When Kodak decided to outsource operation of two major distribution facilities in Europe, it was not looking for quick performance fixes. Years of corporate continuous improvement programs and a well-seasoned logistics staff already had pushed service to a quite satisfactory level. Rather, Kodak's European logistics team saw outsourcing as an opportunity to reduce fixed costs and free capital tied up in owned facilities, while gaining flexibility to respond both to changing market conditions and anticipated increases in future service demands.



A primary market condition influencing Kodak was the structural change taking place in Europe. As borders between countries came down and economic union moved toward reality, many companies - particularly U.S.-based multinationals - rationalized their European operations, consolidating warehouses and distribution centers that had proliferated when each country had to be treated as a separate market.

"If you go back to the beginning of the '90s, we probably had about 25 facilities throughout Europe, on average more than one warehouse in each country," says Jack Frost, vice president and logistics manager of Kodak's European, African and Middle Eastern region. Today that number is down to 10, with further reductions possible. "We are still looking at opportunities that make sense in this new environment," Frost says.

Kodak was changing internally as well, divesting some businesses and acquiring others, while business units "increasingly were striving to differentiate their service network requirements," notes Frost. The result was pockets of "stranded fixed costs where the volume had gone away, or an inability in some instances to accommodate new business coming in."

Clearly more flexibility was needed. Outsourcing, which Frost says had long been an unpopular word among senior management in Europe, began to look like an attractive solution.

There was much to recommend it, not the least of which was that the logistics outsourcing industry in Europe had itself changed in response to the same macro issues impacting Kodak. As restructuring multinationals demanded more logistics services, providers became bigger, more sophisticated businesses. "There are many strong companies, six with more than $1bn in annual turnover, and the largest comparable to Kodak in Europe," notes Frost. "We used these figures to impress on our management that this is a big industry with big players."

Frost and his team also used the "core competency" argument. "Service to our customers is vitally important to us, but we don't think logistics is a core competency of ours," says Frost. "Managing it, yes. But actually doing it, moving boxes around and driving trucks, no. We believe it makes sense to leave the physical activities to specialists, but to manage it very effectively."

The team's arguments for outsourcing, along with opportunities to significantly change the logistics cost structure, convinced top management to approve the plan. Initially, two distribution centers were designated for third-party operation: Swallowdale in Hemel Hempstead, England, and Scharnhausen near Stuttgart, Germany. The Scharnhausen facility was seen as a prime candidate because it had high overhead costs and significant unused capacity, largely due to efficiencies and a reconfiguration that Kodak already had put in place. Kodak's logistics team believed that a third-party would be able to bring in additional clients to share the overhead burden.

"If you want to make some economies and do them as quickly as possible, the key is to find someone who has access to local business and can guarantee to fill up the spare capacity quickly," says Frost.

That's exactly what happened. After a bid procedure, operation of Scharnhausen was outsourced in December 1998 to Logistics Solutions Group (LSG), a part of the Willi Betz Logistics Co., whose many local customers and contacts offered a pool of shared-use candidates. "LSG had access to significant amounts of other business in the area, good quality business, which it has been able to bring in," says Frost. Kodak's employees were transferred to LSG and "that operation is running very well. It was a seamless transition as far as our customers were concerned, and we realized significant cost savings, plus even better quality than we had before, which already was good."

The situation in the U.K. was not as straightforward. The 25-year-old Swallowdale facility at Hemel Hempstead had not been upgraded because of the significant costs involved, so there was less capacity available for other users. "We knew what to do [to capture that capacity], but every time we looked at the cost, we just couldn't justify it," says Peter Blackwell, logistics director.

Moreover, the facility had been designed and built when land was less dear. Swallowdale's infrastructure, which included two high-bay and several low-bay buildings, sprawled over some 20 acres of prime real estate, making it even more difficult to cost-justify.

Additionally, Kodak's logistics requirements at this site were in many ways more complex than in Germany, since it served as a local warehouse for England, a regional distribution center exporting to Europe, Africa, the Middle East and parts of Asia, and as a specialist fulfillment center for customer segments demanding very fast service. And those requirements were far from static. "Our service levels are good now, but we knew we would have to increasingly be world class in every aspect of these activities," says Blackwell. "Customer demands will become greater, not just in terms of current services we offer, but for new services we will have to develop."

