Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.
They may not know it by name, but most users of third-party logistics services are familiar with the concept of "savings leakage." In the outsourcing world, the term refers to the phenomenon in which a customer sees dazzling returns in the first or second year of its contract only to see the savings slow to a trickle later on, according to Kate Vitasek, a consultant with Bellevue, Wash.-based Supply Chain Visions.
"In essence, you negotiate a deal and then you don't realize the savings that you thought you would over time," she explains.
The reason is pretty obvious. The biggest savings come in year one as the service provider assumes labor and asset costs, and focuses on the projects that will deliver the greatest returns. "In the first year, [the contractor] comes to the table with a different solution, whether it be dollar savings, productivity savings, or re-engineering the network by taking assets out of the network or putting resources into it," says Will O'Shea of 3PD, a third-party logistics service provider (3PL) that specializes in last-mile logistics and delivery services. After that, the relationship settles into more of a maintenance mode. "It's unreasonable for any shipper going into a relationship to expect the same year-over-year savings," O'Shea says.
That's not to say companies can't expect to see year-over-year savings later on in the relationship. But it takes some effort. The customer must be willing to roll up its sleeves and work with the service provider to find new tools, methodologies, and process improvements, says Tony Zasimovich, vice president of global international logistics services at the 3PL APL Logistics.
Oftentimes, however, customers don't make that effort. Once the outsourcing arrangement is up and running, they start focusing their attention and energies elsewhere. Only later do they realize that although the contractor has done exactly what it promised to do, the savings have dropped off.
It doesn't have to be that way, says Vitasek. It's possible to keep the momentum going beyond the second or third year. But it takes some work on the shipper's part, she says. In fact, fixing the problem requires nothing less than rethinking its relationship with the 3PL and the way it contracts for services.
Results, not activities
Before you can address the problem of savings leakage, you have to understand the cause. In many cases, Vitasek says, the problem lies with the original service contract. Traditionally, shippers have structured their outsourcing arrangements around activities—that is, they draft contracts that focus on specific tasks to be performed and compensate the 3PL accordingly. For example, "We will pay you a dollar to pick a product, a dollar per month to store it, a dollar to pack it, and 10 cents for each label."
The problem is, there's no incentive for the 3PL to make the business more efficient—which often involves eliminating activities. In other words, if you're paying the provider on the basis of pallets of inventory stored, the contractor is hardly going to suggest ways to reduce that inventory.
A better approach, says Vitasek, is to contract for—and pay for—results. That is, structure the agreement so that the 3PL gets paid not for storing 1,000 pallets but for reducing the total cost of distribution by 3 percent, or for achieving 99 percent compliance with Wal-Mart's routing guidelines.
This concept of paying for results is known as performance-based outsourcing, or vested outsourcing. The approach originated with the Department of Defense. Vitasek and others are now trying to apply it in the private sector. (Vitasek has a book coming out this month on making that transition, called Vested Outsourcing: Five Rules That Will Transform Outsourcing.)
Although the movement is relatively new, a few 3PLs have already adopted this approach, according to Vitasek. One example is Unipart, a 3PL that provides automotive parts service for Jaguar in more than 60 countries. Unipart is involved in almost all aspects of its customer's business, from the development and launch of new models through aftermarket support, and is privy to such confidential information as Jaguar's vision, business plan, and strategies for specific markets. Richard MacLaren, general manager for Unipart Logistics North America, says the two companies have a "shared destiny."
It takes time
Creating this sense of shared destiny is not easy. According to MacLaren, you can't expect to achieve this type of rapport in the first three years of a business relationship, even if you set out with that goal in mind. Although Unipart aims to develop long-term partnerships with its customers, all of its business relationships start off at a transactional level. Then, says MacLaren, you move on to offering the customer practical suggestions for improvements before developing a business partnership. "You have to get to know each other first," he says.
Adrian Gonzalez, director of logistics viewpoints for the consultancy ARC Advisory Group, agrees that performance-based outsourcing is a long journey. He says the "sweet spot" is usually the fourth or fifth year of the arrangement, by which time the two companies have developed a good working relationship and are starting to develop synergies.
It may require some patience, but building long-term partnerships is worth the effort, adds MacLaren. These relationships foster the type of innovation and creativity that propels companies out of the financial doldrums and onto the global stage.
how to take it to the next level
Looking to get better results from your 3PL? It all starts with building a better relationship. Here are some tips.
