Manufacturers Are Calling For “Total Value” But Most 3PLs Only Deliver Cost Savings….

In speaking to the procurement team of a global CPG manufacturer that’s looking to bid their Wisconsin warehouse, distribution and fulfillment operations, I learned that they are focused on the total best value, not necessarily cost. This is a growing trend as manufacturers are calling for growth, less disruption risk, improved service performance and flexibility to meet corporate objectives and customer needs. These manufacturers want cash improvement, accelerated cash conversion cycles and profit margin gains despite key market challenges in commodities, inflation and supply constraints. Yet, more than 50% of 3PLs still focus on cost especially when it comes to the warehouse and DC instead of building an ROI model that encompasses bottom & top line results to ensure growth.

I’m seeing this cost savings focus worsen as the carrier economy persists. Double digit transportation cost percentage increases (up to 15%) have 99.9% of the shipping community way over budget. Nearly 30% of the S&P 500 have mentioned freight, shipping or trucking during their recent earnings calls and many are also discussing commodity pricing pressures as well. As a result, 3PLs are looking for “tactical” ways throughout the supply chain to offset these costs, even if it interferes with growth. In many cases, the achieved cost savings is not enough which causes manufacturers to increase selling prices. For Neenah, a billion dollar publicly traded paper manufacturer, this led to a $7.5M Year over Year reduction in operating profits as sales volumes took a dive.

The manufacturers that partner with a 3PL that focuses on both net cost savings AND growth are the manufacturers that will be able to weather the carrier economy and the challenges it brings. However, as you will learn below, these 3PL partners are a rare find.  

Many 3PLs forget that there’s a 77% correlation between inventory turns and profitability...

In a July 31, 2018 “Supply Chain Dive” article, I learned that 40% of companies in Gartner’s list of top supply chains decreased their inventory turns from 2017 to 2018. These companies included Cisco (-3%), Intel (-10%), Nestle (-5.9%), PepsiCo (-2.2%), H&M (-6.7%) and Coca-Cola (-15.8%).

While companies may put the blame on lagging sales, I believe it’s because companies and their 3PLs are not taking steps to increase supply chain speed. For example, one of the top 5 U.S. trucking and warehouse providers made storage and networking suggestions that would increase inventory levels and reduce inventory turns for a consumer products manufacturer by 50% (after the manufacturer previously took steps to increase inventory turns and accelerate cash conversion cycles by 400%). Also as they were looking backward at historic data rather than future, seasonal promotional data, this provider would have put up to 40% of direct shipments at risk of failed delivery to customers. Their aggregated data which showed a need to increase inventory levels would have cluttered the warehouse and distribution center, making it difficult for the manufacturer to move product where it’s needed. The cost savings that would have been achieved with the suggested changes would be far less than the financial repercussions the manufacturer would have received with its inability to meet the on-time, in full threshold. I share more examples on how 3PLs are making decisions based “cost” versus growth and increasing decreasing inventory turns within this article: Manufacturers Have Little Control Over Inventory Turns & Their 3PLS Are Focused Elsewhere

Increased inventory turns leads to improved service performance to customers but 3PLs are unable to meet OTIF due to current warehouse/DC ops...

Recent studies show that 95% of supply chain leaders find it challenging to meet increasingly higher customer demands – and 75% find it very or extremely challenging. This is why I recently met with a manufacturer's plant logistics manager to review opportunities for improved on-time, in full performance. I learned that how the 3PL manages the DC will impact the plants' ability to service customers like Walmart. For example, he showed me his dock doors on the computer screen. There were 24 dock doors and at that moment in time, 12, were plugged with loaded idle trailers that should be shipped to the DC and to customers like Walmart.

As the 3PL did not have additional local shuttle capacity, the manufacturer found it a challenge to support shipment surges when trucks and equipment were out of service or when there were staff call offs. This is one of the most common reasons behind delays in unloading at the DC and the piling up of product at the plant that should be shipped to the DC and customers.

I've learned that adding little synchronization of the DC and warehouse on top of limited local capacity is like pouring gasoline on top of a burning fire. Since the ERP system is calling for product to be shipped to the DC which is playing catch up, plants are unable to direct ship to customers. If the manufacturer can't get their goods in and out on time due to congestion and door limitations, then it's not delivering to their customers like Walmart on time either. This can often negatively impact their relationship and pricing, or cause profit margin loss through fees and the potential pulling of product from shelves.

Read my recent OTIF article to see how 3PLs can cost manufacturers up to 3% of their profit margins.

Many 3PLs are limited by inflexible technology to drive efficiency to improve service performance and support corporate objectives and growth...

