Bringing Value to the Table: How Today's Logistics Service Providers Stay One Step Ahead

Logistics service providers are responding to the same demands that are forcing changes within the internal distribution networks of retailers and manufacturers. Customer cries for end-to-end supply-chain solutions and ever better inventory visibility have spurred logistics company mergers and acquisitions at the global level. At the contract level, relationships are evolving from highly detailed, three-year contracts, to shorter term, flexible arrangements that are more responsive to business changes, says Adrian Gonzales, a director with ARC Advisory Group (Dedham, Mass.), a supply-chain research firm that monitors the industry.

Logistics service providers are also using lean techniques and Six Sigma programs to eliminate wasteful activities and refine business processes, and they're always investing in new automation and information technology. All so they can deliver the annual cost savings written into customer contracts.

"There's an expectation on [our customers'] part, and rightfully so, being experts in the warehousing business, that we're going to bring some value to the table they might not be able to bring themselves," says Brett Harper, a vice president at Oakland-based APL Logistics.

APL Logistics manages 16 million sq. ft. of warehouse space for customers in North America, and 24 million sq. ft. globally. With production moving offshore, and the ongoing evolution of information technology, Harper says customer expectations and industry capabilities have become much more sophisticated over the past 15 years.

An APL Logistics employee scans a pallet of toothpaste.

"Customers in all industries, some more than others, are constantly looking to take inventory out of the system. To do that, and not lose business, they need to know exactly where it's at," he says.

This need for inventory visibility is why information technology development has become such a large budget line for logistics service providers. They've also had to develop final assembly and packaging capabilities as manufacturers postpone final product configuration in order to be more responsive to consumer demand. One of the key benefits that firms like APL Logistics provide is the rapid deployment of best practices from one customer in one industry to another. A competitive edge, however short-lived it may be, is a competitive edge.

"The more insight you have on what works and what doesn't work, the more value you can bring to any one of your customers with the ability to be flexible and try new things," says Harper. The movement of people within these companies fosters the movement of best practices between clients. When it comes to recruiting talented logistics professionals, this opportunity to work in multiple industries can give logistics service providers an advantage.

Regular training is another factor that attracts career-minded managers. TNT Logistics North America (Jacksonville, Fla.), which operates 182 locations in North American, has a robust training program for all levels of management. The education starts with tactical subjects and progresses up to more strategic areas depending upon management level. The company also has an Internet-based, electronic learning program with 700 different training modules customized to TNT processes. As part of their annual performance objectives, managers must complete specific training courses.

"In order for us to meet the needs of the customers we need to be as smart as they are, if not smarter," says Jeff Hurley, managing director and COO for TNT North America. He says that TNT's internal training budget has tripled in recent years as they have developed the forecasting, supplier management and inventory planning skills that are being demanded by customers. TNT's customers even supply some of this educational development.

Several years ago when Ford, Daimler-Chrysler, GM, BMW and other OEMs were teaching suppliers the principles of lean manufacturing, TNT took advantage of the opportunity and incorporated the knowledge into the company's operational improvement program. It has since incorporated Six Sigma tools as well. Beyond its automotive customers, TNT has applied these process improvement techniques to the contractor and home deliveries that it does for Home Depot, the home improvement store chain. It has also applied them to how it manages the out-bound material flow from Sears distribution centers to its retail department stores.

"If you look at visual management, labor productivity and people involvement, all critical aspects of lean, it applies to those operations just as easily as inbound manufacturing support," says Hurley.

On the IT front, like many companies with global distribution networks, TNT is standardizing its systems so that TNT North America looks the same to customers as its other regional business units. It's a big project. Two years ago Hurley estimates that the company was using 45 different warehouse management systems within North America alone. While remaining open to customer requirements, it's now committed to two systems, RedPrairie and Manhattan Associates. The company is also moving to extract important decision-making information from the systems it has in place. The goal is to present managers with the data they need to make decisions based on facts, not assumptions.

"It's time to figure out what we can do with the data that we have. When you start looking at inventory replenishment, supplier compliance, packaging compliance, meeting the shipping requirements based on production requirements, what customers are ordering, there's a lot of information being exchanged in those transactions," says Hurley. "There's a lot of assumptions made about how things are working. The information sometimes tells a different story."

Superior service begins with the basics
At the other end of the industry spectrum, many smaller players are carving out a market niche by zeroing in on special customer needs. Fidelitone (Wauconda, Ill.) operates around 500,000 sq. ft. of warehouse space in 3 locations. It handles the repair parts distribution program for the Black & Decker family of tool brands (shipping more than 13 million parts per year), and the Internet/catalog distribution activities for several retailers. Whether it's a repair part or an Internet order, the company strives to ship everything in 24 to 48 hours.

To achieve such performance objectives requires a mastery of the basics. Fidelitone combines warehouse automation, radio frequency processing, in motion scanning and weighing, carousels, automated sortation and various productivity improvement programs. Tom Giovingo, Fidelitone's executive vice president, talks about being efficient with order waves, and regularly re-profiling SKUs so that they are correctly positioned within warehouse zones, the fast and slow movers, and the medium movers as well.

"As much as it sounds normal—the normal way of doing things, the basic way of doing things—everybody talks it. Not everybody pulls it off," says Giovingo.

The company recently acquired 51,000 sq. ft. of space that will allow Fidelitone to reconfigure part of its current space with taller racks, narrower aisles and new picking equipment, while it continues to make shipments for customers. Like many warehouse investments today, the focus is on increasing cube utilization.

Labor productivity is another area that triggers capital investments for all distribution operations, whether it's new automation or the latest voice technology. Genco (Pittsburgh), which manages 84 facilities in the United States and Canada with more than 23 million sq. ft. of space, has invested in various productivity improvement technologies that bring products to order pickers. It has also implemented hands-free, voice picking and returns processing in a number of facilities.

"It takes a fair amount of investment up front to justify, to make sure you're going to get the productivity," but they have seen a payoff, says Glenn Mauney, a Genco senior vice president. One of the benefits of voice technology, he says, is its ability to use different languages and accommodate today's multi-lingual warehouse workforce.

Genco's roots lie in reverse logistics, but most of its revenues now come from outbound distribution. On the subject of radio frequency identification (RFID), Mauney reports that the company has tried to remain realistic. It has set up a technology learning center to help customers understand how to make RFID work for their products and processes. Not many are currently using the technology however. Like other logistics service providers, Genco is expanding its repertoire in other areas.

"It's not just pick, pack and ship any-more. A lot of the value-added services include postponement, light manufacturing, kitting," says Mauney. "As retailers are facing cost pressures they're pushing a lot of that back on manufacturers who are coming to us asking if we can build store-ready pallets."

For example, the company distributes all of the combination padlocks for MasterLock (Milwaukee). Responding to retail customer orders, Genco associates attach the backing cards onto shelf hangers, which change from season to season. The company must be ready to respond to strong demand during the back-to-school months.

Handling such tasks requires a flexible workforce. Mauney says his company is able to keep labor turnover fairly low by balancing work between customers and locations, and by catering to the needs of an aging workforce.

"To keep the turnover low and safety high, we do an awful lot of training exercises. We are teaching our people over and over how to lift; how to stretch and limber up at home," says Mauney. Healthy people, after all, are productive people.

At the end of the day the primary concern of logistics service providers is the same as it is for managers of internal distribution facilities and networks. Their success depends on their customers' success. "If the customers' business is not healthy and growing, my business is not going to be healthy and growing," says Harper from APL. They just have more customers to serve well and keep happy if they're going to stay one step ahead.