It seems mighty odd in retrospect. Yet back when the term 3PL, or third-party logistics, first entered the lexicon, the radical notion of handing off responsibility for this crucial business function caused barely a stir. That's not to say Corporate America greeted the notion of logistics outsourcing with a collective shrug: The topic was endlessly debated at conferences and in the trade press. But the arguments centered less on the wisdom of outsourcing logistics than on the best kind of provider. Was it wiser to use an asset-based provider that could call upon its own trucks, warehouses, or whatever in a pinch? Or was it more prudent to seek out partners with no assets to speak of but that boasted strong logistics management skills?
Barely mentioned in the debate were some very big logistics players: United Parcel Service, Federal Express, Airborne Express and a company with only a small share of U.S. business at the time, DHL. Their early entry into the third-party business escaped most people's notice. Yet they were there right from the start, opening parts depot operations in which they stored clients' inventory close to their air hubs so they could rush the parts right out when needed.
But the days when the "express" carriers' third-party services carried a low profile are long gone. Today, UPS, FedEx and DHL—which swallowed up Airborne in 2003—all operate large business units designed for clients that want to outsource all or part of their logistics operations. Their 3PL businesses have developed well beyond the parts depot operations that gave them a toehold in the market.
Today, those businesses encompass everything from ocean shipping, customs brokerage, freight forwarding, warehousing and fulfillment to consulting. What's more, these carriers bring formidable networks and technological prowess to bear on the market.
Not surprisingly, shippers are signing on in droves. For example, DHL announced in February that it had been awarded all of Caboodles Cosmetics' distribution business. Caboodles, a Memphis-based supplier of cosmetics and accessories for teens, ships to retailers from DCs in Memphis and Mississauga, Ontario, and has a huge stake in ensuring that its cross-border shipments flow smoothly. And it appears that where Caboodles' deal with DHL is concerned, it's so far, so good. "By switching to DHL, we increased our on-time delivery service performance, reduced penalties for shipment delays and significantly improved the satisfaction of our retail customers," reports Patrick Duffy, the company's transportation manager.
Replacing the engine
Like Caboodles, Hub Distributing, an Ontario, Calif.-based owner of clothing stores, just completed outsourcing its entire distribution process to UPS Supply Chain Solutions. Hub Distributing (no relation to the intermodal marketing company Hub Group) is the parent of Anchor Blue, a 157-store apparel chain that markets to mid-income 16- to 19-yearolds, and Levi's Outlets by MOST, a 50-store chain selling Levi Strauss & Co. apparel.
The decision to outsource was made by Richard Space, senior vice president of logistics for Hub Distributing, who joined the company shortly after it was acquired by Sun Capital Partners. What he found was a company with an antiquated distribution system. The former owners, Space says, "thought store operations were the most important. They didn't look at what was keeping the engine running."
The sputtering engine Space inherited clearly hadn't seen much in the way of maintenance for quite some time. "The ERP was inadequate to handle the process flow," Space recalls. "We had nine miles of conveyor, no WMS, and 550,000 square feet of space." Receiving operations had gotten bogged down to the point where products weren't available until hours after their arrival (the facility receives 5,600 cartons a day from some 250 vendors, on average). Worse yet, the company, which ships about 5,000 cartons a day to the stores, had no visibility of shipments from the time they left the facility until they arrived at the stores. Even then, store managers had to open cartons to find out what they had received.
Though Space took some intermediate steps to get the goods moving through the building faster (he installed flow racking to replace picking off pallets, for example), he quickly became convinced that the situation called for more drastic measures. "We decided after doing some due diligence that by the time we retrofitted the building and brought in a new WMS, it would cost $5 million to $7 million and take two years," he says. "We wanted it much faster than that."
Though time was of the essence, Space tried not to rush the process of reviewing the outsourcing bids he gathered. "I've gone through five or six outsourcing projects," he says. "When you're outsourcing your DC—that's your lifeblood—you want to be sure of your partner in the operation." After reviewing seven proposals, the company picked UPS. "At the end of the day," Space says, "UPS brought more to the table in terms of technology and a partnership."
Hub Distributing is hardly alone among apparel companies in taking the outsourcing route. "Clothing is a particular sweet spot [for UPS]," says Scott Carter, a vice president of consulting in UPS Supply Chain Solutions' retail and consumer products consulting services unit. Part of the reason is that the business is highly seasonal. (Space, for example, reports that Anchor Blue has two peak seasons: back to school and Christmas.) "Your typical retailer [earns] 70 percent of its revenue in a short window at the end of the year," says Carter, noting that UPS is well geared to handle seasonal business.
Of course, seasonal business isn't limited to clothing companies. Carter cites the case of another customer that makes outdoor furniture (which requested anonymity)."They have a very narrow window to sell a lot of patio furniture," he says. Using sophisticated technology, UPS set up a system that allowed the furniture maker to meet 80 percent of its demand with non-expedited freight, shipping only the final 20 percent via expedited service. It was cheaper for the company to use that expedited freight than to carry the inventory in advance or to build a permanent nfrastructure that would be needed only eight weeks a year.
Quest for world domination
For all their success, it appears that UPS, FedEx and DHL are not content to gobble up domestic business. As more U.S. companies start sourcing and selling overseas, all three are aggressively marketing their international experience and expertise. For example, FedEx Trade Networks now offers an array of international business services, including customs brokerage, air and ocean forwarding, and trade consultancy services. Along with sister companies like FedEx Ground and FedEx Freight, FedEx Trade Networks can manage the flow of goods from point of origin to final destination, often bypassing customers' distribution centers.
"Our target audience—it may be a seasonal issue—does not want to go through the normal supply chain," says Gerald Leary, FedEx Trade Networks' executive vice president and chief operating officer. "We're finding more and more companies are part of an international supply chain. We can shave two to three weeks off the transit time over putting goods into a regular DC."
Not only is it quicker, it's easier. Take the case of a FedEx customer that purchased Halloween goods in China for distribution across the United States. (Again, the customer requested anonymity.) "We did a consolidation in China that made up several container loads," Leary says. "We moved the shipment to Los Angeles, where we cleared it through Customs." Some containers went to a nearby FedEx facility for stripping and deconsolidation into individual store shipments; others moved by rail to different regions of the United States. The result, says Leary: "The customer gets distribution to 400 outlets from one consolidation, then gets a single bill."
Leary touts FedEx's technology as a key differentiator from traditional forwarding service. "We know where the product is at all times," he says.
For its part, UPS offers international services through its Trade Direct business. "Trade Direct was born out of retail customers' needs," says Carter. "They want the perfect order from a supply base thousands of miles, three languages, and eight time zones away."
The idea, he insists, is not to create express shipments, but to build what he calls "warehouses in motion.""We want to create the ability to bypass DC operations in North America and go direct to the store shelf or as near as we can. We do that by managing order flow from the purchase order to handling containers in Asia. We're creating outbound containers that are store orders, so they can be distributed directly to the store. So we reduce the material handling requirements and number of touches."
A big plus, Carter adds, is the visibility provided by UPS's service. "The customer has a consistent, high-visibility flow of goods," he says. "We create a steady flow that allows customers to make real-time decisions based on real-time information without incurring unnecessary cost. For a clothing retailer, obsolescence or lost sales are a huge cost. If he knows he's getting too many large blues, he can stop the flow and instead arrange to get the pink smalls that are flying off the store shelves."