RALEIGH, NC, January 3, 2007 — The key to success in outsourcing distribution centers (DCs) is communication between the company and its 3PL provider. No big surprise. But a recent Supply Chain Consortium survey of 100 top retail and related companies delves deeper into the world of DC outsourcing—a vital link in many supply chains.
“Despite its rapid growth, outsourcing is still a maturing industry,” notes Steven Simonson, Tompkins Associates Principal and author of the Outsourced DC Operations report. “Currently, only a third of respondents to the benchmarking and best practices survey are outsourcing some portion of their distribution operations. Much room exists for continued expansion.” (Figure 1, Comparison of DC Sizes Reported and DC Sizes Outsourced.)
Figure 1:
The survey shows that there are six fundamental industry trends affecting outsourcing success. These areas are growth and current status, reasons to outsource, outsourced services, contracts, and future trends.
Other main findings include:
- 76% of DC operations outsourced by respondents are 100,000 sq. ft. or less.
- Only 9% of outsourced DCs are over 300,000 sq. ft.
- The most frequently outsourced operations are receiving, storing, picking and shipping, which are basic to every DC. (Figure 2, Frequently Outsourced Functions)
Figure 2:
- Most companies that are outsourcing allow 3PLs to provide the major systems and technology functionality that drives their DC, pointing to the increasing experience that 3PLs have in implementing and operating these complex systems.
- 60% of respondents have a negotiated rate structure for their contracts with 3PL providers, while 40% are in a cost plus contract.
- Developing a core competency in the process of outsourcing is necessary to succeed in DC outsourcing
- 80% of respondents indicated that their company has a formal process for outsourcing.
Although sometimes viewed negatively, outsourcing DC operations can be extremely beneficial to companies who have determined that distribution is not core to its business. The top three factors cited as driving the decision to outsource DC operations were:
- Peak season or overflow capacity
- Flexibility to grow capacity and adapt to changing requirements
- Improved service
“The buzz in the 3PL industry is to provide value-added services and to execute them well,” Simonson says. This is a differentiator for many 3PL providers because value-added services can be difficult to perform and, if done correctly, can provide better margins than the basic distribution services.
The survey also found that cross docking and flow through, which companies have been unwilling to outsource in the past, were outsourced by 63% and 74% of survey respondents, respectively. This may point to the growth of some providers in the 3PL industry and their commitment to providing niche services that can distinguish them from their competitors. “Niche services providers will allow companies to outsource value-added functions with confidence, leaving them to focus on core competencies needed to be financially competitive,” Simonson adds.
About the Organization
The Supply Chain Consortium is the premier source for supply chain benchmarking and best practices knowledge. With more than 100 participating retail and retail supplier companies, the Supply Chain Consortium sponsors a comprehensive repository of 9000-plus benchmarks complemented by search capabilities, online analysis tools, topic forums and peer networking for supply chain executives and practitioners. The consortium is led by the needs of its membership and an Advisory Board that includes supply chain executives from Campbell Soup, Hallmark, J.C. Penney, Molson Coors, Polo Ralph Lauren, Rite Aid, Target, The Coca-Cola Co., and Whirlpool. To learn more about how your company can become a member of the Supply Chain Consortium, contact John Foley, 919-855-5461 or visit www.supplychainconsortium.com. |
