Outsourcing Distribution: More Flexibility, Less Risk

During better economic times and possibly in the future as conditions improve, companies may face a new conundrum arising from one or more of the following situations:

• They built a centralized distribution center (DC) network 10 to 15 years ago based on sourcing in U.S. or NAFTA countries;

• They've moved production offshore to multiple regions and now are shipping product across the country to old DCs, often to ship it back again to customers;

• Suppliers can't provide the value-added services needed to meet customer requirements;

• In House or Outsourced?

  Ports and the areas around them become congested;

• Transportation costs are out of control due to limited capacity and escalating fuel costs.

When times get better, these conditions are not going to change; in fact, the complexity of the global supply chain will likely increase. “In reviewing all of these issues, we decided it made the most sense to outsource the DC to a third-party logistics provider,” says Richard Space, senior vice president for logistics and sourcing for Anchor Blue, manufacturer of denim apparel. “It was clearly not this company's core competency, and it was costing us a lot.”

Flexibility Is Key

In this era of spiraling costs and customized configurations, flexible logistics management is strategically critical to the bottom line, but often management doesn't grasp the effect poor logistics has on profit margins.

Under the old model in which goods were sourced primarily in NAFTA countries, shipping goods to one or two DCs to be bundled and labeled then shipped to customers wasn't all that inefficient. But now, with sources of goods shifting continuously, using a traditional DC network doesn't make sense.

If your company needs to modernize its DC network, there are two options: build your own or outsource. The build-your-own option is ideal if logistics is a core competency and you have time and capital.

For most companies, however, outsourcing logistics and warehouse/DC operations makes the most sense. With an outsourced solution, you get:

Value-Added Services

• Best-in-class logistics/DC operations;
• DCs that are closer to ports and customers;
• Operations that are up and running in a few months;
• The ability to add short- or long-term capabilities;
• Integration of WMS data to internal systems;
• Value-added services (labeling, bundling, kitting);
• Lower costs and improved customer service.

The real cost of old DC networks is not the overhead; it's the lack of flexibility to respond nimbly to changes in the market, customer requirements or unforeseen shifts in the supply chain. Having DCs close to customers allows companies to be more responsive and deliver goods faster, cheaper and exactly the way the customer requests.

A Nimble Supply Chain

“Companies are turning to 3PLs to act as warehouses for them,” says Walter Byrd, managing director at Transwestern. “They're saying, ‘I want 15,000 to 20,000 square feet dedicated to me.’ Many of the 3PLs occupy three or four buildings each at about 500,000 to 600,000 square feet.”