Third-party warehousing and distribution operations may be as old as the logistics industry, but no one would argue they've reached market saturation. In fact, the explosive growth of outsourcing has emerged as one of the most significant trends in logistics over the past two decades.
It appears the trend has not yet run its course. Nearly two-thirds (64 percent) of the shippers surveyed for The 2012 16th Annual Third-Party Logistics Study said they planned to increase their use of third-party logistics service providers (3PLs). The study, conducted by Capgemini Consulting, Penn State University, and others, was released last October.
This probably comes as little surprise to most logistics professionals. The advantages of using third parties, or logistics service providers, are manifold, ranging from reducing brick-and-mortar assets and labor to more strategic issues around such things as serving specific geographies or taking advantage of expertise outside a firm's basic core competency.
The two stories that follow give a sense of why companies make the move to logistics service providers. The first is an account of how Cutter & Buck, a specialized West Coast apparel company, took advantage of a major 3PL's location to serve its Eastern corporate customer base. The second tells how Xterra, a small company that markets wetsuits to triathlon athletes, initially turned part of its distribution over to a third party, then eventually outsourced its entire fulfillment operation.
A WINNING STRATEGY
Cutter & Buck, a Seattle-based company best known for its golf-inspired apparel (it is a preferred provider for the PGA of America), is a major supplier of branded merchandise to corporations: think the golf jacket embroidered with a company logo offered at a corporate event.
Until 2010, the company fulfilled its nationwide orders from its 150,000-square-foot distribution center in Renton, Wash. But with much of its corporate clientele located in the eastern United States, the company had difficulty balancing the cost of fulfillment with customers' demands for expedited service.
The problem wasn't with merchandise ordered by its college and professional golfer customers, or with its direct-to-consumer and retail customers' orders; Cutter & Buck handles its own embroidery for those customers, and the company is satisfied that the system works well. The difficulty it faced was meeting the requirement for blanks (unembroidered goods) destined for the East Coast, where 80 percent of its corporate customers are located. Those customers, who manage the embroidery separately, demand fast shipping and low transportation costs.
The challenge lay with Cutter & Buck's biggest channel, the corporate channel, says Rick Martinez, the company's director of distribution. "The industry standard for the corporate channel," he says, "is that you will ship the same day and that either a third-party embroidery house or the customer will receive its shipment within two days and that freight cost will be anywhere from free to minimal."
Meeting the demand for two-day shipping out of Renton to the East Coast required using expedited freight and discounting the freight costs to customers, Martinez explains. "That was OK for the customer, but not necessarily what we were looking for," he says. The company faced a Hobson's choice: use ground shipping that was too slow to meet customer demands, or rely on faster, premium-priced services that ate heavily into Cutter & Buck's margins.
With its East Coast business poised for growth, Cutter & Buck decided it would be better off moving part of its distribution closer to the customers. The company initially considered opening its own fulfillment center on the East Coast but was deterred by the upfront investment required. Instead, it began searching for a suitable third-party logistics service provider.
Martinez says he had three priorities in choosing a 3PL. For starters, he wanted a partner that already had experience in apparel fulfillment. He also wanted a vendor that operated a multi-client facility, with the ability to leverage its workforce and equipment across several accounts to accommodate shifts in seasonal demand. "I had a background in working with a 3PL with multiple accounts and got to see how good that can be for both parties," he says.
But the biggest consideration of all was the provider's technical capabilities. Martinez says his number one requirement was that the third party be able to integrate easily with Cutter & Buck's existing warehouse management software (WMS), a system supplied by Manhattan Associates, as well as provide tracking for all shipments.
THE RIGHT STUFF
Martinez's search for the right partner eventually led him to the third-party logistics arm of parcel delivery giant UPS. UPS operates a fulfillment complex in Hebron, Ky., that looked to be a good fit with Cutter & Buck's requirements. Not only is it a multi-client facility specializing in apparel and footwear, but the Hebron operation would also be able to provide the coverage Cutter & Buck needed on the East Coast. Shipments from the Hebron campus, UPS says, can reach 70 percent of the U.S. population with two-day ground service.
On top of that, UPS would be able to accommodate Cutter & Buck's technology requirements. The company was able to assure the apparel maker that it could integrate the Manhattan WMS with UPS's WorldShip shipping application as well as provide the necessary tracking with its Quantum View Manage system.
Cutter & Buck signed an agreement with UPS in the spring of 2010, with the aim of having the Hebron facility begin receiving goods in November of that year and begin shipping in January 2011—a schedule UPS and Cutter & Buck were able to meet.
Today, the golf apparel vendor is one of six customers using Hebron, with 40,000 square feet dedicated to its operation. Should it someday need room for expansion, that will be no problem, says UPS. The Hebron operation overall has three facilities totaling about 2.2 million square feet.
