Outsourcing the logistics function has long been viewed as an easy way to cut costs and shed internal resources. But Eaton Corp. doesn't see it that way. The Tier-1 supplier of transmissions to commercial vehicles wanted its outsourcing relationship to save the company money, improve customer service, and boost market share.

Not Too Much To Ask
Bob Kraska, manager of logistics and customer support with the truck components division of Eaton, knew that many companies approached outsourcing purely from a tactical standpoint. But, like a growing number of executives with some experience in outsourcing, he was seeking much more from a logistics partner.

In 2001, the company began taking a higher view of operations at its three North American assembly plants. "We wanted to start looking at ourselves more as an enterprise," says Kraska. "We wanted to maximize capacity across all our plants."

Eaton saw big gaps in its parts production schedule, which was preventing it from utilizing 100 percent of manufacturing capacity. Among the culprits was an inefficient supply chain. Inventory was scattered across all plants, creating both shortages and duplication. The solution lay in placing all production and aftermarket parts at a central facility. For that, Eaton would need the assistance of a logistics and warehousing expert.

The company began searching for a provider that could do more than just manage the storage and shipment of parts. "We were looking for someone who would be strategic along with us, and get deep into our business," says Kraska. The chosen partner was even expected to advise on the location of the parts distribution center.

The winner of the contract, TNT Logistics North America, helped Eaton to settle on Indianapolis, Ind., for the new facility. The decision was based on an in-depth study of supplier and manufacturing locations, says Kraska. The goal was to provide next-day transportation of parts to the plants, as well as easy access to all metropolitan centers in which aftermarket customers were located. Most shipments would go by truck, although air was an option in emergencies.

The Indianapolis facility covers 150,000 square feet and maintains 12 picking lines. With more than 6,000 parts in storage at any given time, it handles around 30,000 parts a day. TNT was hired to perform basic warehousing functions there, including receiving, putaway, picking and shipping. But Eaton also drew on the provider's expertise for some value-added services, including facility sizing, assessing the priority of parts according to order frequency, material-flow design, packaging and returns management.

"Ninety-five percent of our business is consultative," says Mark Morrison, senior vice president of TNT Logistics North America in Jacksonville, Fla. Often the provider will undertake a basic assessment of the customer's supply chain before it has a signed contract. It conducts a number of "what-if" scenarios to determine the best approach to warehousing and transportation, Morrison says.

In the case of Eaton, the customer insisted on storing both production and aftermarket parts at the same location. Many manufacturers prefer to keep those two supply chains separate because their needs differ so widely. Eaton was determined to create a single site for all parts operations-and hire a skilled outsider to manage it. Says Kraska: "The efficiencies you can get by using a part wherever it's best needed is really a powerful concept."

The project has already yielded dramatic results. Eaton has significantly lowered its total parts inventories, says Kraska, while improving service to customers by an estimated 15 percentage points. Even better, the company has seen a marked increase in sales, completing Kraska's supply-chain hat trick.

TNT is expected to participate in key future decisions as well. "They're really becoming our logistics consultant on any expansions we want to do, as well as ongoing improvements," Kraska says. "They have become very much a champion for our customers, too."

The consolidation of third-party logistics (3PL) providers has made such extended services possible, claims TNT's Morrison. "Some of the major companies in North America and the world are seeking to have relationships with fewer qualified logistics organizations that understand their supply and distribution environments," he says. Large, competitive 3PLs once numbered in the hundreds; today there are around 25. The survivors, often the product of multiple mergers, are better equipped to meet customer demands for deeper relationships.

Bombardier Consolidates
Supply-chain fragmentation was also the catalyst for change at Bombardier Inc., the Montreal-based aircraft manufacturer. The Bombardier Aerospace division is the world's third-largest maker of civil aircraft, with U.S. revenues of around $8bn. Yet its service-parts supply chain, the product of multiple acquisitions, was in dire need of an overhaul. Adding to the complexity was a flurry of new products-15 new aircraft in 15 years-each requiring its own assortment of aftermarket parts.

The new aircraft and other factors had taken their toll on Bombardier Aerospace's overall service levels. The company had slipped from first place to fifth or sixth in customer rankings, according to Des Bell, vice president of parts logistics. An inadequate service parts operation was partly to blame. Bombardier suffered from a lack of common systems among its business and regional aircraft groups. Inventories were too high, and parts too slow moving, to maintain adequate service levels.

With the help of an independent consultant, Bombardier had already analyzed its parts distribution network. The exercise concluded that some rationalization of distribution centers was warranted. But the company still wasn't sure whether it should operate a centralized facility itself, or where it should be. The situation called for "a fundamental review of the line of business we're in," Bell says. In the process, Bombardier sought the advice of a qualified 3PL partner.

Bombardier turned to Caterpillar Logistics Inc. The 3PL augmented the customer's internal skills and systems in order to overhaul and manage the parts network. The two entered into a 10-year deal by which Caterpillar became intimately involved in Bombardier's day-to-day business.

