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Article: Logistics Outsourcing Picks Up Steam October 13, 2010

Link to original article: http://www.edn.com/article/510910-Logistics_outsourcing_picks_up_steam.php

Logistics outsourcing picks up steam

OEMs and ODMs in the electronics industry are increasingly offloading their logistics. That includes everything from shipping and warehousing to assembly and programming.

By Rob Spiegel, Contributing editor — EDN, October 11, 2010

Outsourced logistics services have grown at a fast clip in the past couple years. The move to outsourcing escalated during the cost-cutting of the prolonged recession. Logistics service companies are taking larger and larger chucks of OEM activities. Sometimes it’s hard to tell what the core competence is for an OEM these days. Manufacturing has been outsourced for years. Portions of deisgn are getting outsourced, particularly in the cell phone and laptop markets. Logistics companies are taking on more than just transportation. They offer warehousing, kitting, assembly, programming, design engineering, and forecasting. Some even take ownership of their customers’ inventory, providing a significant balance-sheet benefit.

And just when you think OEMs have become little more than marketing companies, along come logistics companies that provide marketing and sales services. During the recession, logistics companies greatly expanded their array of services. “OEMs are continuing to evaluate what it costs to get things to market,” said Tom Dinges, senior consultant at iSuppli Corp in El Segundo, Calif. “So if they can save money by using someone else’s facilities, they’ll look strongly at those opportunities.”

Distributor logistics

Distributors have long provided inventory services, but those services are expanding as customers let their distributors keep ownership of the inventory until it’s ready for production. “We offer services as though we were a logistics company,” said Colin Campbell, VP of supply chain at Newark in Chicago. “As well as managing our customers’ inventory, we also offer them a balance-sheet advantage.”

Sometimes logistics services are as simple as taking responsibility for the transportation of products from a warehouse to the customer. Digi-Key Corp in Thief River Falls, Minn, uses UPS and FedEx for its shipping, but the company maintains the tracking on its own site so customers don’t have to go off to a transportation site to follow product across the country. “We wanted complete visibility for our customers. We’re like a glass house,” said Todd Bills, VP of order fulfillment and logistics at Digi-Key. “We see where the freight is and report it to our customers.”

One of the reasons more services are getting outsourced is simply that OEMs have become comfortable with the idea of using a specialized service company to provide services. Manufacturing led the way years ago. If you can accept the idea of a vendor building your product, the idea of offloading transportation and warehousing to a specialized company is acceptable. And why not some assembly and returns? “As companies get comfortable with outsourcing it’s easier to decide whether it’s the right thing or the wrong thing,” said Jim Smith, president of Avnet Logistics, a subsidiary of Phoenix-based Avnet Inc. “Typically, if they’re outsourcing one thing, they’re willing to look at other things.”

Manufacturing was outsourced primarily as a cost-saving measure, not because the manufacturing process at an EMS company was necessarily superior. Logistics and warehousing, however, are often shipped out because a logistics company can provide a better customer experience. “All of our customers have to look internally at where they want to place their investments,” said Tim Kolbus, VP of operations and logistics at Arrow Electronics Inc in Melville, NY. “They say logistics is not one of their core competencies, so they’re asking us to help them.”

In order to bolster its logistics services, Arrow recently acquired a reverse logistics company and a firm that performs IT asset disposal. Kolbus noted it was an easy extension to provide a greater range of logistics services. “It’s simple for us to manage a customer warehouse,” said Kolbus. “We have the product knowledge. That way they ask us instead of using a 3PL. We even manage products that are not on our linecard.”

Recession sparked a growth spurt

While logistics companies may provide an improved customer experience, cost cutting was certainly part of the decision process. So it’s not surprising there was a surge in outsourced logistics over the past three years. Companies like Avnet and Arrow have both launched expanded outsourced logistics services that go beyond their longstanding supply chain services. “There are cost savings in outsourcing logistics,” said Avnet’s Smith. “If companies don’t have the knowledge of logistics, they’ll throw excessive costs at it. They can avoid that and keep their costs down by outsourcing.”

Some of the trend toward outsourced logistics was prompted from the corporate boardroom. “During the recession, companies looked at improving their balance sheets,” said Bill Sanders, VP and general manager of Ingram Micro Logistics North America in Santa Ana, Calif. “They said, ‘What can we do differently?’ And the CFOs started looking at the supply chain. That created a higher level of outsourcing.”

The economics of outsourced logistics make sense in a global world of expanding and shrinking markets: OEMs can buy their services tailored to their exact needs. They don’t have to worry about layoffs and empty warehouses during downturns. And they don’t have to hire employees and buy buildings during boom times.

“If you get 10,000 orders this month and 20,000 the next month, we’ll ramp up and down,” said Ingram Micro’s Sanders. “This allows the OEM to take advantage of system built to handle volumes without the need to invest in in-house systems and processes.”

A wide range of companies are now turning to outsourced logistics, including both OEMs and ODMs. And size doesn’t matter. The largest companies are offloading logistics and warehousing, as well as smaller companies. “The type of companies using outsourced logistics include OEMs, ODMs, e-tailers, and even brick-and-mortar retailers,” said Sanders.

Reverse logistics gets in the game

One of the new areas for outsourcing is reverse logistics, the business of returns. According to Gailen Vick, president of the Reverse Logistics Association in Lehi, Utah. For years companies didn’t consider their returns as an outsourcing opportunity. “Today most companies down even know they have reverse logistics,” said Vick. “When they realize they have it, they outsource it.”

More and more logistics companies have started to offer returns services as part of their overall service package. “We offer reverse logistics services,’ said Sanders. “We bring in a customer’s phones and return those ones that can be refurbished to the customer’s manufacturing center, and we take care of scraping the rest.” He noted Ingram Micro also provides the service of selling refurbished phones into the channel that buys refurbished products.

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