When Kodak first went to the marketplace, however, it sought bids for a traditional outsourcing contract with a shared-use solution. MSAS Global Logistics, a division of the Ocean Group based in Bracknell, England, was one of the companies that Kodak asked to bid.

"I think one of the reasons they talked to us is that there already was a relationship," says Paul R. Brown, MSAS regional development director for Western Europe, the Middle East and Africa. "We provide them with a majority of their freight forwarding services in the 50- to 500-kilo range globally. And secondly, multi-user warehousing is a core skill as far as our business is concerned."

	"We share systems and a whole range of backup services, so it is genuinely sharing overhead between customers on the sites, not creating multiple overheads." - Paul R. Brown of MSAS Global Logistics

Brown notes that MSAS specializes in what he calls "genuine shared user" facilities, which he differentiates from situations that amount to having several dedicated operations under one roof. "Our preferred approach is to flex the space and the workforce," he explains. "We have a core workforce for each contract that really understands that customer's business, but 50 percent of the workers flow between one contract and another. We share systems and a whole range of backup services, so it is genuinely sharing overhead between customers on the sites, not creating multiple overheads ... when you do it that way, one-plus-one becomes significantly less than two."

As Kodak and MSAS talked further, however, both concluded that constraints at the Swallowdale facility meant that Kodak would realize only minimal gains from a traditional contract. Something more radical was needed.

MSAS subsequently came back with a more far-reaching proposal: to move Kodak into a newer, more efficient MSAS facility that also would serve two or three other, smaller accounts. This would give Kodak its shared overhead as well as an infusion of cash from the sale of land freed up at Swallowdale.

Kodak and MSAS agreed to pursue this approach, but after looking at several potential building sites it became clear that none was as attractive as Kodak's present location, which is 25 miles from London and at the intersection of major national highways. Existing warehouses in the same general area also were investigated, but all felt like "force-fitting into a facility that really wasn't quite right," says Blackwell.

That dead-end led to the next, big leap: allow MSAS to build a high-capacity, multi-use facility on the present site designed to occupy a much smaller footprint than the existing buildings. Kodak would retain all the advantages of the current location, gain a shared-use solution designed to specifically fit its needs, and still free up a substantial parcel of land for sale on the open market, as well as selling acreage to MSAS for the new building.

In addition, staying on site would make the transition for employees easier, notes Peter Branch, director of product handling at Kodak's U.K. regional office. "There is a morale issue involved with using this site. We have about 100 people affected by this transfer, most of whom are long-term employees and who would rather not leave Kodak, so it has not been easy. Staying here makes the transfer as seamless as possible and it prevents this site from being perceived as a failure. Seeing an investment being made here has had quite a significant effect on the way people feel about the whole project."

It also guarantees that MSAS will be able to retain a core of employees thoroughly familiar with Kodak's business. Even though only about half the current employees can be expected to retain their jobs long-term, the addition of other clients to the site and the likely opening of logistics facilities on Kodak's divested land considerably brighten the employment picture.

Reaching agreement on a final plan took close to two years, and it would be another 12 months before the new building's June 5, 2000 go-live date, but for Kodak the final plan's advantages clearly outweighed any compromises.

"We learned a hell of a lot in this process," says Frost. "If you are running tolerably well, all the low hanging fruit in terms of efficiency have long been gone. The only way to get a set of economics that works is to somehow break the paradigm surrounding how you think about a project."

Think Vertical
The key requirement of a "small footprint" for the new facility meant that storage had to be vertical. By using a high-bay facility 30 meters tall and connecting it to Kodak's existing low-bay building and loading area, MSAS kept the design to 6.4 acres, compared with the current facility's 20-plus acres. The new building is being constructed on what currently is a car park, so disruption of operations is minimal.

The high bay will be fully automated, run with the use of nine un-manned cranes. No employees will work in this area, with the exception of equipment maintenance people, and it will be kept in semi-darkness.

