M. Block and Sons, Inc. Our Company

Why Outsource Distribution

Today, the challenge of moving product from the manufacturer to the end user is more complex and costly then ever before. Whether you are managing your distribution in-house or need distribution services for the first time, outsourcing your distribution supply chain requirements can often be a smarter, more cost effective option.

There are a myriad of potential reasons for outsourcing the distribution supply chain, but the majority of those reasons can be grouped into the following main areas:

• Core Competency

At the root of the outsourcing decision is the concept of core competency. Companies seeking to outsource warehousing, distribution and other supply chain services need to first assess if these core competencies are already embedded in their business, and if so are they executing these functions in an effective and efficient manner.

For some companies this is an easy decision. They have either not yet established these functions, or they recognize that these functions are not what they do well or cost effectively. They may also recognize that the value of their company may come from areas such as product development, manufacturing, sourcing or marketing, and functions such as warehousing, distribution and customer service become a "necessary evils." In these circumstances, they should willingly look for a supply chain provider that can improve their performance in these areas.

For others they may recognize that warehousing, distribution and customer service are essential functions for achieving their company mission. This recognition does not necessarily mean that they should seek to build or maintain these functions in-house. Actually, it could mean quite the opposite. In utilizing a respected supply chain provider, companies can gain "instant" core competency in these functions by leveraging the embedded and proven skills in their chosen service provider. If, however, a company views these functions as critical to their mission, already supports these functions in-house, and operationally exceeds customer expectations at the lowest cost...they probably shouldn't seek to outsource these functions.

• Service Enhancement

Closely aligned to the concept of core competency is that of service enhancement. Often companies begin by providing their own warehousing and distribution services, yet they eventually realize that they do not have the experience or structure to consistently deliver a customer experience that they can be proud of. Such poor performance can stem from a variety of issues ranging from simple experience to a lack of systems and infrastructure.

Outsourcing to the right supply chain provider can be an effective means for quickly dealing with these inadequacies. A supply chain provider should have the people, processes, systems and support infrastructure to rapidly improve service levels, and in turn improve the customer experience and company profitability.

Often companies design distribution resources around their largest customer base for maximum efficiency, and find outsourcing a perfect solution to manage customers in secondary channels or those with unique business requirements.

• Capital Investment

To deliver excellent service in warehousing, distribution and customer service requires a significant investment on behalf of any company. The office and administrative infrastructure requires investments in human resources, communication and ERP systems, computers, servers and networking, customer relationship management systems, and facilities. An even greater investment is required for a distribution center considering the cost of warehouses, racking, forklifts, conveyors, automated material handling equipment, computers, warehouse management systems, shipping/manifesting systems and staffing. Not only do companies face the up-front investment in these functions, they must also constantly maintain and improve on these investments to remain at the forefront in their respective industries.

In addition to this asset-based capital investment, companies must also consider the working capital implications of running these functions themselves. Cash availability for payroll, benefits and insurance for customer care and warehouse employees can prove to be a major hit to working capital. In addition, this working capital investment is only semi-variable...if sales or orders are light in a given month, people and their related working capital requirements cannot be easily jettisoned.

When a company chooses to outsource, the up-front capital investment related to these functions is truly eliminated. A respected supply chain provider has already made the investments (and continues to make investments) necessary to support its clients' business. Ultimately, these costs will be recouped by the supply chain provider in its billing to clients, but these investments will be spread over many clients making the expense very affordable. Furthermore, these costs are generally imbedded in a provider's "per order" pricing (margins), allowing clients to pay for these investments as a function of their volume. In essence, using an outsourced solution allows companies to pay for their capital requirements in a cost effective, "pay-as-you-grow" manner. In doing so, capital is preserved allowing companies to strategically redeploy their cash for items such as product development, marketing, branding and sourcing and manufacturing.

• Efficiency and Cost

Not only must a company make a capital investment for their distribution and customer care operations, to be competitive they must also carefully manage these functions on an on-going basis to ensure they are delivering the required service at the lowest possible cost. To do so, companies need the management, systems and hardware expertise to wring costs out of their operation. Furthermore, volume is inherently a key driver of unit cost. If a company is not working with sufficient volumes they will be incapable of delivering a true low-cost solution.

