off.

  1. Resource wisely

Both during implementation and the ongoing partnership a competent team is essential. Both the customer and the third-party logistics company must create an open and trusting working relationship. Each company’s team should include senior relationship managers from across the organisations, who meet regularly to discuss and monitor progress and performance.
Too often, once an agreement is signed implementation is left under the stewardship of the logistics service provider. This is a mistake. It must be a joint exercise. The best implementations are those that have a key member of the customer on the team to lead, organise and develop the relationship to full implementation with the provider. Such implementations are usually augmented by robust project management methods to ensure that all milestones are achieved.

  1. Raise potential issues early

From my experience, issues that are not dealt with proactively and in good time can fester into ‘relationship breakers’ and end in disaster. Therefore both parties should take a long-term perspective and be mature in their outlook and approach, always avoiding disrespectful behaviour to the other party. It never helps if one party is kicking the other. During implementation planning phases representatives from each company should meet weekly to discuss implementation tasks. Some may argue that this is too often, but in my experience the regularity maintains momentum and full attention to successful outcomes.

  1. Use KPI to manage

The contract and agreement should be subject to regular reviews of KPI. Data speaks volumes in terms of performance. For both warehousing and transport, KPI should be agreed at the outset. Typical measures include delivery in full on time, goods lost in transit, stock damage, ullage (unexplained loss or damage), inventory accuracy, time to receive goods, and time to dispatch goods.
As a rule of thumb, no more than six KPI should be used. But make sure you choose the ones that are most meaningful to your business. In this way, a focus on the ‘facts’ can help remove ‘emotionally charged’ opinions or feelings by either party.
Whether you are an organisation seeking to outsource, or a third-party logistics provider, by following these tips you will be equipped to enter into an outsourcing agreement that is ‘fertile for growth, and well placed to build into a mature and successful partnership.
In my next article I will be covering the different types of outsourcing relationships and issues to be aware of when entering contracts.
Mal Walker is manager, consulting with Logistics Bureau where he works with local and international organisations to guide them in specification preparation, establishment and review of outsourcing contracts. For more information contact Mal on 0412 271 503 or email mwalker@logisticsbureau.com.
 
 

Caroma to reorganise its supply chain

Bathroom hardware giant GWA Group (Caroma’s owner) is repositioning to an Australian designed, engineered, and outsourced manufacturing model.
GWA Group is to reposition the company to create more efficient manufacturing practices for its customers and business. GWA Group will be completely redesigning its distribution network inclusive of a purpose-built distribution centre, all the while reducing operational costs and environmental footprint. The new facility is also enlarging the group’s R&D resources.
GWA group general manager of supply chain Sean Mitchell said: “The transformation of our warehouse management system will future-proof our business. The outcome will provide us with flexibility to grow with improved supply and operational efficiencies.”
The new 31,029 m2 facility in Prestons, NSW will reduce GWA Group’s overall network footprint by consolidating NSW operations to one purpose-built site with state-of-the-art warehousing and R&D facilities.
TM Insight led the property procurement process, and together with GWA Group, is designing the warehouse and managing the construction and implementation of the facility. The Charter Hall-managed Prime Industrial Fund (CPIF) is developing the asset for ownership within its $2 billion industrial and logistics portfolio.
“This new facility will be truly bespoke to ensure optimal warehouse and operational flow for GWA Group’s diverse product range. This new building, which will be owned, managed and developed by Charter Hall, will be moving away from the traditional property led industrial building model into a purpose-built facility to meet the business objectives of GWA Group,” said TM Insight director Milan Andjelkovic.
The brief encompassed numerous environmentally sustainable design elements to  reduce GWA Group’s environmental footprint and simultaneously increase operational and costs efficiencies.
The facility is anticipated to be operational in 2018. The overall project is estimated to cost $45 million.

Modest pay hikes for Australia’s logistics workers

Seventy-one per cent of Australia’s transport and distribution employers will give their staff a pay rise of up to three per cent in their next review – compared to 65 per cent of employers across all industries nationally.
The annual Hays Salary Guide, released in early June also shows that 16 per cent of transport and distribution employers will not increase salaries at all, above the 11 per cent non-industry-specific average.
Hays Logistics reported that 10 per cent of transport and distribution employers intend to award a salary increase of between three and six per cent in their employees’ next review, and just three per cent will increase salaries at the higher level of more than six per cent, compared to19 per cent across all industries.
The Salary Guide shows that many employers have a positive outlook yet remain cautious when it comes to salaries.
“2016–17 proved to be a mixed year for the logistics industry and, while costs remain tightly managed, recruitment activity has increased across all job levels,” said Tim James, Director, Hays Logistics.
“3PL providers continue to grow and the trend towards outsourcing logistics functions means salaries are being squeezed to accommodate aggressive pricing strategies geared to win new business on lower margins.
“Across Australia, positive productivity is linked to efficiency improvements, be that in warehousing, transport or supply chain. Companies are targeting candidates who have a strong knowledge of systems and processes, combined with a proven track record in reducing costs and achieving demanding KPIs.
“From a supply chain perspective, companies continue to seek jobseekers who have strong systems knowledge, especially SAP/APO. However these skills are scarce and subsequently salaries for these roles have increased, especially in NSW and Victoria,” he said.