The high bay will hold 32,000 pallets of either European or U.K. dimensions, and will include a large refrigerated area to accommodate certain film and other Kodak products that require strict temperature control. Kodak will occupy approximately 60 percent of the facility, with from one to three other clients being brought in to share the remaining space. Kodak's restrictions on these other users are minimal and mostly focus on products that cannot be stored safely with film.

Systems and cranes to operate the facility are being supplied by Cleco, a U.K. company with which MSAS previously has worked. Along with subsidiary IO Systems, Cleco also is supplying and integrating the automated conveyors and warehouse management system that complete the setup.

Kodak and MSAS emphasize that the high-bay automation and other technology to be employed at this site are well proved, an important consideration since both express an aversion to "bleeding edge technology."

"I am not ever for using bleeding edge technology for my clients because I don't think I can afford to take that risk," says Brown. "Mechanically all of these components are very, very sound. It is the thought that has gone into designing the system and how the components work together that makes the difference."

Fitting Kodak's Needs
Given Kodak's diverse needs at Swallowdale, a good deal of thought had to go into designing the interior layout and automation plan. "We serve a range of businesses and a range of markets from this warehouse, with service levels that have to be maintained or bettered," says Blackwell.

The site receives product from three factories in the U.K., including an array of paper, graphics, medical and consumer film, cameras and imaging equipment. It also processes imports from North America and Europe and exports to Europe, Africa, the Middle East and many other parts of the world, including Japan.

"About 70 percent of the volume we handle is made in the U.K., but only about 40 percent of the range is produced here," says Branch. "Things we don't sell as much of, we import."

Exporting generally involves full pallets, but is far from simple since special handling often is required. "Overpackaging for export markets is particularly important for safety and security reasons," notes Blackwell.

Other requirements can be bothersome. For example, about a year ago Egypt introduced legislation requiring that all film products have the expiry date stamped on the boxes, not just the pallets. "Some of our products didn't have that information, so we had to start doing that here, which is a big task when you have 40 boxes on a pallet," says Blackwell. "No sooner had we gotten that process down than they changed the rules again - labels had to be in Arabic. So we had to go out and get equipment that could print Arabic characters. The point is, we need a system flexible enough to handle this type of customization."

This facility also needs flexibility in handling local demand, where many orders are for small lots. Because of the way the photographic market has developed in England, Kodak still ships direct to many individual commercial photographers, rather than supplying them through distributors. The same is true of individual pharmacies. "There are 9,000 retail pharmacies in the U.K. and at one time, in the 1970s, we were supplying 4,000 of those direct," says Branch. "That's changing, but we still have to service that segment of our business."

In other sectors, such as medical film, changes are occurring more rapidly. Where once Kodak delivered to individual hospitals, now value-added resellers are taking over this market. "When we only have four or five resellers, we have to ask why we can't ship direct from source of manufacture," says Blackwell. "I think that's where we're moving in this area."

Currently, standard domestic delivery from Swallowdale is two days: the order arrives day zero, is picked day one and delivered day two. However, some 20 percent of orders are for next day, being placed before noon and delivered within 24 hours. Most of Europe is served within 72 hours. "We were not looking for a provider to do better or worse," than these standards, notes Blackwell. "We wanted continuity, and we also were looking for the flexibility to speed this up if the market demands."

For one segment of business, motion picture film, exceptional speed already is paramount - another factor MSAS had to take into account in its operating plan.

Movie-making is a big business in England and when a set employing high-paid actors runs low on film, replenishment must be immediate. "Probably 20 times a week we have to fill an order in 15 to 20 minutes," says Blackwell. Sometimes the film is picked up by the purchaser at a trade counter, or Kodak uses the fastest means available to speed it to the site, which often is via taxicab.

"We currently have a dedicated facility for these orders and this business unit was the most concerned about outsourcing," says Blackwell. "Now that they have seen the plan, they actually believe it could open up further business opportunities which they couldn't have considered with the existing facility."