All national providers websites’, including Ryder and NFI claim that they can implement interleaving. However, we’ve learned that they cannot support manufacturers where technology-assisted decisions are needed. As a result, product are on the forks only 50% of the time because warehouse employees would travel in only one direction while carrying a pallet. By using WMS technologies which can customize to your operation within 3 weeks instead of 3 months, one of our manufacturing clients was able to double their efficiency and have product on the forks nearly 100% of the time! This increased efficiency, dropped labor costs by 37%, improved performance to customers and ultimately drove growth.

The canned technology that many 3PLs are using are not only impacting warehouse and DC operations but also the manufacturer’s ability to compete with Amazon in ecommerce. For example, one of our paper manufacturing clients reached out to a national WMS provider who said it could take “a year or more, and hundreds of thousands of dollars” for a custom picking program to support their customer’s unique requirements. By utilizing a fast and flexible solution, the manufacturer was able to make adjustments within six weeks, whereas previously they were not able to deal with the complexity of shipping 2000+ small packages each day via FedEx, in addition to the pool loads for small parcel zone-skipping.

Before this change, the manufacturer was unable to ship product directly to end customers or businesses who are purchasing on the Staples or Grainger Online Catalog. The nationwide provider’s WMS did not have the labeling capabilities to create the perception that product was shipped from the Staples or Grainger DC instead of our manufacturing client. By using technology that’s more aligned with their culture, a competitive advantage was created as the manufacturer removed unnecessary transportation and product handling. This is also shortened lead time and improved service performance to their clients, which resulted in increased SMB sales.

3PLs Should Focus on Removing Disruption Rather Than Making Decisions Based on Cost...

Throughout this article, I’d shared how 3PLs are creating disruptions to operations, customers and the P&L because they are making decisions based on “costs”. Instead of adding disruption, 3PLs should be looking for opportunities to remove risk, which will in turn drive greater growth and profitability than focusing solely on offsetting costs. For example….

• When we learned how our CPG and paper manufacturing customers were seeing up to 12 annual supply chain, production and customer disruptions resulting from rail issues and trucking capacity challenges, we created a Green Bay port logistics solution. This way our manufacturing clients in Northern Wisconsin could bring raw materials inventory closer to plants or their customers. They don’t have to use ports in Milwaukee where they are reliant on trucks and rail for the final miles as they’ll be able to easily secure a shuttle from the Green Bay port for lower cost and risk. International shippers won’t have to import into places like Mobile, Alabama and then rely on rail transportation simply because it’s the way they’ve always done it. Read my recent Journal of Commerce article to see how this is protecting operations, finances and the customer.
• Serving book printers and firms like UPM, a Wisconsin based paper manufacturer had a high estimated percentage of claims against shipments (30-35%) due to product damage and production shutdowns, as well as a lack of on time, in full deliveries. They were at risk of losing one of their largest customers because almost half of shipments had product damage or shortages. The damaged product affected 40% of our customers revenue. To remove the risk to customers, the warehouse needed to be optimized for increased time efficiency and decreased product handling and damage. And, they needed to synchronize inventory speed with product shelf life .This is where most 3PLs would stop as efficiency and labor cost savings were achieved, However, new processes were needed to synchronize the shippers and customers sustainability. For example, with pick and load times reduced, we were able to implement for the customer final quality checks before loading product onto trucks. To avoid incurring the additional cost and delays from sending damaged product back to the mill in Michigan, the warehouse staff was trained to slab off damaged paper and rewrap them to protect the rolls from becoming loose and easily damaged. The warehouse was also able to utilize custom WMS capability to reprint roll labels with the correct weight and item. Click here to read the case study.

Since manufacturers are calling for “total value” beyond cost savings - 3PLs need a way to be more accountable for how they manage warehousing & distribution

Because customers are putting increased demands on manufacturing supply chains and our clients are looking to the supply chain for growth instead of just seeing it as a cost center, we are putting together a “Total Supply Chain Value Index” which will measure:

• Inventory turns and speed to market
• Cash conversion cycle acceleration speed
• Cash improvement
• Profit margin growth
• Increased ecommerce sales
• On time, in full service performance to plants and customers
• Risk and disruption reduction (production, operations, finance and the customer)
• Warehouse, DC and transportation synchronization
• Customer experience improvements
• Meeting of corporate objectives
• Continuous improvement among all areas
• Shipment velocity
• Labor productivity
• Increased sales
• Cost savings

By having a means to measure the complete value, this fosters a “what if” environment where partners, ranks and divisions collaborate together to accelerate learning and growth, beyond just cost savings. Inside our On Time, In Full Logistics LinkedIn Group you'll learn how CPG, paper/packaging and other manufacturers can drive greater profitability by focusing on customers, service performance and impacting the areas highlighted above.

Click here to join our On-Time, In Full Logistics Group.