A Strategic Approach to Outsourcing European Distribution

I spoke to Tom Doherty, Senior Director Global Supply Chain at Welch Allyn, about the process they used to select a third party logistics (3PL) partner for European distribution.  Welch Allyn, a private company headquartered in Skaneateles Falls New York in the USA, is a leading global manufacturer of medical diagnostic equipment. The company has 2,600 worldwide employees.

At the European distribution center (DC) goods, mainly in the form of ocean containers that originate from two North American plants, are received and stored.  As orders come in, the European DC would be the source for shipments into mainland Europe, Eastern Europe, and the Middle East.  This DC would also serve as the hub to replenish their warehouse in South Africa.

Welch Allyn began the selection process by starting with the network strategy.  Their goal was to co-locate three activities – warehousing, postponement, and bench repair/technical support – in a centrally located part of Europe.  By collocating activities, synergies were possible, particularly in the area of reverse logistics and postponement.

Postponement minimizes the inventory necessary to achieve a high service level. Postponement at Welch Allyn consists of receiving a vanilla product and then doing the final configuration – adding the power cord, software, accessories and packaging specific to a particular country.  Not all Welch Allyn products destined for Europe were suited for postponement, but some were.

Bench repair and technical support is part of the Welch Allyn reverse logistics and service function.  If goods are returned broken, technicians fix the product by diagnosing the problem, disassembling it, and putting in the necessary new components.

Once the network strategy was in place, it really came down to an insource versus outsource decision.  They decided to outsource lower complexity activities while keeping higher complexity activities in-house.  Warehousing – receiving, put-away, picking, and simpler postponement (for example, taking three parts, kitting those parts, and then bagging and tagging for shipment) – was deemed to be a lower complexity activity.

On the other hand, bench repair was clearly a more complex process requiring trained technicians and specialized equipment owned by Welch Allyn.  This they decided needed to be done by their people.  And yet to attain the logistics synergies in an outsourced warehouse meant that Welch Allyn employees would need to work in the same building as the 3PL.

Finally, once the decision was made to outsource distribution, they knew that they would be working out of a multi-client warehouse because they lacked the critical mass for a dedicated warehouse.  Even though this was a public warehouse environment, they were still looking for a partner that could grow and evolve with them. This was a relationship that needed to be based on trust and flexibility.

Once Welch Allyn had their core strategy in place, a Welch Allyn cross functional team spent three days touring the facilities of a number of 3PLs who claimed to be capable of performing value added services (VAS) even before they built their request for proposal (RFP).  The thinking here was that they did not want to put together a RFP that no 3PL would bid on because what they were asking for did not exist.  And indeed, they decided that certain criteria that they had considered including were not something most 3PLs were likely to have initially, but might be something some 3PLs could evolve towards.

Welch Allyn then built a comprehensive RFP. Key criteria included:

  • VAS capabilities,
  • Heath care industry experience, including ISO and medical device certification;
  • The 3PL’s culture;
  • Lean capabilities;
  • Management and staff stability;
  • Technology and technical capabilities – a robust Warehouse Management System, EDI, portals with robust real time visibility and analytics, and the ability to interface to their SAP, telephony and bench repair functionality;
  • And, references.

The RFP consisted of both quantitative and qualitative criteria.  The quantitative side – perhaps 60 percent of the RFP, was easy; this was black and white.

But the qualitative side, which included things like the 3PLs’ culture, and how that culture would mesh with their culture, and whether they could grow and evolve with their 3PL, was tougher.  This was more impressionistic and a place where the cross functional team had to engage in more thinking and discussion.

The site location was also important for cultural reasons, approximately 20 Welch Allyn employees would be working in the same building as the 3PLs staff.  This is something they devoted a great deal of thought to. For example, the 3PL they finally chose, Rhenus Logistics, initially showed them a “beautiful, new site.”  But this was a traditional High Bay DC.  This was not the kind of location that their technicians were used to working in. They ended up choosing a different Rhenus location that had a section of the building better suited as a technical service workplace.

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The Welch Allyn EME Operations Team

Welch Allyn selected a Rhenus warehouse in the Netherlands.  They took a phased approach to the implementation beginning with bringing the bench support up, then standard warehousing, and finally the more advanced value added services and configuration.  The last phase went live in the first quarter of 2014.

In conclusion, Tom pointed out that a successful selection process depends upon having a well thought out strategy so that a shipper knows what to look for. But also important is having a flexible selection process where the RFP is not considered cast in stone. Roughly 85 to 90 percent of the RFP criteria they started with stayed the same. But as Tom pointed out, “the criteria do have to change; you learn as you go through the process.”