Given the news every week about trucking capacity and driver shortages, pool distribution is the way to go, says Tim Egan, director of integrated logistics at refrigerated prepared foods and bakery products manufacturer Chef Solutions, Schaumburg, IL, the parent company of Orval Kent Foods, Pennant Foods and I&K DSD.
Chef Solutions has about 70 third--party carriers handling all its cargo around the country. Of that number, 23 are full truckload carriers, two are less--than--truckload carriers and a few handle parcels. The rest are all pool distribution carriers, which Egan says have worked wonders for his company.
With pool distribution, also called final--mile service in some circles, shippers move product into regional terminals in truckload quantities. There, the third--party logistics provider (3PL) unloads it, segregates and sorts it by store and reloads it onto local delivery trucks for delivery to multiple locations in a geographic area. This transportation method is usually cheaper than shipping as LTLs, depending on the number of stores, volumes per store, weight per shipment, frequency of deliveries and distances between the stores and pooling center.
"Historically, this final mile of freight delivery to the point of sale has been the most difficult," says Edwin Conaway, president/CEO of Con--Way Now, a unit of Con--Way Transportation Services, Ann Arbor, MI, which began offering this service last month. "The demands of just--in--time inventory, time--specific promotions and new product releases put significant pressure on a company’s supply chain to get product on the shelves as soon as possible."
Since implementing pool distribution about a year and a half ago, Egan has cut his carrier base by about 65 percent, reduced delivery costs by between 5 percent and 7 percent, and has always had trucks available whenever he’s needed them. "It's a great source of pride for me that we’ve handled our toughest delivery cycles without capacity issues," he says.
Not all shippers have been that lucky. In this tight market for capacity, "shippers who believe that if one carrier cannot do it for me there is another that can just don’t get it," says John Miller, general manager of refrigerated business at Schneider Logistics, Green Bay, WI. "It can quickly become a bidding war, and when it gets into a bidding war, it's never a good thing for the shipper."
The reverse is also true. "Truckload carriers in particular have been in the driver's seat because their thinking is that 'if you don't want me to take your freight, I will find someone else who does'," observes Tom Sanderson, president and COO of Transplace, a Plano, TX--based 3PL and logistics services provider. "For the big trucking companies, there is no incentive to find a solution to the capacity issue because there is no reason to change. Their prices are up, so their earnings are up. It falls on the shippers to keep on top of it."
"Demand is outweighing capacity, and that allows carriers to be more selective in whom they do business with," observes Brad Young, vice president of transportation business at Exel, which has U.S. headquarters in Columbus, OH. "Especially if you're perceived as a company that is difficult to do business with, carriers can just walk away now."
That is why it was crucial for Egan and Chef Solutions to lock in carriers early. "It allows us to have dedicated carriers that know our exact lanes, order cycles, the origin and destination of our freight and the frequency of loads with us for the rest of the year," Egan says. "Now, our buyers know exactly when they will get their shipments when there was a lot of uncertainty about that before. We have a confirmed order--to--shipping delivery cycle at least twice a week to all the markets we serve; for some, it's three times or even five times, but it's always at least two."
Weber Distributing, Santa Fe Springs, CA, is the pool distributor for all of Chef Solutions' shipments in California and Nevada. Because product is cross--docked and never placed in static storage in Weber's warehouses, Chef Solutions avoids many of the costly warehouse storage, labor, temperature control and insurance costs, says Carl Neverman, Weber's vice president of client solutions.
"We're reducing warehousing costs, but we also have a team in place that knows them and their products well, and we've been able to set up a sailing schedule for them," Neverman says. "Their customers have regular days that they submit orders and receive products, and that regular schedule is good for them too."
Lanter Distributing, a division of Nashville, TN--based Ozburn--Hessey Logistics, is another large pool distributor for Chef Solutions. The 3PL handled more than 2,750 pooled salad shipments for Chef Solutions last year on its way to being named the company’s "LTL/Pool Carrier of the Year" for 2004.
"Lanter Distributing and [Ozburn--Hessey] have brought us quantifiable results that include a 3 percent improvement in on--time delivery based on scheduled and requested appointments. They also have helped us lower our overall logistics costs by helping us reduce multiple--stop TL and irregular route LTL that we utilized heavily before redesigning our distribution network," says Egan. "In addition, we were able to smooth production and distribution schedules and reduce finished goods inventories."
