Designing Distribution for Profit

Outsourcing logistics operations is hardly a new strategy. The practice dates back to ancient times when ships sailed the oceans collecting and consolidating merchandise for multiple buyers. Even then, consolidation warehouses were likely involved at origin and destination ports so goods could be staged for the first and final miles of the voyage.

Use of third-party logistics providers (3PLs) has grown over the last 75 years because the benefits are based on simple math. If a company buys an asset to store or move its own goods, that asset is only productive when it's moving the company's inventory. No activity means the asset is idle. Outsourcing to a third party allows the asset to be used again to store or move goods owned by other companies. This increased productivity means the asset has a lower cost per use, and that reduces operational costs for every company involved.

Third-party warehouses typically assess charges on a per-unit basis for monthly storage and again on a per-unit basis each time the pallet is handled. There are variations, but the general goal is to gain operational savings through shared use of assets.

However, several years ago, a fundamental change began to take shape. Manufacturers, distributors and retailers began to establish more specialized and strategic relationships with 3PLs. In the new era of outsourcing, capitalization is just as important as operational savings. Companies are replacing their own investments in brick-and-mortar assets and material handling systems with investments made by outsourcing partners. In other words, they are outsourcing capital requirements along with logistics. The result: Outsourced logistics is a strategic advantage rather than just a way to reduce costs.

A Case Study

Using outsourcing as a strategic advantage can be illustrated by the recent case of Sataria Distribution, a 3PL in Indianapolis.

Patrick O'Keefe, general manager at Sataria, is a seasoned big-box warehousing manager who has operated warehouses owned by many manufacturers and distributors over his career. “A good general manager can save his employer hundreds of thousands of dollars in space and labor expense every year by simply managing the warehouse with a focus on the tactical elements of space and labor utilization,” he says.

Applying those skills to a 3PL operation has allowed O'Keefe to achieve similar savings for users of warehousing operations.

“There is an additive, strategic advantage to outsourcing logistics functions that is not so apparent to those looking to simply save space and labor expense,” he explains. “Comparative savings represent low-hanging fruit. The real advantage of outsourcing today is defined in the user's ability to leverage investments of the outsourced logistics service provider as opposed to making those investments on its own. A customized logistics solution that incorporates real estate, rolling stock, information systems, management and personnel will generate much more than comparative savings. Our solutions incorporate capital savings.”

O'Keefe uses a recent example to show how it's done. Since 2001, Sataria has provided warehousing services to a major food ingredient manufacturer that had been using multiple facilities to serve a small geographic area.