Kuehne + Nagel to manage Carcano Antonio’s in-house logistics

Italian company Carcano Antonio has awarded a six-year contract to Kuehne + Nagel to manage its in-house logistics.
Specialising in the field of aluminium foil rolling and converting, Carcano has two production plants in Delebio and Mandello, where it applies a fully integrated and traceable production process, from the raw material to the finished product.
In order to simplify the current logistics model and to increase operational efficiency, Kuehne + Nagel will now implement an equally standardised operational approach across the company’s entire logistics operations.
Within the partnership, the logistics provider will reportedly be responsible for the set-up and storage of coils coming from the manufacturing sites and picking and shipment to the customers, including domestic and international transport.
Thirty workers that were previously employed at Carcano’s warehouses are expected to be transferred to the in-house logistics operations carried out by Kuehne + Nagel in order to ensure a seamless transition of processes.
In addition, Kuehne + Nagel said it will support the design of the layout and set-up of Carcano’s new logistics centre in Andalo, which is currently being built.
“We selected Kuehne + Nagel thanks to its values, know-how, credibility and the constant attention paid to people: a careful choice of the right partner can ensure a total integration of the logistics in our industrial system,” commented Paolo Mari, Organization Development Director of Carcano.
Ruggero Poli, Managing Director of Kuehne + Nagel Italy said: “We are very pleased that Carcano chose Kuehne + Nagel to manage their logistics activities. This new contract is a result of our proven expertise in production logistics and motivates us to continue innovating and developing solutions that effectively support our customers in their day-to-day business challenges.”

State of logistics outsourcing study shows major changes ahead for supply chain

New findings from the 20th Annual Third-Party Logistics (3PL) Study reveal both shippers and third-party logistics providers continue to be invested in collaborative and positive relationships.

The 2016 Annual Third-Party Logistics (3PL) Study, which examines the global outsourced marketplace of shippers and 3PLs in the logistics industry, is a joint effort of Capgemini Consulting, Penn State University; Korn Ferry; and Penske Logistics.

The report is based on a survey of more than 260 shippers and logistics service providers in North America, Europe, Asia-Pacific and Latin America. The study found that 87 percent of shippers and 96 percent of 3PLs have agreed-upon performance expectations, and 80 percent of shippers and 81 percent of 3PLs have formal performance reviews. 

Change is also being observed in the ways shippers and 3PLs are working together as competition within the logistics industry ramps up. Tightened capacity along with increased consolidation among logistics service providers has resulted in fewer partners for 3PLs and increased prices. As a result, 44 percent of survey respondents reported that they have enhanced relationships to guarantee shipping lanes and on-time shipments while 40 percent have increased rates. Among shippers, 29 percent said assets have not been available to move shipments when needed while 29 percent have engaged with a larger number of 3PLs to get access to capacity. 

Bob Daymon, Vice President of Transportation Management for global logistics and supply chain management provider Penske Logistics, observes that the spirit of collaboration between 3PLs and shippers has led to increased efficiencies in the supply chain with these enhanced relationships resulting in operational cost savings and ensuring reliable coverage and better rates.

To differentiate themselves, 3PLs are working to provide sustained value, innovative solutions and information to facilitate data-driven decisions. Technology and data are being used to assist shippers with selecting the right shipment modes to maximise efficiency and reduce costs. Among 3PL respondents, 60 percent are using technology to increase visibility within orders, shipments and inventory; 40 percent for planning within transportation management; and 48 percent for scheduling within transportation management. 

To meet increasing customer requirements, 58 percent of respondents said they are investing in new capabilities for themselves, 40 percent said they are leveraging new capabilities from other companies in different industries, and 15 percent said they are leveraging new capabilities from competitors. 

Shanton Wilcox, Vice President and North America Logistics and Fulfilment Lead at Capgemini Consulting, notes that these factors should create an interesting competitive environment, spurring significant changes to the 3PL business model. While social, crowd-sourcing and flexible fulfilment will converge to create opportunities for alternative logistics service providers, the challenge will be how traditional, asset-based providers respond to these circumstances.

Workforce innovation and agility will be particularly important for the 3PL industry given the unprecedented labour and talent shortage in the logistics industry. The majority of 3PLs (79 percent) said they are unprepared for the impact of labour shortage on their supply chain. However, more than half of the shippers (53 percent) felt they could rely on their 3PLs to address the effect of labour shortage on their business.

According to Neil Collins, Global Leader of Logistics, Distribution and Transportation for Korn Ferry, the pre-eminent authority on leadership and talent, the employee skill sets and traits that logistics companies need are shifting as new technologies and distribution approaches transform the industry. With wage issues and job alternatives increasing competition for talent, companies are forced to make a fundamental shift in how they recruit today's workforce for tomorrow's needs. 

Sevaan boss says sourcing from China can work out more expensive

Sevaan Group’s CEO Tony Panrucker has questioned the practice of Australian manufacturers sourcing from China, with the benefits from using local suppliers often being overlooked.

Many Australian businesses have recently complained about Australia’s high-cost environment, and have looked to China for components.

Panrucker, however, said that many of the beliefs in sourcing from China being simply cheaper were grounded in habit, and there were risks, such as logistical issues, that should be considered.

“The inherent risks are so profound it is somewhat confusing why so many companies in Australia blindly accept outsourcing to Chinese manufacturers as some sort of destiny – almost as a default culture,” the CEO said, in comments reported by Dynamic Business.

“The [companies] that have normally found the right supplier domestically and can attest to the various risks which actually make China an unattractive risk if the manufacturing supply chain.”

He also mentioned that despite unit prices seeming cheaper, but standards and speed could be drawbacks, with weeks potentially being added to lead times.

Sevaan Group was formed in 2011 in a merger between Proline Technology and Wisby & Leonard, and “provides services that satisfy the majority ofthe steel processing industry requirements under the one roof.”

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