Lanter, and other 3PLs, are gaining a lot more pool distribution business of late. "Many shippers used to do pool distribution and are now getting back to that," says Bob Brendel, business division manager at Lanter, which specializes in LTL shipments. "They're realizing savings in dollars and increased capacity."
The same is true for dedicated contract carriage business, where a 3PL guarantees a set number of trucks and drivers along a specific route or shipping lane under a pre--negotiated contract with the shipper. Though only about 5 percent of all U.S. shippers use dedicated fleets, this industry segment is definitely growing.
"We're seeing a lot of customers now with dedicated fleets for all or part of their operations, and it gives them better efficiencies in running their logistics and filling trucks better," adds Transplace's Sanderson. "At Transplace, we're doing a lot in retail, with some very large retailers."
Family Dollar Stores, Matthews, NC, is one such retailer. More than 750 dedicated trucks from 21 contracted truckload carriers and three national and regional LTL carriers offer Family Dollar a cost--effective means of providing service to its 5,650 stores in 44 states and eight distribution centers, including one consolidation center in Jersey City, NJ, says Raina Avalon, director of transportation operations at Family Dollar.
Martin Transport, Kilgore, TX, is Chef Solutions’ largest dedicated carrier. Using Martin and the other dedicated carriers in his stable, Egan says his internal transportation costs are much lower. "Administratively, we don’t need people calling around to get carriers, and it gives us a little more clout when it comes to rate negotiations because of the savings we get for them," he states. "If they know they have one of our routes ahead of time, they can better secure backhauls."
Frito--Lay, the Plano, TX--based snack foods division of PepsiCo, is another firm believer in dedicated carriers. Last year, Exel handled more than 7,750 dedicated shipments for Frito--Lay, and posted a 97 percent on--time delivery rate to Frito--Lay's plants, distribution centers, co--packers and grocery suppliers.
Exel is just one of 16 dedicated carriers that manage freight through Frito--Lay's Logistics Communications Center (LCC) in Plano. Exel has been a core carrier for Frito--Lay since the Plano facility opened in 2000.
"Exel's superior management of our loads reinforces our position as customer of choice in the carrier industry," says Tim Franklin, Frito--Lay's LCC manager. "The company's long--standing relationships with our suppliers and vendors serve as a positive extension of our brand and deliver cost savings resulting from purchasing power for the best transportation lanes at competitive prices."
Exel also works with Frito--Lay to help it cut costs. "As a non--asset--based carrier, we are uniquely positioned to serve Frito--Lay amid changing conditions because of market demand, capacity issues and fuel prices," says Kevin Hudnall, Exel’s carrier representative on--site at Frito--Lay. "In many cases, we’ll make daily recommendations to Frito--Lay based on timetable, destination and cost to redirect or combine shipments onto one route."
This dedicated contract carriage segment has turned into a huge windfall for the 3PLs as well. Armstrong & Associates, a 3PL consulting firm based in Stoughton, WI, reports that this industry segment reached a new high of $8.7 billion in 2004. Tight trucking capacity in the United States led most 3PLs to experience double--digit growth in their dedicated business, according to Armstrong’s annual 3PL industry report.
The 3PLs like contracted carriage business so much because it is a steady stream of income, but also because it gives them more lead time to make deliveries and pick up backhaul opportunities, says Bill Behrman, Lanter's vice president and general manager.
For shippers like Frito--Lay and Chef Solutions, it's now more important than ever before to lock in rates through dedicated and pool carriers, mainly because most 3PLs and their carrier partners are raising rates to offset added costs associated with escalating costs for fuel, insurances, maintenance, equipment, technology, driver pay and benefits and more. The average rate increase is between 8 percent and 12 percent, according to industry estimates.
Regional LTL carrier Old Dominion Freight Lines, Thomasville, NC, for example, last month announced that it was increasing its basic rates by about 5.9 percent. "The increase is necessary to offset higher costs as a result of new equipment, new service centers, state--of--the--art technology, insurance costs, as well as wages and benefits," explains Chip Overbey, Old Dominion's vice president of national accounts and marketing. "We believe the increase is essential to continue to provide our customers with the value in technology and quality performance they have come to depend on."