MSAS Global Logistics: One Brand In 1998 Ocean Group plc created the MSAS Global Logistics brand, bringing together under that banner a wide range of integrated supply-chain management services. In addition to forwarding and logistics company MSAS Cargo International, the group includes Freight Express International and Airlink; Intexo, a European third-party logistics specialist; McGregor Cory; Mercury, including Higgs International; Skyking Freight Systems; A.W. Fenton; Dutch Air; and Marken Worldwide Express. The newest addition is Mark VII, an U.S. intermodal service provider based in Memphis, Tenn., which was acquired in August 1999. While the long-term intention is to market all of these companies' services under the MSAS Global Logistics flag, Ocean Group CEO John Allen says he does not wish "to relinquish existing brand names prematurely. "We want to do this in an orderly, managed transition so that we don't disorient these companies' existing customers," he says. "But our end point is clear: The MSAS Global Logistics brand will be our global brand offering and other names will either be played down or in most cases eliminated." MSAS Global Logistics is focusing on three strategies that Allen says are essential "if we are going to continue to satisfy the needs of our most demanding customers." The first is to extend the company's global reach. "We now have directly owned or invested operations in 88 percent of the world's manufacturing economy and agents that cover the remaining 22 percent," he says. "I expect that will increase by two to three countries per year as we gradually and selectively fill the remaining holes in our directly managed network." The second strategy is to further develop what Allen calls "capability," described as "the ability to provide the full range of services that our customers need and to fashion those together to form solutions appropriate to individual accounts." This further involves being able "to integrate those services so that they work as a whole," says Allen. "A lot of things flow from that. In addition to our base services, we are building our logistics solutions design capabilities and the skills needed to implement complex logistics solutions." MSAS Global's third area of focus is consistency of process. "We want to have standards of quality in place across the world so that our global multinational customers are comfortable they are getting essentially the same service, performed in the same way, wherever we handle their business," says Allen.

Stock-to-Picker
The plan developed by MSAS and Cleco is an innovative configuration that combines sophisticated scanning and conveyor technology with a stock-to-picker concept.

Here is how it will work. As orders are released, the system will retrieve a pallet from the high bay and drive it via conveyor to the case picker designated to handle that order. Each of four pickers will handle three orders at a time. When the pallet is coming around into position, the picker will scan the pallet's barcode, which will cause an adjacent screen to give him instructions: pick so many cases for order one. When he signals that task as complete, he will be told whether to pick additional cases from that pallet for orders two and three. The picker may also be asked to do a check of the quantity of product remaining on that pallet or to confirm that he has in fact picked the last carton so the pallet is now empty, a feature that provides continual inventory control. Once he confirms that he is through with that pallet, it moves away and is followed by the next.

When orders are complete they are moved by conveyor to the appropriate dock and dispatch area. Full pallet orders bypass the pickers and are sent directly to loading.

If a pallet has been picked to zero, it goes back onto the main conveyor and travels to one of two automated pallet stackers, one for Euro pallets and one for U.K. pallets. When these cassettes accumulate a predetermined number, an operator has two options: send them back into the high bay to be stored or redirect them to the reject spur for temporary holding.

Single-pick and fast-moving items, including movie film, are stored in plastic bins in a separate mini-load area near the front of the high bay. The bins are moved by a separate feed to two dedicated picking stations. The process is the same as for case picking except that items typically are packed into a box instead of onto a pallet. "The speed of this tote bin activity is very fast and will be used to satisfy very short lead-time business," says Richard R. Morris, MSAS's senior manager for the Kodak project. "We are very confident that our tote bin solution maintains and can potentially exceed the levels of service currently offered to those customers by the existing operation, both in response time and accuracy."

Many orders consist of full pallet, cases and single items. The system is designed to recognize these various constituents and to time-sequence them, based on information stored in the system concerning how long it takes to pull and pick each component. "The likelihood is that loose elements will be directed out of the high bay shortly before pallets coming out for case picks, and finally full pallets will be directed out so all three activities will come together at the same time and consolidated, rather like a train set," says Morris.