Remember that continuous improvement requires continuous attention. If your 3PL is performing to expectations, you might be tempted to back off and get out of its way. But that's a mistake, says Zasimovich of APL Logistics. He advises shippers to sit down regularly with their 3PLs to review goals and set new objectives. Companies like APL rely on that feedback to fine-tune their services, Zasimovich explains.
Tackle the KPIs right away. The advantages of establishing key performance indicators (KPIs) at the outset might seem obvious, but many times, companies sign the contract and leave the KPIs to be determined later, says O'Shea. That can lead to disputes about performance down the road. Make sure both parties agree to the KPIs before the deal is inked.
Pay your 3PL to solve problems, not put a butt in a forklift. Vitasek urges shippers to stop writing contracts that specify how something should be done and focus instead on what should be done. It shouldn't matter how many forklifts the 3PL has or how many picks it makes per day as long as it achieves—or exceeds—the desired outcome.
Make sure that there's something in it for the 3PL. Taking performance to the next level often requires some investment on the 3PL's part—whether it's in equipment, technology, or a network analysis. The provider is likely to be more receptive to the idea if you offer to share some of the resulting savings or profits.
Commit to the long term. You can't expect your 3PL to invest a million dollars in systems and equipment to serve your account unless you show that you're in it for the long term—say, seven years or more. "If the provider knows that the business is just going to be put out to bid again in two years, there are no long-term incentives... to take that risk," says Gonzalez.
Have a third party review your contract. After months of hard-fought contract negotiations, you can't be expected to render an objective opinion on the fairness of the deal. That's where an outsider's unbiased opinion can be valuable. The University of Tennessee, for instance, will launch a "deal review" service beginning this spring.
Robotic technology has been sweeping through warehouses nationwide as companies seek to automate repetitive tasks in a bid to speed operations and free up human labor for other activities. Many of those implementations have been focused on picking tasks, a trend driven largely by the need to fill accelerating e-commerce orders. But as the robotic-picking market matures and e-commerce growth levels off, the robotic revolution is shifting behind the picking lines, with many companies investing in pallet-handling robots as a way to keep efficiency gains coming.
“Earlier in this decade and the previous decade, we [saw] a lot of [material handling] transformation around e-commerce and the handling of goods to order,” explains Josh Kivenko, chief marketing officer and senior vice president at Vecna Robotics, which provides autonomous mobile robots (AMRs) for pallet handling and logistics operations. “Now we’re talking about pallets—moving material in bulk behind that line.”
Kivenko explains that whether items are being packaged and shipped directly to a customer’s home address or moved as finished goods to a shipping bay for store delivery, those items are first moved in bulk in some way, often by human hands and with human-operated equipment. He describes warehouses as chaotic environments in which humans move pallets and cartons in multiple ways—up and down, side to side, from receiving to storage, from storage to shipping, or via cross-docking. Automation can help bring order to that chaos.
“What we’re trying to do is relieve some of the pressure [on the] humans [doing] this work,” Kivenko says of companies that develop pallet-handling robotic technologies. “At the end of the day, we’re trying to automate some of those flows, relieve labor pressure, save costs, and keep the goods flowing.”
But automated pallet handling isn’t right for every situation, so it’s important to understand the warehouse conditions required and the protocols and best practices needed to make it a win. Here are some guidelines for applying pallet-handling robots and gaining the most from your investment.
FIRST, UNDERSTAND THE TECHNOLOGY
Pallet-handling robots fall into four general categories, explains Rich O’Connor, vice president of storage and automation for Raymond West Group, a business unit of lift truck manufacturer The Raymond Corp. They include:
Palletizing/depalletizing robots, which are used to load or unload items onto and off of pallets, usually with the use of a robotic arm for picking and placing. Today, these systems are being increasingly integrated with automated storage and retrieval systems (AS/RS) to further streamline pallet handling in the warehouse, O’Connor explains.
Autonomous guided vehicles (AGVs) and autonomous mobile robots (AMRs), which are used to transport pallets within the warehouse. Often outfitted with lift decks or conveyors, or designed to tug or tow items, these robots move pallets from point A to B within a facility. AGVs, which often follow a marked guide-path or wire in the floor, have been around for many years, but the advent of high-performance guidance and vision systems is allowing them more flexibility today, O’Connor says. AMRs are self-guided vehicles that use software and sensors to navigate their way through the warehouse.