A proven outsourcing partner on the other hand is inherently focused on the day-to-day operation of these functions. All time, attention, and investment is geared around the efficient and cost effective delivery of these services. They have to provide this focus and attention...it's not just another corporate function, it's their business. In addition, these supply chain providers are working for several clients and processing thousands of orders per day. As a result they can truly streamline their operations to deliver highly efficient solutions.

On the distribution and fulfillment side, efficiency and cost reduction can also be garnered by utilizing the multiple warehouses and the freight clout of a strong supply chain partner. With multiple warehouses, products can be positioned closer to the customer and in-turn can reduce overall freight costs while improving delivery time-in-transit. In addition, large supply chain providers ship a significant amount of freight with a wide range of small parcel, less-than-truckload (LTL) and full truck load carriers. As a result of their volume they are able to garner significant freight discounts that are generally available to only the largest companies. These discounts can be shared with their clients, thus further reducing the cost of product delivery.

• Flexible and Scalable

Flexibility comes in many forms. It can be maintaining the staffing to meet the variability in daily orders and customer service inquiries. It can be having the resources to support specific marketing or sales campaigns that generate back-end operational "spikes" in the business. It can be the ability to get in and out of product segments or markets without incurring large set-up or termination costs. It can also be maintaining an organization that tests concepts, learns as it goes, and modifies operational approaches based on this learning. Flexibility in itself can be a key strategic component and can even create a sustainable competitive advantage. However, when pursued, this flexibility is not free. It can carry a significant cost for any company that wants to remain truly flexible.

To counteract the high cost of flexibility, companies can seek an out-sourced solution that is billed on a variable basis. Rather than having dedicated staff for the sake of flexibility, companies can literally buy this flexibility "as-they-go" by working with a supply chain partner. Peak workload, either on a daily basis, or tied to a specific program, can be handled very incrementally by any out-sourced operation of sufficient size and scope. Trusted out-sourcing partners are also expert at the rapid deployment of new programs or products...they do this each and every day as they work to meet the needs of their clients.

In addition, purchasing flexibility does not need to be an all-or-nothing proposition. Working with a third party, companies can outsource individual programs or even peak demand to meet their flexibility goals. For example a large one time promotion or a special repack project might be better managed outside a company's existing resources so as not to disrupt normal operations.

• Information Technology Systems

Often overlooked, but vitally important, companies must maintain robust yet flexible information technology systems and networks to meet their supply chain and customer care needs. This is no small task or investment. Comprehensive and well integrated systems allow the best supply chain providers to operate efficiently and cost effectively.

Well designed IT systems must seamlessly manage back office functions and work flows such as customer service, EDI transmissions, customer compliance, order management and order processing. Flexibility must be built in to account for the multitude of unique customer requirements. Systems must be well integrated with the sales order and shipping processes to ensure that customer service agents have the necessary information to respond to clients on a real-time and fully accurate basis.

On the warehousing and distribution side, not only must technology meet the basic requirements of inventory control, order processing and freight analysis, they must be flexible enough to respond to the varied and changing needs of clients. A well designed warehouse management system (WMS) will function with multiple order processing methods for maximum efficiency, and keep clients compliant with all routing, loading and labeling requirements, including UUC 128 and ASN's.

Technology needs to be robust enough to support all client requirements and provide real time access to information and reporting. To generate true productivity in the distribution center, they must also be more than an extension of an accounting system. Ideally, these systems should support a range of automation technologies that streamline the distribution process and ensure the highest standards of order accuracy.

To support these systems companies must also make investments in programming, server and data centers, and redundancy to ensure the required up-time for their operations. Even small outages can generate negative customer experiences ultimately impacting the bottom line.

To address, or avoid, these system issues a company can seek an out-sourcing partner committed to information technology. In doing so they can avoid the cost and ongoing headaches of managing their technology and can instead focus on the value added activities within their business.