If one element comes out of sequence, the system will simply direct it to make a circuit of the conveyor before arriving at the pick station. Similarly, the system has a forward view to orders and whether a pallet that has just been picked will be needed again in five or 10 minutes it will circulate rather than being returned to storage.

"All these conveyors are fully circulating all the time," notes Brown. "They never jam up because if a pallet gets to a particular point and it can't go in the direction it wants to go, the system doesn't stop, it just sends that pallet on a loop and brings it back again two or three minutes later. "Fundamental to keeping these things running is to have no places where a pallet hasn't any options. So there are readers at all key control points, wherever a pallet can go this way or that way. The system responds in fractions of a second to the barcode and decides which way it wants the pallet to go."

The same concept is employed at receiving. All incoming pallets are put onto the main conveyor and sent to a profile gauge which makes sure that the weight and dimensions are within given parameters and reads the pallet's barcode. If there is a problem with the pallet at this point, it is sent to a rework section. "The logic of the system gives operators a clear idea of what is wrong," says Morris. "Usually it is something simple and 90 percent of the problems are rectified immediately." The pallet then is redirected back into the loop. If it gets rejected twice, it will be taken off the conveyor and worked on, so it doesn't slow down the rest of the system.

If all is well with the pallet, it moves directly into the high bay and is put away automatically by the cranes. The system driving the cranes recognizes what the product is and whether specific storage conditions are required.

The cranes also are programmed to spread work across the aisles, so that a crane's failure will not block access to a product, as could happen if it were stored in only one aisle.

Kodak will realize significant time efficiencies with this new system, notes Blackwell, who expects around a 50 percent improvement in the time required to fill an average order. "The key part is that the mini-load is significantly faster than a manual pick," he says. "The case pick isn't necessarily much faster than a conventional pick, depending on how many checks are involved, how many cases need to be taken off the pallet, and so on, but bear in mind that this arrangement takes significantly fewer operatives to achieve the same performance."

Blackwell also anticipates a 50 percent improvement in order accuracy, thanks to all the built-in automatic checks. "The system will ensure that a picker only ever gets presented with the right pallet and the right tote bin," he notes. "Kodak was probably at top end of accuracy already" - an estimate with which MSAS agrees - "but we do expect to see some further improvement."

With so little human intervention, getting the right barcodes on incoming pallets is especially important. "One of the things we are totally dependent on is that when the product comes in, it has the right label on it, because effectively this system is only concerned with two things, the piece of wood at the bottom and the label that tells it what it is and where it goes," says Brown. With Kodak, he adds, this is not a problem.

The layout provides office space for MSAS, for potential new clients and for Kodak's transport and load-planning team.

"It was very important that we kept our key transport people next to the warehouse to ensure that they could interface directly with MSAS for the distribution activity," says Blackwell. Kodak contracts with a number of trucking companies for service throughout England and Europe, as well as with ocean and air carriers to more distant destinations.

The new building is on schedule to be up and running on June 5. It will initially operate on a 5X24 basis, though the facility is capable of running 7x24.

Management of operations transferred to MSAS, along with all of Kodak's DC employees, on Jan. 1. At that time, notes Brown, Jim Hodder, general manager of the facility, already had been working with Kodak for more than a year. "By the time we went live, we wanted Kodak to already feel that Jim was a part of their team," he says.

Since the Jan. 1 transfer, MSAS has interfaced with Kodak's legacy computer system, but a corporation-wide SAP installation at Kodak is due to go live in the U.K. in April. MSAS and Kodak will run trials on the new system from April to June and then will begin a phased-in program to fully connect with SAP, which will be complete in October.

"We are spreading this out in order to de-risk the situation," says Blackwell. "The period between April and August is our busiest time and we really didn't want to make fundamental changes during that period."

Because of the extent of this project, the initial contract between Kodak and MSAS is for five years, longer than most first-time outsourcing agreements. Both parties, however, appear to be looking even beyond that time frame.

"This plan is far different from what Kodak came to us for in the beginning," says Brown, "but we believe what we have ended up with is the right blend of business risk vs. reward. We believe it's a solution that Kodak can be confident will meet their business requirements for at least the next 10 years."