- Food Logistics
- Manufacturing Support Services
Outsourcing non-core competencies has been a business strategy since the beginning of time. In the supply chain world, we assume that as soon as someone invented the wheel, there was an enterprising cave-entrepreneur ready to move freight for a fee. Similarly, there are a number of reasons why an organization may decide to outsource its supply chain services, but how much thinking have organizations done as to when to pull the trigger?
To set the table for this decision, let’s back up and identify some of the most commonly cited reasons for why companies decide to outsource supply chain services:
There are plenty more, but we’ll stop there for demonstration purposes. We like to say that if we have worked on implementations with 100 different customers, we have seen 101 different reasons to outsource. So with those benefits as the goal, we are left to ask a much more urgent question: When should I do this?
We know we should eat better, and you probably know that you should exercise more. Plenty of people know that they should quit smoking, and executives around the country know that they should offload some portion of their supply chain services in order to better serve their customers and shareholders. So why do so many businesses hold on to those processes for so long, and sometimes for too long? Sales professionals often refer to the concept of B.A.N.T. criteria (Budget, Authority, Need, and Timing). A buyer needs at least three of the four to make a purchasing decision, and executives similarly need some combination of these criteria to make an outsourcing decision.
Let’s focus on the timing piece of that puzzle. Just like in our personal lives, there never seems to be a “good time” to have a baby or start a new business, there never seems to be a “good time” to introduce a strategic change to the way an organization operates. However, we all need to take that leap of faith at some point.
Do you or your business identify with any of these “problems”…continuous growth, business model changes, geographical changes, your startup business isn’t a startup anymore, you lost a key person, or you are launching a new product? If yes, keep reading!
When your growth continues to exceed everyone’s expectations – Let’s say you manage a consumer products company with more than 10 years of accelerating growth. That 20-40% annual growth curve has required that you grow the organization faster than you can update the HR system. Thankfully you have added enough capacity to grow production tenfold, but the warehouse that holds the raw materials hasn’t grown, and you’re out of land on which to expand your footprint.
Solution: Procure dedicated warehouse space at an off-site warehouse from a provider with the ability to shuttle product back to your distribution center (DC) to be mixed with other SKUs to meet customer demand. Limit space commitments to a year or so, since even if your CEO and bankers green-light a massive distribution center to be built, it’ll be a year or so before it comes online.
Now let’s assume you make children’s toys under a classic brand name. Your outdoor toys are as American as picket fences and golden retrievers, but domestic production costs have soared and executive leadership has decided to outsource production to a lower-cost offshore country. Many organizations, especially if they are in the hands of private equity or other investment partnerships, think about offshoring the production, but often overlook the domestic distribution infrastructure that had been built. However, once production moves, does it really make sense to hold on to that DC in Middle America?
Solution: Outsource all distribution activities altogether – rent an office in a corporate park, and become really good at sales, marketing, and management of vendors. Let the logistics professionals work together between transportation and warehousing to drive out costs. It’s a win-win.
Many companies, especially those in the food and consumer products markets, start small. Very small. Grandma’s pickle recipe or a granola from “the old country” are perfectly good bases for a new business endeavor, but companies like this are often born in home kitchens, local shared-space incubators, and the like. What often separates businesses from local farmers market favorite to legitimate national distribution is the ability to produce at scale. Often, food and consumer packaged goods (CPG) companies will employ a contract manufacturer (also called Co-Man) to do this work, and just as often, that Co-Man is not exactly in your backyard. Let’s say a snack foods company in Texas hires a Co-Man in Michigan to scale up its proprietary recipe of corn chips. That’s great for business and revenue growth, but not so good on your transportation budget if you’re trying to bring product back to your small warehouse in Texas.
Solution: Find a local 3pl to work with your Co-Man and receive fresh product off the line, and use that inventory as your forward position for filling customer orders. Even better if that 3pl offers transportation services from the plant to its warehouse nearby.
