Outsourcing Final Mile Logistics
The word “outsourcing” strikes an emotional cord whenever it is mentioned. There is typically quite a bit of debate in the media about the pros and cons of outsourcing, which usually carries the connotation of American jobs being shipped overseas. That process is, in fact, more accurately referred to as “off shoring.”
|More window and door manufacturers are using 3PLs operating their own cross-docking facilities.|
For the responsible business owner or manager, outsourcing non-core operational activities is a way to alleviate risk, capitalize on functional expertise, tap into new technologies, and access additional capacity. Within the window and door industry, a growing number of companies are benefiting from outsourcing their logistics functions, in partnership with an expert third party logistics (3PL) company.
Today, more than ever, companies are scrutinizing their supply chains in search of creative ways to take costs out of the system, manage inventory levels, increase efficiencies and satisfy often fluid customer demand. Companies that outsource their logistics functions name cost savings as the number one reason to turn to a 3PL service provider. There are several ways a company can leverage a logistics partner relationship to gain economic efficiencies. These include:
- Reduced capital footprint, i.e. warehouse space, equipment, systems
- Transportation costs become cheaper by pooling greater volumes
- Swings in volume due to seasonality or economic conditions become more manageable
- Staffing costs are reduced
- Moves cost basis from fixed to variable, based on volume and timing
In addition, there are other non-economic benefits of outsourcing. By using logistics companies, window and door manufacturers and door pre-hangers work with experts in the field, with the experience and resources to do the job better. They can also gain access to cutting edge technology used by 3PLs to reduce costs and streamline the order fulfillment process. It can be difficult for a business to keep up with changing technology demands in activities that are not the company's primary function. Finally, outsourcing various activities enables a company to focus on what it does best, rather than a non-core competency.
According to the 2012 Third-Party Logistics Study—produced by Cap Gemini Consulting—64 percent of companies surveyed are planning to increase their use of 3PL services in the coming year or so. A key area of growth is in the use of 3PLs for “final mile” delivery. Final mile can be considered as delivery to the homeowner or job site where the product is to be installed. Many companies extend their supply chains to retailers, but do not focus on these final mile deliveries. Oftentimes, there are unique challenges identified with managing final mile delivery with in-house logistics resources. These include:
- Quality of delivery and cost control are difficult to manage due to varying customer needs, extensive geographies to cover, less than full truckloads into a market and the timing of customer delivery requests.
- Delivering the final mile requires a different set of core competencies versus other logistics functions. One consideration is the use of 53-foot tractors to make home deliveries. Many homeowners and new construction job sites are in small residential sub-divisions. Making deliveries into these areas using traditional full-size tractor-trailers can be cumbersome and expensive.
- Managing a dedicated delivery fleet is challenging given the ongoing vehicle costs and maintenance, insurance requirements, driver salaries and other allowances, which can cause a financial burden, especially as volume fluctuates.
- Companies also have to take into account increasing regulatory standards associated with managing vehicle fleets such as the recent DOT CSA 2010 regulations.
These and many other challenges have made it difficult for companies to assess the benefits of providing final mile deliveries and adding this service to their offerings.
|Outsourcing can give companies access to greater expertise in non-core business activities..|
For many manufacturers of products for the home improvement industry, such as kitchen cabinets and millwork, the use of “cross-docks” is the preferred method for accomplishing the objective of outsourcing final mile logistics. Cross docking is a distribution system where items received at the warehouse are not received into stock, but are prepared for shipment to another location item. According to the 2011 Cross-Docking Trends Report, developed by Saddle Creek Corp., 31 percent of companies surveyed have moved to cross-dock operations during the past three years. This recent growth trend indicates that companies are finding significant value in cross-docking, especially during the recent economic downturn.
The most frequent drivers cited for moving to outsourced final mile logistics were improving service levels (37.9 percent), reducing transportation costs (32.4 percent) and consolidating shipments to destination (32.4 percent). Companies that specialize in cross-dock services act as an extension of the manufacturer or distributor themselves. Not only do they ensure the manufacturer’s valuable product gets safely to the end customer, but they manage the entire customer facing process. These companies take on the responsibility for scheduling the delivery, with as little disruption to the customer as possible; communicate any changes or updates along the way; ensure the product is delivered safely and damage free and promptly communicate the end result back to the manufacturer–often in real time. Some 3PLs also add more value by managing the customer satisfaction survey process and feedback loop.
A recent J.D. Power & Associates 2012 Windows and Patio Doors Satisfaction Study highlighted the importance of the ordering and delivery process in achieving high satisfaction marks from customers. The ordering and delivery process was cited as the most important performance criteria out of six ranked. The study also found that the condition of the windows/doors at the time of delivery has the most influence on the overall customer experience. These results are very similar to another recent study conducted by the firm for the kitchen cabinet industry. Executing the delivery process well and delivering on commitments made to the customer are essential to achieving and maintaining high levels of customer satisfaction.
As with any outsourcing decision, deciding whether to utilize the services of a 3PL should be based on sound inputs and decision-making. Key criteria to consider should include whether the 3PL has cross-dock and warehouse capabilities, nationwide coverage, logistics expertise specific to the company’s requirements, full breadth of services that meet the business’ needs, technology and systems in place to efficiently transfer data and other information, and dedicated account management that ensures the end customers receive the highest levels of service and satisfaction.
Is outsourcing the right decision for everyone? Probably not. If your operations are primarily local, or you have specialized distribution needs (e.g. increasing brand awareness), then an owned delivery fleet may make the most sense. If, on the other hand, your products are packaged well, sold nationally through multiple retail channels, and/or subject to variations in sales volumes, then outsourcing is a strategy that can greatly improve operating efficiencies and add value to your customer offerings.
Increasingly, many companies are recognizing third-party providers as valuable partners in the management of their overall logistics process—leveraging their expertise and best practices, utilizing their full breadth of resources, and taking advantage of the flexibility 3PLs have in customizing distribution models based on the customer’s specific needs.