First, however, Caterpillar collaborated with the customer on a new distribution network analysis, which echoed previous conclusions about the need for centralized control of service parts. The 3PL looked at Bombardier's entire parts business, including the location of customers and their demand profiles. "We helped them to understand the benefits of consolidating business units, and the impact on the cost and resource side," says Eric Cagle, general manager of aerospace and defense with Caterpillar Logistics in Tempe, Ariz.

The effort led to creation of a Business Solution Definition Manual, to guide the efficient deployment of resources. It also prompted the closure of two parts facilities, in Detroit and Wichita, Kan. In their place, Bombardier will create a worldwide master distribution center in Chicago, supplemented by a warehouse in Frankfurt, Germany, to serve Europe and the Middle East. The Chicago facility will commence operations in May, while Frankfurt will open its doors a month later. The transfer of control will take about three months at each location, Cagle says.

Caterpillar worked with Bombardier for 12 months before signing a formal service agreement. "It was basically done in good faith," says Bell. The gamble paid off for the 3PL, which was granted the contract to operate the warehouses as well as make purchase recommendations, improve fill rates, assess inventory targets and help guide overall network and service policy. Today, says Bell, Caterpillar Logistics is "a voice at the table when discussing and debating strategy."

Bombardier is well on its way to achieving the goals of improving parts availability, eliminating excess inventory and speeding the flow of parts to the customer. The company expects to reduce total inventories in the system, says Bell, but the primary goal is better service. Improved coordination around engineering changes should cut down on obsolete parts and ensure the right mix of materials to support the company's ever-changing line of aircraft.

Information systems are being standardized at the same time. Bombardier is relying on Caterpillar's materials planning and warehouse management systems, coupled with third-party transportation management software and a transactional backbone from SAP AG.
Caterpillar will participate in re-planning over the life of the contract, to align Bombardier's parts program with current market needs. "There's a benefit to both parties," says Bell. "The longer the contract runs, the more opportunity [exists] for them to generate profit on the deal."

Repairing Customer Service
There's no more cutthroat business than that of personal computers. Manufacturing costs have been sliced to the bone, and while outsourcing helps to control overhead, margins remain painfully thin. Yet sellers must pay equal attention to customer service. So the Digital Products Division of Toshiba America Information Systems chose to increase customer satisfaction through an outsourcing relationship.

Based in Irvine, Calif., the Toshiba division makes a variety of products, including desktop and notebook computers, personal digital assistants, servers and peripherals. Looking for a way to differentiate its brand, Toshiba embraced the Six Sigma quality process on a number of fronts, including returns and repair.

UPS Supply Chain Solutions was selected to beef up the Toshiba repair program. Joe Karcher, senior director of service logistics with Toshiba, says the company's relationship with the Atlanta-based provider dated back to some relatively minor depot work, as well as the use of UPS's standard transportation services. In September 2003, following a period of "grueling" due diligence, Toshiba hired UPS SCS to handle some of the company's repair work for laptops and other devices.

The relationship evolved gradually, moving through distribution packaging, depot operations, reseller returns and finally complete repair services. Meanwhile, beginning in late 2004, Toshiba was drastically reducing the number of authorized service providers (ASPs) that repaired its units. The ASP universe consists of retailers, resellers and small, self-owned repair shops. In cutting the number of ASPs by nearly 75 percent, Toshiba focused on giving more work to the reseller channel, while emphasizing those partners that delivered a higher degree of customer satisfaction.

ASPs had been doing most of the repair work, but the presence of UPS SCS gave customers another option, says Karcher. The provider carries out repair work at a facility in Louisville, Ky., adjacent to UPS's global air hub. At the 2-million-square foot "campus," UPS SCS technicians receive, repair and ship laptops back to their owners in the same day, delivering as early as 8:30 the next morning.

Toshiba customers now have the choice of sending their units to UPS SCS, via the company's network of more than 3,300 UPS Stores (formerly Mail Boxes Etc.). Or they can opt for one of Toshiba's ASPs, who can be found both through the company's call centers and web site. The latter includes a global ASP locator, with a five-star service rating based on previous customers' reviews.

Between 60 percent and 70 percent of all repair customers choose the ASP route, with the remainder going to a depot or UPS Store. Most prefer having repairs done by the retail outlet where they bought the equipment, or by a technician whom they can meet personally, Karcher says. Still, UPS SCS provides an important alternative to buyers who want fast repairs and the convenience of dropping off laptops at the UPS Stores. And it boosts Toshiba's brand image in the eyes of fickle customers. "Before this, Toshiba wasn't perceived as a top-level service provider," says Gene Long, president of consulting services for UPS SCS.

Toshiba was drawn to the "one-stop" nature of the UPS repair facility. All returns and repair operations are under one roof, with different functions separated by an aisle. The configuration lowers turnaround time, while cutting down on the "massive amount of touch" that was involved when Toshiba's returns, storage and repair operations were located in different states, Karcher says.