Forklift AGVs and AMRs, which can move products both horizontally, from place to place, and vertically, into and out of storage racks. They come in various styles—including stackers, counterbalanced trucks, reach trucks, and even very narrow aisle (VNA) vehicles for use in densely packed warehouses. These vehicles are more complex than those used only for horizontal transport, O’Connor explains. They must be “highly integrated” into the facility’s warehouse management system (WMS) or warehouse execution system (WES) so that they know precisely where to retrieve and deliver pallets within the facility.
Robotic pallet shuttles, which move pallets into, out of, and within dense storage racking. The Raymond Corp. describes such a system as “a standalone, automated deep-lane pallet storage system that utilizes self-powered shuttle carriages to move pallets toward the back or front in a racking channel. Shuttles are motor driven and travel along rails within a storage lane.”
O’Connor and others say that no matter which of these technologies you’re investing in, it’s important to remember that they are all part of a larger system designed to optimize operations throughout the warehouse.
“The expanding role of all these different styles working together is what’s amazing today,” O’Connor says.
SECOND, ENSURE THE TECHNOLOGY IS A FIT
Kivenko, of Vecna, also emphasizes the importance of pallet-handling robots working in concert, particularly AMRs and AGVs.
“The magic isn’t just that the robots are autonomous and driving by themselves. The magic is multiple robots—when you have a [whole integrated] system [in place],” he says. “[It’s] how the fleet operates autonomously and optimizes itself for continuous improvement. That’s where the exponential gains are. [It’s] not just about automating what a worker does; it’s about automating a system.”
But you can’t install these systems in just any warehouse and expect magic. Kivenko and others point to certain conditions that enable the best robotic pallet-handling outcomes, especially when it comes to transportation-based and forklift-type AMRs and AGVs.
“The robots that I sell are large-load machines with very expensive technology,” Kivenko explains. “They move material, generally, in larger facilities. And in order for them to produce a return [on investment]—because that’s the name of the game here—they have to be higher-velocity facilities.”
He says pallet-handling robots work best in large facilities running multiple shifts, usually more than five days a week. Wider aisles allow the equipment to move more freely through the facility and at higher speeds, to optimize efficiency and productivity. Strong Wi-Fi networks and clean, dry environments also help keep equipment running at top performance.
O’Connor agrees that pallet-handling robots are best suited to facilities with multishift operations, where they can ease labor constraints and boost productivity. And he says many customers are willing to extend the typical two- to three-year ROI period to five years in order to achieve those gains. But there is even more to it than that. O’Connor’s colleague John Rosenberger says customers must first step back and analyze their processes to ensure that, even if they have the right facility for pallet-handling AMRs or AGVs, they are moving material in the most efficient way to begin with.
“Many times, we find that the processes in place [are inefficient],” says Rosenberger, who is director of iWarehouse Gateway and global telematics for The Raymond Corp. He emphasizes the importance of analyzing existing data—from an equipment telematics system or similar—to determine the best path toward automation.
“Do you have congestion zones now?” he asks. “They’ll still exist if you automate [those processes exactly].”
THIRD, MAKE SIMPLICITY A PRIORITY
Another basic rule of thumb when implementing pallet-handling robotics: Keep it simple.
Andy Lockhart, director of strategic engagement for global warehouse and logistics process automation company Vanderlande, says that when designing a pallet-handling robotics system, “you want to minimize the processes you [automate]. When you can create [an automated system] that focuses on one task—for example, AMRs delivering pallets from a high-bay [storage rack] directly to the palletizing cell—you can do that efficiently and effectively. When you ask the AMR to do this and this and this … you are adding risk of failure.”
Lockhart’s colleague Jake Heldenberg advises customers to first test their target processes via pilot programs within the warehouse or DC. Heldenberg is Vanderlande’s head of solution design, warehousing, North America.
“If AGVs or AMRs for pallet handling are interesting [to a customer], the best thing to do is pilot one or two in an existing DC,” he says, explaining that the process can help companies troubleshoot, understand integration timelines, and gauge ROI. But pilot programs can add expense to a project, making it unaffordable for some.
“If that’s the case, then the best advice is work with a vendor who has experience integrating [the technology],” Heldenberg says. “Use their experience to benefit your business. You won’t have the same hiccups and challenges you would with a less-experienced vendor.”
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”