There are plenty of manufacturing startups here in Michigan. Often, they have been in business for three years or fewer, and have procured buildings that are big enough that they never thought they’d run out of room for their little operation. Raw materials, Work In Progress (WIP) inventory, and finished units all fit just fine in the building, with enough space for an employee break room and a few offices. Now assume that the manufacturer has found a need to increase output by 80% in 2018 alone. To meet that capacity, orders of inbound parts from Asia nearly triple, and all of a sudden, “the cage” where materials had been stored is being torn down to create production floor capacity.
Solution: Find a 3pl with space in the area to hold all raw materials and production consumables. Use available shuttling services to bring materials to the line on a Just In Time (JIT) basis according to your production plan. To take full advantage of a manufacturing support solution like this, consider allowing the 3pl full access to your ERP system so that all parties are operating on the same platform.
Picture this scene…the VP of Supply Chain is sitting in her office enjoying her morning coffee, and the Sales Manager, Controller, and Plant Manager all arrive at her door at the same time. In a minute, she’s inundated with questions like “Why didn’t the last Target order get the proper labels? You know we have to pay a fine every time that happens? How did our cost for stretch film triple last quarter? Who is managing the vendors? I don’t have anywhere to put the finished goods rolling off the line today, what’s going on down in the warehouse?” To all of these questions, VPs of Supply Chain are too often forced to answer with something like, “Charlie from the shipping department quit last week.” More than anyone would like to admit, individual departments rely heavily on the tribal knowledge carried by a select few individuals. If your company is in a position where the departure of one person or a small number of persons would bring a piece of your supply chain to its knees, then you’d be well suited to have a frank discussion: Get better at it or get out of doing it.
Solution: Engage with a supply chain consulting practice to evaluate your business processes, documentation, and training program(s) and help you arrive at an insource/outsource decision. From there, either continue the engagement for 3pl selection and project management or do it yourself if you have the resources and talent to do it well.
Let’s say your company makes a ready to eat breakfast cereal. Now, what if you coated your cereal with peanut butter? Or blended one of your cereals with another to make a variety pack? New product launches like this happen all the time, and their success rate is spotty at best. Every company would love to have a hit with every new introduction, but new products often go the way of Crystal Pepsi and other ill-fated ideas. Should you add on to your primary distribution center just for this new launch? Maybe. But I wouldn’t want to be the one who signed off on a real estate investment to support the introduction of Betamax tapes or Crystal Pepsi.
Solution: Engage with a 3pl to support launches into new products with warehouse space, transportation capacity, and process discipline, but only for a limited time. Even larger-scale rollouts can be supported with relatively short (1-3 year) 3pl engagements, and if the product fails, then the obligation goes away and nobody is worse for wear. If the product is a hit, then you have some time to figure out how to roll it into your existing distribution network in a planful way.
Let’s face it, outsourcing is tough, and there’s never a good time to do it. If it were easy, and if every company were eager to realize the benefits outlined earlier, then we wouldn’t be having this conversation. But if companies can spend a little less time looking at “why or why not,” and more time looking at “when and how” significant gains can be made. Business schools use case studies all the time to demonstrate concepts and to draw parallels for students. If a company’s leadership can use some of the above examples as case studies, they may realize their barriers to outsourcing aren’t nearly as unique as they think they are.
Public Warehousing is a dubious term. It has several definitions, depending on your viewpoint, and several uses, depending on your business need. There are a lot of misconceptions about public warehousing, so let’s take some time to dig a little deeper into what it is and how to leverage it.
The easiest way to define Public Warehousing is to recognize its counterpart- Contract (or dedicated) Warehousing. Both public and contract approaches involve outsourcing business processes to a service provider, but there are some major and significant differences. First among those differences is the issue of real estate risk. In a contract warehouse agreement, facility leases are often borne by the manufacturer, or if borne by the service provider, they are typically aligned with the term of the warehouse agreement. This way, the warehouse services provider is not stuck with an empty building if and when the customer agreement ends. In public warehousing, that risk is assumed by the provider. Whether the buildings are owned or leased, the service provider takes on space and then finds customers to fill it. It’s a subtle difference, but the risk profile can be important to a decision maker.
Another key difference between public and contract warehousing is the typical duration of the business relationship. Public Warehousing agreements are typically on an auto-renewing 30-day term, while dedicated contracts are commonly in the 3-5 year range.