UPS downloads orders from Cutter & Buck hourly. Under terms of its agreement with the golf apparel maker, it must ship orders received as late as 5 p.m. Pacific the same day. On average, the Hebron facility processes about 250 shipments daily, comprising about 5,000 units.
By all accounts, the move was a winner. By shifting its East Coast distribution to the UPS campus in Hebron, Cutter & Buck is now able to reach all of its major corporate customers within two days, Martinez says. "That positions us to minimize freight cost and be much more responsive than we could be out of Renton," he says.
At present, the Hebron facility ships products for Cutter & Buck that do not require value-added services such as embroidery. That means nearly all of the shipments from Hebron go to third-party distributors who handle further embroidery and customization. Cutter & Buck continues to handle any orders that include embroidery from the Renton facility.
But that could change. Martinez says his company may consider adding embroidery services at the Hebron facility in the future, although it is not a high priority.
If it should decide to take that path, UPS will be ready. Alan Amling, marketing director for UPS's logistics and distribution business, says it is a service that UPS could take on. The facility already provides other customers with a variety of value added services, he says, including kitting, packaging, and preparation of store-ready displays.
STICK TO WHAT YOU KNOW
Like Cutter & Buck, Xterra Wetsuits is an apparel company that found itself struggling with distribution problems brought on by rapid growth. Established in 2001, Xterra Wetsuits markets wetsuits to triathlon athletes. Its name derives from its role as a licensee of Xterra, a separate company that sponsors off-road triathlons and trail runs both in the United States and around the world.
In the early years, the company managed its direct-to-consumer business from a small warehouse in the San Diego area. But as the company grew, fulfilling orders became more vexing. To illustrate the kind of growth Xterra has experienced, Brian Walters, a co-owner and former president of the company, notes that when the current owners acquired the company in 2007, sales ran to about 3,000 units a year. By 2010, sales had soared to 36,000 units across 200 stock-keeping units. "That growth was difficult to manage," he says. (Current volume is closer to 30,000 units after the company shed its least expensive and least profitable product line.)
Like Cutter & Buck, Xterra sought help from a third-party logistics service provider. "We wanted to be a wetsuit company, not a warehouse company," Walters says.
Xterra initially went with ProLog Logistics, a small San Diego-based third party, hiring the 3PL to handle part of its fulfillment operations. When Lakeland, Fla.-based Saddle Creek Corp., a larger 3PL, acquired ProLog in late 2010, Xterra stayed with Saddle Creek.
A SIMPLE SOLUTION
Walters credits Saddle Creek with helping solve one of its biggest distribution problems. In the early days, he says, Xterra took a kind of hybrid approach to fulfillment, handling some orders on its own, handing off others to ProLog, and turning over still others to a third party in the United Kingdom. "We confused efficiency with simplicity," Walters says. "We wanted to be close to everybody. But we quickly realized we did not have the systems to adequately manage inventory and warehousing."
Shortly after Saddle Creek acquired ProLog, Walters says, it began working with its new client to consolidate its operations. One of the first steps was choosing a location for national fulfillment. The problem was, while many of Xterra's clients are in California, most of its customers are on the East Coast. After some consideration, the two decided to consolidate operations at a Saddle Creek facility in Lexington, Ky., a location closer to most of Xterra's customers. "That's our center of gravity," says Walters.
Once the decision was made, the two parties swung into action. "Within a short time, we moved everything to Lexington and got everything in one place," Walters says. Today, all of Xterra's fulfillment is handled out of the Lexington facility.
The arrangement has provided Xterra with a number of advantages. For one thing, consolidating distribution operations at a single site allows Xterra to minimize inventory levels and the time it takes orders to reach customers. For another, it has led a reduction in shipping rates. Saddle Creek was able to use its market power to obtain better small parcel shipping rates than Xterra could do on its own, Walters reports.
In addition, packaging specialists at the 3PL helped develop a Tyvek bag for the wetsuits that took up substantially less space than the corrugated boxes formerly used, saving on both warehouse space and shipping costs. Walters says that a quarter of Xterra Wetsuits' storage costs were for storing the boxes it used previously.
"They made us think about packaging in a different way," Walters says. "There was a lot of cost in making, shipping, and storing the boxes." He adds that the bag can also be resealed, making returns easier for customers.
Cutter & Buck and Xterra Wetsuits are two examples of what students of the 3PL industry see as a continuing trend toward outsourcing important, but not core, business functions. The 2012 3PL study found that most often, firms outsource logistics activities that are "transactional, operational, and repetitive," while keeping strategic, customer-facing, and IT-intensive operations close to home.
What bodes particularly well for 3PLs is another finding of that study: The vast majority of shippers—88 percent—view their relationships with 3PLs as successful.