Most in the industry share the belief that dedicated and pool business is the key for shippers who want to take advantage of secured capacity at lower rates. "To lock in rates, it may be a matter of lining up a dedicated carrier, with a certain amount of capacity that has been lined up for a specific customer and payment based on miles," says Schneider’s Miller. "Rates are usually negotiated annually, but with a dedicated business, the carrier and the customer get to know each other very well and it's easier to get some gains and savings."
In the present environment, most carriers are setting their rates annually. Though many shippers would like to lock in rates and contracts for a longer term, carriers are reluctant to do so, citing uncertain market conditions. "Rates are negotiated customer by customer, and a lot of it has to do with volumes," says Lanter's Behrman. "We continue to fight the battle with our customers to go direct with their full truckloads and to call on us for LTLs."
"Our customers need to look at the ways they are shipping, the frequency of their shipments, the way they package their materials to control damage, and, if they can, let us hold their shipments so we can consolidate them," adds Rick Thomas, director of managed transportation services at TNT Logistics North America, based in Jacksonville, FL. "They can also rearrange their logistics through routing, looking at multiple customer freight and marrying up freights to create more desirable transportation routes; look at shared channel opportunities with multiple customers in the same industry--even if it may be with direct competitors—to combine logistics operations; and build relationships with dedicated carriers so that price increases do not become price gouges."
At just about every 3PL, the type of service provided definitely plays into any rate increases. "When we look at our customers, we are looking at their freight and shipping environment. Can they fit into our existing shipping lanes? Do we have to go to our broader base of carriers or can we keep the business to our standard base of carriers?" says Exel's Young. "Shippers need to look at more cross--enterprise collaboration, where customers get together and ship products together to avoid LTL's added expense."
"Shippers need to be more willing to collaborate with one another and less reticent to working with others, even if it means working with competitors, just to get carriers to listen," advises Paul Lomas, vice president of sales/marketing at TLC, the 3PL that was acquired earlier this year by Minneapolis--based Supervalu. "They need to be working with carriers to link shipments together and do closed--loop runs. That also applies to backhauls and multi--stop runs."
And, while the cost increases on transportation service may seem like a lot, the service still often comes out cheaper than if a retailer or manufacturer tried to run his own fleet.
"The 3PL can bring savings in other areas. Most notably, the shipper doesn't have to invest in his own fleet and all that goes with it," says Schneider's Miller. "Our biggest challenge is in getting the shippers to understand the value that a 3PL adds. On--time deliveries, less out--of--stocks, etc., lead to real dollars saved, and there is more value in that than just a cost issue."
"The worst thing in the world for a shipper is an out--of--stock, and if we can take out--of--stocks out of their system, it's a tremendous benefit for them," adds Transplace's Sanderson.
Warehousing Less Affected
Price increases on the warehousing side of the 3PL arena are not as steep. "There are certainly costs pressures on the transportation side...but in distribution center operations, we do not see those same cost structures," says Mike Jones, vice president of business development at Logisco, a mid--sized 3PL based in Brentwood, TN.
The two items that were most expected to drive up 3PL warehousing costs have not really done so, according to Jones. "On our side, RFID is certainly a cost--add, but it's still a relatively small part of what is going on out there. The other cost--add is government regulations for bioterrorism and food safety, but most of the industry was already doing most of the things that are now being required."
But just because 3PL warehouse prices haven't seen the same increases doesn't mean manufacturers and retailers can’t cut costs further. Much of that can be done during contract negotiations.
"Clients have a lot more leverage on the warehousing side. In fact, many clients are trading away risk for margins, signing a management fee contract as opposed to a unit cost contract," says Jones, who also notes that many customers are signing longer contracts--most for three to five years--to lock in better rates up front.
"In warehousing, longer term deals are more attractive," says TNT's Thomas. "If it's a dedicated warehouse, you can create more attractive deals with us. Customers can also go with larger facilities. As long as they can keep it utilized, it lowers their total overall operating costs."
Take Steps To Become Carrier Friendly
Prashant Bhatia, senior director of product management at Manhattan Associates, Atlanta, recently authored a white paper in which he recommends a number of ways shippers can improve their partnerships with carriers.
"With the capacity crunch, fuel costs and driver shortages expected to continue, the dynamic between carriers and shippers has changed dramatically from a buyer's to a seller's market," he observes. "As a result, it is more important than ever for shippers to forge and maintain strong partnerships with preferred carriers. Central to this relationship is a strong understanding of what factors are driving carrier’s costs."
