Magazine Article | September 1, 2002

Three Steps To 3PL Outsourcing Success

Source: Field Technologies Magazine

Make your warehousing outsourcing transition as painless as possible by heeding time-tested advice from industry experts.

Integrated Solutions, September 2002

You're about to outsource the warehousing and shipping of your products to a 3PL (third party logistics) provider. You've already bought into the concept that focusing on your core competencies - enhancing the design and functionality of your products - is where you are going to experience the most return on your investment. Before you take the plunge, it's important to educate yourself on some of the changes you'll need to make to your business practices and to your ERP (enterprise resource planning) or legacy manufacturing and purchasing systems. By following the three steps below, you'll ensure a shorter implementation period, provide a more transparent business change to your customers, and possibly save hundreds of thousands of dollars in the process. (Note: A small percentage of you may even save millions by reading this article.)

1. Trust Your 3PL
The first step is to realize your 3PL partner is going to set up its warehouse differently and pick, pack, and ship your products differently than you are used to. As long as the end result doesn't look any different to your customers, you're wise to follow Italian wisdom and "forget about it." The 3PL may know, for instance, that it is more efficient to put away products as received and not to wait until the next morning to begin shipping products. Rather than spending energy looking over your 3PL's shoulder and concerning yourself with how things used to be done, you're better off focusing on your customers' experience with the 3PL.

2. Don't Underestimate Data Complexity
Next, it's time to get into the process of aligning your enterprise systems. This step, known as mapping, entails matching the data fields in your ERP system with the data fields in your 3PL's system. "For instance, your system may lump shipping addresses into one field, whereas your 3PL may require that city, state, and ZIP code each have its own field," says Mark Walker, VP of C.H. Robinson Worldwide, Inc. (Eden Prairie, MN), a 3PL. "It's important for the client to thoroughly map out all data fields that will be shared with the 3PL and verify that all business objectives have been met. Only after completing this transformation operation is the client ready to go live."

"Oftentimes clients underestimate the complexity of their data, and they don't build in enough time to properly map out the data flow," says Rob Abbott, CEO of Abbott Systems (Daphne, AL), a provider of supply chain management consulting and implementation services. "This oversight can negatively affect the 3PL's ability to map out the most efficient process flow and can compromise its ability to ship on time." Just about any 3PL can tell you a story about a client who signs on and gives the logistics provider a 30-day (or less) window to go live. "Proper mapping could take months to complete if the client isn't fully ready to support the effort," says John Pulling, COO of Provia Software Inc. (Grand Rapids, MI), a supply chain solutions provider for enterprise and 3PL companies. "After the data fields are transformed, clients should do a mock startup to ensure that everything goes smoothly." By doing this, there is a better chance that any exceptions that hadn't been previously discussed may be caught and built into the system. Not all of the client's business rules may have been captured in a database. For instance, it might have been understood that any customer who orders more than $5,000 worth of products gets free shipping. The warehouse employees were trained this way, but nowhere does this rule appear in the ERP system. It's this kind of knowledge that gets overlooked when the mapping step is compromised.

3. Use EDI/XML To Push And Pull Data
After your data fields and your 3PL's data fields are formatted the same way, it's time to put the gears in motion. During this next phase you'll determine how you're going to get your data to your 3PL and vice versa. There are two basic ways to send B2B data. The first way is to use EDI (electronic data interchange), an established protocol that has been around since the 1970s. The second method of sending data is via XML (extensible markup language), a flexible descriptive code often used for sending data over the Internet. Both protocols have their upside and downside.

Oftentimes the 3PL you choose will dictate which method you use for sending data. Like many large companies, many large, well-established 3PLs use EDI as the primary (and perhaps only) means of transmitting data. The strength of EDI is that it is a very secure way to send and receive data. The downside is that even after purchasing special servers and software that translate your data into an EDI format (an investment that can run in the tens to hundreds of thousands of dollars), there are monthly service fees associated with the VAN (value added network) contract. "Most VANs charge approximately 6 cents per 1,000 characters transmitted," says Abbott. "For larger enterprises, or those sharing detailed warehousing and shipping information with their 3PL, this can translate into steep monthly service fees." Many see EDI as a necessary evil for doing business. For instance, many larger retailers such as Wal-Mart and Sears will only do business with suppliers that use EDI. Smaller suppliers often bite the bullet and spend big bucks on doing business via EDI just to keep their larger customers. Because some EDI is probably inevitable, it's important to minimize your EDI transactions by determining how much supply chain visibility you need. "Some clients think that they need to be aware of every small process step the 3PL makes," says Pulling. "We've seen clients in the past who wanted to be notified not only when products arrived at the warehouse, but when they were unloaded and when they were stored. This leads to requirements that are not necessary to the success of the business and can waste hundreds of thousands of dollars in integration and data transaction fees just to have the impression of being in more control of the 3PL." In reality there may be just a few data sets you need to get from your 3PL, such as ASNs (advanced shipping notifications) and order fulfillment confirmations. If you find yourself becoming too much of a watchdog over your 3PL, you have to think about why you chose them in the first place. The benefit of being able to use XML is that you can make use of the Internet, which will save you the monthly service fees of leasing a VAN. "XML enables the client's customers to more easily interface with the 3PL over the Web," says Bruce Matthey, general manager of technology at the Bekins Group (Sioux City, IA), a 3PL. "For some clients, this feature alone is enough reason to add XML functionality to its repertoire."

Some of the upfront investments for sending data in an XML format are similar to EDI, however. You will need a dedicated server, such as a Microsoft BizTalk Server, which is able to translate your data into an XML format and to provide trading partner integration. Also, you will need to configure your server to communicate securely by setting up certificates issued through a trusted certificate authority, such as VeriSign. According to Abbott, there are a few things about XML that many users don't hear about. "Because XML is a standards-based language and very descriptive, it takes a lot of bandwidth. In fact, when one of our customers recently made a switch to XML from EDI for one of its data sets, the file size of the XML data set was more than its previous seven EDI data sets combined," Abbott explains. The increased bandwidth that is needed to send XML transactions may require the user to purchase additional servers and use higher speed connections such as T1 or T3 lines, which increases the investment. Ultimately, this investment should be weighed against the monthly service fees of using a VAN.

Following the three steps outlined above will help reduce some of the obstacles you may encounter as you outsource your warehousing to a 3PL. It will also enable you to capitalize on your core competencies and allow your 3PL partner to capitalize on its core competencies as well.