Keep On Truckin'

If meeting your delivery schedules is chewing a big chunk out of your business day, maybe it's time to consider third-party logistics.

If there's anything that can make beads of sweat pop out on a distributor's brow or cause a customer to go blue in the face, it's not getting the customer's product to him on time, as promised. The chain reaction of work stoppage, wasted time and frayed nerves that undelivered or mis-delivered product causes makes efficient and accurate delivery a top priority in any distributorship. So why would a distributor be willing to turn this weighty responsibility over to a third party, to a stranger, to someone not even in the electrical wholesaling business?

Distributors who've gone this route will tell you they relinquish that responsibility because transportation and delivery, or logistics, is so important. Important enough to turn it over to someone who specializes in getting an item from point A to point B as quickly and reliably as possible. "We're not in the delivery business... we're in the electrical supply business" was the message in a fax to the customers of Missouri Valley Electric in Kansas City, Mo., when it made the decision to go with a third-party delivery service, One-Hour Delivery, a branch of Dynamex, Dallas, Texas.

Missouri Valley Electric Co., a single-location electrical distributor, had been doing its own deliveries for years, according to Duane Carnes, the company's director of operations. "It was bad at best for several reasons," he says. "The equipment we were using was not what it should have been. It wasn't versatile enough. And there were only two drivers, so they couldn't handle the scope. They couldn't be everywhere we needed to be."

Carnes says their drivers had been Missouri Valley Electric employees before becoming self-employed contract delivery drivers for One-Hour Delivery. The comfortable familiarity of long-standing employee friendships and camaraderie with the drivers often contributed towards slipped delivery departures. If an inside salesman wanted to get "just one last item" on a truck for his customer, the drivers were always willing to wait.

"Sometimes our morning run wasn't out of here until 10 a.m.," says Carnes. "Not letting the trucks leave on time just to get all those last-minute orders on for customers was a shortsighted way of looking at 'the customer comes first.' Holding a truck up in the name of customer service means one customer is getting what he wants, and every other customer that's riding along with him on the truck is getting screwed."

Carnes says when he joined Missouri Valley a year ago, the company had already assembled a freight committee to review outsourcing freight. "They saw that what Missouri Valley was doing was not working," he says.

"They realized what we needed to do was find somebody who does delivery for a living and let them do it." But not everyone on the freight committee was completely open-minded about outsourcing the freight.

"They were worried about losing control," says Carnes. "It was a hard decision for them. The problem was complete fear of the unknown. They thought they would lose part of their identity in the freight service or lose contact with our customers." But Missouri Valley hasn't lost contact with its customers. In fact, Carnes says their customers love the new system.

Nancy Olson, sales manager for One-Hour Delivery, says they can provide better delivery service for Missouri Valley's customers because they have the equipment and systems in place that are designed specifically to handle transportation logistics.

"We have in place the dispatch system, we have laptops in all the vehicles and we're able to communicate with all the drivers throughout the day-where they are, what their needs are," she says.

"With the system that we have in place, we can route and dispatch and keep track of what needs to go where. We can provide access to 15 to 20 other vehicles, so if Missouri Valley has an unscheduled delivery, they can call us and we can send another person out to help them. If you own your own vehicles, you're tied to just those drivers who are already out in the city delivering."

Contracting with One-Hour also keeps Missouri Valley from having to maintain a fleet of vehicles and put drivers on their payroll.

But even large distributors who can easily afford to staff and maintain their own delivery fleet are choosing to use a third-party logistics provider. Platt Electric Supply, a 60-branch electrical distributorship based in Beaverton, Ore., has traded in its fleet of delivery trucks for the services of Menlo Logistics, an international transportation and logistics company, based in Redwood City, Calif. Jack Mumford, Platt Electric Supply vice president, says it wasn't a matter of trying to reduce delivery costs. "In general, we started looking at these kinds of things because of our customer service issues," says Mumford. "We're a central-distribution company, and we wanted to up the value of our service to our customers to provide a distinct difference in what we can do for our customer versus what our competition can do."

One example of how that contracted delivery service paid off for Platt was during the recent UPS strike that left millions of packages sitting on loading docks nationwide. "It made a huge difference because we already had this daily service in place," says Mumford. "During the strike we had a competitive advantage over everybody because our trucks were going. It was a big deal to be able to get our stuff delivered every day."