"In many ways, a shipper's behavior and practices relative to shipment execution can have a significant affect on a carrier's cost. Rate negotiation aside, a shipper can often improve the service and cost they pay for transportation by becoming a more "carrier--friendly" shipper.
How, then, can shippers adopt a new and collaborative paradigm that makes it easier for high--quality carriers to partner and do business with them? Consider the following:
Pop Quiz: Test Your 3PL Knowledge
How well do you know the third--party logistics market? With the help of several logistics studies, APL Logistics, Oakland, CA, has assembled this brief questionnaire to help you assess your 3PL IQ.
True or false: Companies that outsource their logistics are in the minority.
That statement may have been true 15 years ago. But today, nearly 90 percent of Fortune 100 companies use 3PLs, according to Dick Armstrong of Armstrong & Associates. And approximately two--thirds of logistics expenditures in North America will be allocated to outsourcing by 2007, according to a study by Cap Gemini Ernst & Young and Georgia Tech.
True or false: Most U.S. warehouses/logistics facilities are located in--house.
It’s true. Although the use of 3PLs is on the rise, only about 10 percent of the 6.2 billion square feet of warehouse space in North America is allotted to public or contract warehousing, says Dick Armstrong. The rest is privately owned and operated.
The length of a company's contract with a 3PL can be:
A). Less than a month
B). 30 days
C). 60 days
D). One year
E). Three years
F). Five years
G). Any of the above
The correct answer is G, any of the above. Contract lengths with 3PLs can run virtually any length, although if your warehousing contract is less than 30 days, you’re technically using public rather than contract warehousing. The most common contract length is three to five years, according to Armstrong & Associates.
Which of the following is the most prevalent form of 3PL contract?
C). Activity--based costing
It's B. Although times have changed in many areas of the outsourced logistics world, transactional or unit pricing--where clients agree to pay their 3PLs a fixed fee per unit--is still the most frequently used form of pricing.
Which of the following have been acquired by or merged with other 3PLs in recent years?
A). GATX Logistics
E). Airbourne Express
F). Roadway Corp.
H). All of the above
The correct answer is H, all of the above. Growth through merger or acquisition is a huge trend in the 3PL industry, and recent consolidation activity has been especially busy.True or false:
It's more common to use one 3PL than several.
That's false. Nearly two--thirds of Fortune 500 com--panies use multiple 3PLs, according to a recent Northeastern University/Accenture study. Their biggestreason for doing so: Not being able to find a single provider whose service offering is broad enough. Many of the world's larger 3PLs are expanding their service offerings to offset this fact.
Who outsources more, companies in the United States or Europe?
Companies in Europe do. U.S. companies spend nearly half of their logistics budgets on 3PLs, according to a survey of Global 1000 companies by the Georgia Institute of Technology and Cap Gemini Ernst & Young. But 65 percent of large European companies' budgets go to the same.
Which of the following selection criteria most drives companies' choices of 3PLs?
A). Systems capabilities
B). Global capabilities
E). On--time performance
The answer is C. Money talks. In 2003, companies rated price as the number one 3PL selection factor, according to the Association for Logistics Outsourcing. (By contrast, companies had ranked price 11th in 1993). This selection criterion is consistent with the findings of a 2003 Northwestern/Accenture study, which reported that finances were companies' key concern.
What does "fourth--party logistics provider" mean?
C). Four logistics providers working together
D). A logistics provider that provides four key services
If you were taking this test several years ago, the correct answer would have been both A and B, because the term fourth--party logistics providers was used to describe an objective consulting firm to integrate other logistics providers, including 3PLs. Today, the correct answer is just B, because any outside company acting as a logistics integrator is functioning as a 4PL.
What's the best reason to outsource logistics?
A). Cost containment
B). Greater focus on core competency
C). Moving manufacturing to places such as China
D). Greater supply chain efficiency
E). Economies of scale
F). Entry into new markets
G). A product launch
There's no right or wrong answer to this one. Advocates of outsourced logistics will tell you that using a 3PL is a viable solution to many supply chain challenges or business opportunities and that as long as it supports the success of your business, it's a good reason. Additionally, they will remind you that outsourcing isn't an all--or--nothing proposition. Most companies that use 3PLs also have some form of logistics operation in--house, too. It's all a matter of what works for your company.