Louisville was an obvious choice for the site, given its status as a global hub for UPS. But Toshiba also launched an optimization exercise which looked at cost from the resources standpoint, and customer satisfaction based on feedback, before choosing UPS SCS as its repair partner. Karcher says the company preferred a top logistics company with strong repair capabilities to a repair operation with logistics expertise.

Combining UPS's information systems with those of Toshiba was something of a challenge, he says. Among the priorities was the listing of all UPS Stores on Toshiba's web site. At the same time, the company battled to avoid "scope creep," caused by internal groups looking to add features and technology in order to marry the two systems.

On the Same Page
So what makes a strategic outsourcing relationships? Long says it has a lot to do with common goals. "The relationship becomes strategic when both partners have a vested interest in meeting the business plan and objectives of the buying party," he says.

That sort of a relationship is becoming increasingly common, Long says, as companies realize that cost-cutting alone won't increase profits. Instead, vendors and buyers are sharing sensitive information at the transactional, operational and strategic levels.

And they're doing it at higher levels of the organization. As a middle manager in a large manufacturing company, Long used to negotiate with outside service providers. Today, "big deals don't get cut at the operating level. It [happens] where strategy is set."

Among the pioneers of the new breed of strategic outsourcing relationships is Vector SCM, the division of CNF Inc. which was set up in 2000 to provide a full range of logistics services for General Motors. Gary Kowalski, chief operating officer of the automotive group of Menlo Worldwide (another CNF company), says strategic deals typically last five years or more. By contrast, the standard contract for an old-style outsourcing relationship might run two or three years.

Most companies won't jump into a strategic partnership immediately, Kowalski says. They have to get comfortable, not just with the vendor, but with the whole idea. The process might take several years. "It's a major decision," he says. "It goes against the normal standard of not putting all your eggs in one basket."

The ties between Vector and GM are closer than most. Nearly $5bn in logistics services were on the table at the outset, with Vector taking gradual control over the design, implementation and management of GM's supply chain in four regions of the world. The automaker retained voting power over the arrangement, and the president of Vector sits on GM's sourcing council. Today, Vector coordinates and manages the services of multiple 3PLs, of which Menlo is just one. The provider also makes purchasing decisions and assesses their impact on the entire supply network.

The vision behind Vector SCM hasn't changed, but the way it serves GM has. At the outset, major operations had to be justified through the formation of detailed business cases. Principals had to compare the current state of affairs with desired changes, scrutinizing each step of design and implementation.

Now, says Kowalski, change happens much faster, with GM shifting its focus from cost cutting to eliminating bureaucracy and granting more autonomy to the regions.

Strategically minded outsourcing deals needn't be exclusive; Kowalski says that Vector is seeking other automotive business. But they must be intimate in nature. Gary Allen, North American distribution sector leader with Capgemini in Detroit, Mich., defines a strategic relationship as one that involves the vendor in the client's planning functions, stresses innovation, takes a global perspective and increases shareholder value. Such deals can last 10 years or more, he says.

As an independent consultant, Allen doesn't feel threatened by 3PLs' incursion into his territory. Capgemini works closely with large 3PLs like TNT, DHL and Exel, he notes. And a tight link between planning and services can be of great value to clients. Some vendors are even venturing beyond logistics consulting, into other parts of the supply chain such as sourcing, purchasing and manufacturing.

3PLs must do more to enable the formation of strategic relationships, Allen says. Most aren't set up to support full product lifecycle management. Moreover, they must be nimble enough to change their service offerings to reflect what customers need. "Fifteen years ago," he says, "what was considered a value-added service is now a basic offering."

A successful outsourcing relationship will be greater than the sum of its parts, says Steve Simonson, principal of Tompkins Associates Inc. in Raleigh, N.C. He likens the arrangement to a merger, where each party contributes its respective strength to the whole.

A good 3PL can bring strict performance metrics into a company for the first time, Simonson says. Many lack the basic guideposts for measuring supply-chain quality. Metrics hold both 3PL and customer accountable for the results. And they can be extended well beyond logistics into other parts of the organization.

Companies should be cautious, however, about the recommendations of 3PLs, whose consulting arms are typically tied to a menu of physical services. "They may try to get you into a part of the country where they have a presence or hub," Simonson says. A truly involved partner will recommend what's best for the customer, not its own service network.

Simonson also warns of letting 3PLs perform tasks that are outside their core competencies. Even the biggest 3PLs might lack the tools to optimize a client's supply chain on a global basis. "There are providers who can handle everything," he says, "but I don't think they optimize everything."

Still, 3PLs wishing to survive the next wave of consolidation will have to embrace a strategic approach, ranging well beyond price-sensitive offerings such as warehousing and transportation. "You've really got to sign up for a little more than a functional process," says Kraska. "It's about designing solutions."