Platt Electric Supply still uses UPS for certain accounts, for direct-to-customer shipments out of their central distribution center and for some off-hours deliveries. But Mumford says their UPS bills have dropped tremendously because they now have delivery to every one of their branches every day, overnight, with Menlo. And although Platt Electric isn't yet realizing a savings on shipping by using an outside delivery service, Mumford says he thinks they will eventually break even. The improved service is what makes it worthwhile. "That's why we're a believer in it. It's one of the biggest separations we have from our competition right now."

Until recently, Platt was still doing its own local deliveries within 150 miles of the distribution center with its own trucks; everything else was being shipped by common carrier, and its branches received weekly deliveries. They decided to look at how much more it would cost to send out a full truckload (by common carrier) of goods daily to all the branches, rather than a full truckload once a week to each branch on a rotating schedule. Kevin Dier, Platt Electric'sgeneral manager of corporate operations, says it turned out that it cost Platt about 10% more to ship daily on a common carrier versus weekly. "What you wind up doing is paying more for the extra stops they make on that route," he says. "So we were making daily deliveries, but it was only so effective because a lot of our branches weren't getting delivery the next day until late in the afternoon. And we still had these branches that were two-day delivery. Our common carrier just couldn't do better than that.

"Our choices at that point were to stay with that system, to go ahead and make the investment ourselves in all the equipment, drivers and all the logistics expertise to set this thing up, or to look into third-party providers, which were really just starting to come onto the scene." Platt looked into several different third-party delivery services and settled on Menlo Logistics. "They set up a program that required us to change some of our operations here to get the orders out in time, but it gave delivery to almost all of our stores before 8 o'clock the next morning," says Dier. "We were doing nightly deliveries that way, which common carriers cannot do.

"What would happen before (switching to Menlo) is that we would tell our customers that it would be there tomorrow somewhere around ten. On a common carrier, that means that it will get there anywhere from 8:30 in the morning and 2 o'clock in the afternoon. They're just not that reliable, and our customers really depend on that product. They've scheduled people on jobs to install materials, and they need it to be there."

Dier says Platt Electric Supply carries about 35,000 products (SKUs) in its distribution center. "Our branches rely on that inventory for their customers, because they can't afford to carry that kind of inventory," he says. "Our customers can go into any Platt location, have access to those 35,000 items and have them delivered to our branch for them the following morning at no extra charge. There's no freight charge, no FedEx fee, no anything, which helps us be more responsive to our customer's needs."

All those items they needed on hand to serve their customers don't have to be stocked in the same quantities as before because they have backup inventory that can be in their branch before they open the next day. Dier says he knows they're picking up new customers as a result of the overnight delivery, which provides quick and ready access to such a large inventory.

"The average distributor carries some number of items," says Dier. "For our branches it's typically between 4,000 and 7,000 items. Very rarely do you run into any distributor who carries 35,000 items. But you can go into any Platt branch and it's a one-stop shop. You can get whatever you need out of 35,000 items with just one order. You don't have to go to Platt and then CED and then whoever else to get all your materials. And you don't have to think very far ahead, either. If there are products you need tomorrow, you can call the Platt branch before noon, and you'll have it tomorrow. It's like having this distribution center in 60 different places on the West Coast."

Tom Daniels, the Menlo Logistics manager who orchestrates the shipping for Platt and has kept it running at a 99% on-time delivery rate, also has worked out beneficial arrangements with Platt's vendors to provide backhaul services to help recover some of Platt's shipping costs. Instead of returning empty, Platt's dedicated Menlo fleet picks up shipments to haul back to Beaverton. Dier says this arrangement is a win for Platt's vendors because they get a better shipping rate than they could get from an LTL (less than truckload) carrier; it's a win for Menlo because it gets paid for the off-route miles and the additional pick-up fees; and it's a win for Platt because it helps offset the cost of third-party logistics.

"We started this (backhauling) full-fledged back in April 1997," says Dier. "Our backhaul revenue has been at a pace of about $ 7,000 a year. We're planning to push that to $225,000 in the next 12 months. If we can get it to those numbers, then the cost of third-party logistics really comes down because it's offset by those revenues."