It’s reasonable for one to look at a public warehousing arrangement and ask “why would I want to do that? Why engage in such a transactional way?” Well, there are several answers to that question:
Public warehouses can provide a tremendous level of flexibility. A manufacturer looking to expand a product line for the first time may not want to invest in permanent infrastructure to support that launch, so a public warehouse could be the perfect fit for fulfilling orders that trickle in as your product takes off.
A similar argument can be made for startup companies introducing a better mousetrap. Even more effective can be a seasonal or ad-hoc product introduction via public warehouse. Did you know that if you make a product that has chocolate chips in it, you may be interested in temperature controlled storage only in the summertime when ambient heat and humidity present a threat to the quality of your product? Using a public warehouse provider during that risky time can mitigate that risk without requiring significant investment in refrigeration.
There’s a reason we often refer to Columbian’s Hall Street facility in Grand Rapids, Michigan as the “amusement park of warehousing.” In that facility alone, there are more than five different types of racking, four separate temperature controlled spaces, a four-car rail dock served by one of the country’s largest rail carriers, a dedicated recoup room for disposition of damaged merchandise, and a parcel shipping station.
Pair that infrastructure with a daily workload that includes full pallet handling of finished goods, case picking, each picking, kitting, display building, and trans-loading from rail to truck using more than a dozen different types of equipment, and you’ve got interesting things happening in every direction Public warehouses offer what is often considered to be a “menu” of services. Some customers order just one or two items off that menu, but some go all-in and allow the provider to act as their outsourced logistics department. Did you realize that with so many options, it’s not hard to configure a solution that works for just about any client?
In a recent meeting of a supply chain peer group, Blair Thomas, our director of customer care, came to realize that in a very senior group of supply chain professionals, very few of the members were even familiar with how a third-party logistics firm, and especially a public warehouse provider, even rings the cash register. Many people know that the two largest cost inputs for a public warehouse are space and labor. However, many do not know that storage (for space) and handling (for labor) charges can come in many different forms.
The traditional rate structure in a simple public agreement charges for space per pallet at the time of receipt and on the first day of every subsequent month that the pallet stays in inventory. Handling is billed as a one-time fee for inbound and outbound handling, also billed at the time of receipt. Surcharges such as for case picking or parcel processing are charged at the time of outbound shipment along with any other accessorial charges. From that baseline, many variations can take place.
Space can be charged on a per-square-foot- per month basis if a commitment to dedicated space makes sense for your business. Similarly, when customer requirements vary widely, handling labor can be billed on a per-hour basis. At Columbian, we have several customers who value dedicated space, but like transactional handling pricing, so we charge per square foot for storage and per pallet for handling. Did you know that storage can even be assessed by unit, by volume, by hundredweight, or just about any other measure?
The final feature of public warehouses to explore is the benefit of shared scale. When you buy into a public warehouse program, you are buying into a mature business run by industry experts. Many startup companies or other small businesses do not have the time or the resources to invest in programs related to food safety, pest control, project management, employee training, cycle counting, and continuous improvement. At Columbian, for example, our customers get that service every day. Similarly, our customers benefit from a shared investment in security, systems capabilities, and insurance coverage. Sharing scale can allow a company to get access to a big business infrastructure long before its bootstrap financing would otherwise allow.
We all know that outsourcing logistics services can provide benefits related to cost rationalization, turning capital dollars into expenses, or simply outsourcing the headaches, but it does not need to be so scary. By utilizing a public warehouse agreement there are no obligations in either direction, but relationships can last for decades. If you have not ever considered public warehouse engagement, give us a call. Let’s see how we can help.
Jim Gadziemski, vice president of warehouse operations, was interviewed by Trucks.com regarding futuristic technology in the logistics industry, including driverless trucks and automated loading docks. The author, like many industry experts, believes there is a long way to go in driverless technology, and drivers will never be obsolete.
“…Rather their duties will change as the industry works out man-machine partnerships,” says the author, Erik Sherman.
Beyond robots behind the wheel, new technology in the warehouse has also made conversation. Trucks.com reached out to Gadziesmki for an expert’s opinion on the automatic truck loading systems (ATLS).
The author argues that automation requires predictable loads, which is uncommon in the warehousing business. Similar items can cause confusion on the dock as well.
