When companies make the decision to outsource warehousing to a third party logistics company (3PL) because they are not happy with their own capabilities, they tend to demand more of the 3PL then they would demand of themselves. I talked to an IT executive at a well-known 3PL active in providing warehousing services about this.
This executive made the point that one reason to outsource for many companies, is that the distribution arm of the company does not have the same priority as manufacturing. Where the manufacturing group would be able to invest in an upgraded manufacturing execution system, the same is very often not true for the warehousing department. The ability to move off a legacy warehouse management system (WMS) onto the latest version of a high end WMS, or the ability to invest in voice recognition or a labor management system, is made possible by the decision to outsource. Whereas the department would never get the budget to make these moves internally, it becomes part of what they demand of their 3PL partner.
When it comes to WMS implementations, customers have a right to expect faster and lower cost implementations than they could achieve for themselves. This 3PL has standardized on Manhattan Associates’ WMS for more complex warehouse environments. They have their own proprietary WMS that can be used in simpler environments. Because they have implemented these solutions over and over, they know where the mine fields are.
The one thing the 3PL does try to convince potential customers to do is to let them implement a vanilla version of the software, with customizations so minor that the upgrade path will not be affected. They try to convince the customer that is their right to set service level requirements and have other key metrics, but that it does not make sense to tell a 3PL HOW to achieve those goals. If the 3PL is allowed to achieve the goal through a non-custom implementation of the software, both sides benefit.
This 3PL has standardized on a labor management system from Spalding Software. Over the last two years, almost all request for proposals (RFPs) from companies of any “reasonable level” of supply chain maturity have included labor management as a requirement. For large 3PLs, the ability to provide labor management has become table stakes, they can’t get into the game without this.
Here again, a company might not be able to realistically think they come up to speed on a labor management program based on their internal capabilities. Achieving a good labor program requires more than a software implementation. Hiring industrial engineers and getting them up to speed, determining what type of labor standards to use, and developing granular standards are all nontrivial tasks. By hiring a large 3PL, you can also hire an experienced labor engineering team. At this 3PL these engineers are highly valued. The engineering team has a seat at the executive staff level of the organization.
There is a trend in the industry for 3PLs to provide “non-asset based” warehousing services. In other words, 3PLs do not own the warehouses. This was driven, in part, by the economic downturn of 2008-2009 when several 3PLs got trapped with warehousing space they couldn’t monetize. So today, if there is a three year contract for warehousing services, the 3PL has a three year lease on that warehouse. From a technology perspective, this is also how much modern material handling equipment is acquired. For example, a three year services contract means a three year lease for fork lifts.
In conclusion, it sounds almost glib when 3PLs say if “warehousing is not a core competence you should outsource it.” But when you look at what customer’s demand of a 3PL technologically, that they would never demand of themselves, it does not sound quite so trite.