Running an efficient transportation system for a company starts with doing a lot of preparation beforehand to come up with what both parties consider a very realistic operating plan, according to Darryl Wright, Menlo's business development manager for the western U.S. It also means the distributor and the logistics provider must go into the deal as 'partners.' Both companies must work together to resolve problems.

"I know you hear the term 'partnership' a lot these days, but this is very much a partnership," says Wright. "If we've got problems, they're really Platt's problems, too. A lot of customers don't really want to accept that. They take the attitude, 'Well, you're doing it, so it's your problem.' No. It doesn't work that way. Before we even started up, we met every Friday with Platt to let them know how our start-up plan was going, where we were, any problems we were having."

Tom Daniels says a lot of the early problems stem from the fact that the distributor employees tend to resent or fear the third-party provider. "Probably the biggest barrier we have to break down is the relationship with the people in the warehouse and on the dock," he says. "They don't realize that we're working with them, for them. They maybe think that we're coming in here to steal jobs and take something away from them. So, initially we were like the redheaded stepchild. Everybody kind of hated us. Once we got beyond that, they realized that we're here for them and to make suggestions to help them save money."

Another major hurdle was finding and keeping good route drivers. "Our turnover was 30% in the first six months," says Daniels. "Now it's down to only 5% in the last six months. You go through the growing pains. People come in and the job's not what they thought it would be, or they find out that they don't like driving at night, and that's primarily when we run. That was a challenge in the beginning." But Daniels says it's a challenge faced by every carrier with each new route it sets up. Darryl Wright says it takes from three months to a year for a new third-party logistics operation to finally fall into sync and run smoothly."

It takes some time for the employees to stop looking at the third-party provider as an outside company that came in and replaced friends who had been with the company for a long time, and to start looking at the provider's employees as people, people who are there to help them and do a good job for them," says Wright. He also adds that it takes some time to learn the distributors business. "The more we know about their business and what they do--their products, their goals and objectives as a company--and finding out how what we do benefits them, the better we can serve them."

Wright says it's critical that the distributor understand what his goals are as a company as well. "That's key, because if they don't understand what the goals are, it's a no-win situation for the people they out-source to as well as the people internally," he says. "The people within the company will have trouble making changes if they don't know what they want out of it. Also, be able to provide the third party with as much information as possible on what's needed. Do some good data analysis. The old saying, 'Garbage in, garbage out' holds very true here."

Anyone looking at contracting with a third-party logistics provider should make sure that everything that is wanted and needed from the provider is completely and precisely defined.

"Don't re-evaluate and change the bid request each time you send it out, or you'll end up having to compare apples to oranges," he says. "If you're not concise and consistent in what you want, if you send a different bid request to four different suppliers, you'll end up getting back four completely different things to compare-different price models, different diagrams, everything."

Missouri Valley Electric's Duane Carnes says it's also important not to get into arelationship like this if you are too focused on price."If you are not willing to admit that there are intangible cost benefits that come from this, such as employee hours not spent worrying about where delivery trucks are, if you cannot accept costs like that as being very real, it may not be for you," he says. "Also, you must accept that whatever price you negotiate with the freight service for your contract cannot be renegotiated in six months. The freight company bases its estimate on the data you give them up front, so you must be willing to stick with it for awhile, whether your business goes up or down, as a result of the freight service or anything else."

Carnes says those things should be discussed in a year after everyone has had a chance to see how it works. "If it's not a win-win, it's not a win," he says."If the freight company is not making money, the service will suffer. Your logistics vendor shouldn't be worrying about whether working with you is a good deal. If you're seen as marginal business, you can begin to get yourself into a bind. If they're not pretty sure that the place to commit their resources is with you, then you might not have a good contract."

Above all, when choosing a provider, remember that outsourcing is about more than delivery schedules, intact packages and trucking fleets. Platt Electric Supply's Kevin Dier says that when you bring in third-party logistics, they represent your company.

"Find someone whose performance and the way they represent themselves is how you would want to be represented to your customers. There are a lot of companies out there who say they can do the job. Make sure you find one who is doing the job."

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