“I was supposed to get some kind of organic product and they sent me regular product,” said Jim Gadziemski, vice president of warehouse operations at Grand Rapids, Mich.-based logistics and warehousing firm Columbian Logistics Network. “How can a conveyor system notice that?”
In addition to those problems, deliveries won’t be easy either.
Many destinations require the truck driver to unload, Gadziemski said. “He has to have a pallet jack, [a fork lift like tool used to lift and move within a warehouse].”
Just because the truck leaves the loading dock, does not mean that the problems will stop.
“What happens when there’s a mechanical issue?” Gadziemski said. “An air line breaks or a trailer is dirty with some kind of contaminate and you have to reject it. How would [automation] handle those things?”
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Let’s face it: inventory disappears once in a while. Materials get lost, damaged, or pilfered on a daily basis in America, and over time, those losses can add to real and significant dollars. The good news is that there are some simple steps one can take to minimize the impact of inventory loss on a business.
Let’s start with damage, one of the most common types of inventory loss. To think about what is causing damage and how to avoid it, first think about where and when damage occurs. Is your damage happening in inventory? Or in transit? Warehouse damage is often caused by one of two major factors: packaging or handling. It is important to understand the capabilities of your corrugate boxes or other storage conveyance and how those materials will stand up to the conditions in the warehouse. For example, in hot, humid Memphis, Tennessee, a box will sag and possibly fall over far more quickly than in the bone-chilling cold of a Michigan winter. Also consider the empty space at the top of a package, also known as “headspace.” If your materials do not completely fill your packages, you are inviting an opportunity for a creased seam or crushed box that could cause a domino effect throughout the warehouse.
For materials damaged in transit, it is very important to consider loading technique, platform composition, and trailer properties. Loading technique refers to the method used by the material handler at either the shipping or receiving facility. Is that person properly trained? Does s/he take proper care when handling the product? Taking a walk out to the loading dock might surprise you. Platform composition simply refers to what, if any, materials are used to hold the product in the trailer or container. Grade A heat-treated pallets are very reliable and sturdy, but can run upwards of $10 each for the convenience. Slipsheets are simple corrugated platforms that can help shield goods from splinters in the trailer floor or walls. Speaking of the trailer floor or walls, the composition of a trailer itself can be a big reason for product damaged in transit. Wood-sided walls and floors are less expensive than their metal counterparts, but have a higher frequency of leaks and splintering, which is very risky. Be careful to consider these factors when shipping product.
While this piece addresses inventory loss in general, sometimes inventory in a warehouse simply… gets lost. A robust inventory auditing and cycle counting program can provide numerous returns, including a reduction in simply losing inventory. In this arena, technology can help as well. Many current warehouse management systems (WMS) offer “count-back” functionality wherein a person who picks product from a specific location is asked to validate the remaining inventory in the location before moving on to his or her next task. Even without expensive technology, simple cultural shifts can be almost as effective. If you see a pallet of product sitting in an aisle, is there a process for how to find out where that pallet should be? Is every location where someone might put product labeled appropriately with clear and effective signage? If not, think about what cultural shifts you might need to make.
While many do not want to think about it, there are just bad actors out there, and proper precautions can help ensure that they do not do damage to your bottom line. Warehouse theft is most common in warehouses where the products stored are either high value or easy to fence. If you look around your area and walk the local flea markets, take a look at the items that are selling popularly. You will typically see food products, household goods like soaps and paper products, and others. In today’s times, ebay and Craigslist are also common marketplaces for stolen goods. If your company makes products like this, you may be at risk for pilferage, and it may be time to take action. A clear, consistent, and fair inspection program could be valuable, wherein you search the bags of employees, executives, and visitors alike. Video cameras are also helpful as both a deterrent and investigatory tool. Yes, a person has a reasonable expectation of privacy, but advance notification and implementation that does not show bias or discriminate are well within the rights of an employer.
These are just a few tips to get you thinking about what might be slipping through the cracks in your distribution network. In the end, careful consideration and some simple changes can be a big step in the right direction. Finally, simple measurement of loss, damage, and pilferage is the best way to start setting the baseline for understanding what you are missing.