Many small retailers tend to outsource the transportation of their supply chains

Question

Many small retailers tend to outsource the transportation of their supply chains to a third party. On the other hand, a large retailer such as Walmart chooses to own its own trucks and manage transportation itself.

a) Discuss why, in general, small retailers benefit more from outsourcing transportation than Walmart.

b) Even if a third party could reduce Walmart’s transportation costs, outsourcing to it may come with risks. Provide two examples of risks that Walmart might have if they were to outsource their transportation to a third party.

Explanation / Answer

Small retailers benefit more from outsourcing.

Transportation costs are a major reason for growth in price level of products from manufacturers to retail stores. While large nationwide stores like Walmart, Costco, Safeway, Seven Eleven and many more have their own transportation, distribution and warehousing facilities, small stores rely on local distributors for their merchandise. Food products required by grocery stores are also in great demand by restaurants, hospitals, schools and other finished food retailers. In the midst of food distribution the parties involved have to also be careful about selling their finished products within a certain period of time as they are perishable and cannot be stored for long.

To reduce distribution costs grocers and convenience stores have varying strategies for both warehousing and transportation to retain competitiveness. To keep a cap on transportation requirements grocery wholesale distributors are using both third party carriers and their own private fleet for distribution of merchandise to their list of retailers. This hybrid transportation methodology helps both transporters to improve their distribution techniques and minimize wastage. Increasingly even food hubs close to large farms which work as cooperatives to collect and distribute food from local farmers use their own distribution trucks for local areas and sometimes transportation facilities of convenience store brokers to send it to distant markets.

Why third party logistics are profitable for grocery chains and convenience stores chains

Though convenience stores and grocery store chains understand that using external transportation facilities may add to the overall cost of merchandise, the benefits accruing from this system far outweigh the expense as they can achieve better productivity from hybrid transportation system. The recent increase in labor costs followed by transportation costs due to high rates of fuel has reduced the grocers’ margin forcing them to relook at the supply chain network to reduce operational costs for having profits. To keep their business profitable retailers have to measure the costs of distributing their products by themselves or through third party logistics providers.

Types of third party transportation management providers to retailers – Depending on the type of product there are several types of transportation management providers that specialize in food distribution like wholesale food suppliers and those that deliver apparel, shoes, cosmetics, accessories, cleaning products, tobacco and several others. These distributors are small and large which distribute goods either within the state or on national level on the basis of their expertise and profitability. While some third party distributors focus on small parcel shipments which are carried over large distances through their network of trucks and warehouses large bulk carriers transport goods by rail or ships which are then loaded on trucks and moved to retailers and grocery store distributors.

Manufacturer distributors – In this setup the manufacturer or point to point wholesale distributor take the responsibility of distributing the finished product directly from production point to convenience store chain or grocer. This type of delivery is possible when the whole truckload is bought by the retailer store which saves the transportation cost of moving from one retailer to other making deliveries.

Central distribution center to retail stores – Instead of having their own transportation service to supply finished products to retailers, manufacturers have a finished goods warehouse or distribution center. This is then moved to other locations by wholesale grocery distributors and convenience store brokers through their own transportation facilities by breaking them into smaller individual orders for distribution to retailers.

National distribution channels- These are centers where small manufactures and producers bring their individual finished products which are packed and ready for delivery. These distribution centers are sometimes run by food distributors, wholesalers, manufacturers’ cooperatives, and also by retailer groups to have a uniform delivery system. These products are then distributed to retailers which are a part of this association in small quantities for sale in vehicles which are generally owned by the distribution agency itself.

Grocers know that minimizing logistics and transportation costs can help maintain operational costs. As distributors add their own markup to products handled and delivered by them it can affect overall price a retailer charges from end customers. If a large wholesale retailer can take delivery of products from manufacturers’ factory or distribution center then they can provide lower price depending on transportation costs. In the use of third party logistics retailers have to look for multi-client distribution services which travel nationwide to distribute food and other convenience products to large and small retailers in a profitable manner. Like manufacturers, retailers also set up cooperatives to setup their own distribution network or engage third party distributors to complement their operations.

If Walmart uses third party for transportation ?

3PL stands for 3rd Party Logistics. A 3rd Party Logistics Company manages your transportation needs for you. Wal-Mart is a company that has their own trucks to get product to and from locations. They do not need a 3PL because they are their own logistics manager. Most companies do not also own and operate a trucking company for their fulfillment needs. Some companies have a Shipping Manager, or a fulfillment expert to handle their shipping needs on a case by case basis. When your company gets large enough it will no longer be cost effective to keep hiring employees to manage your shipping needs. It will become no longer feasible to call on every shipment. Situations like this call for outside consultants or 3PLs.

Good logistics companies will integrate with your backend inventory system and streamline your shipping operations. This means instead of manning the phones all day for good rates, calling brokers etc. The system will automatically put in great rates, print shipping labels, and give you everything you need for shipping. A good system will take the place of 3 employees if utilized correctly. For example a large treadmill manufacturer will partner with UPS freight to get discounted rates, and also gain access to their software that seamlessly manages all of their online shipments, and wholesale orders. Orders being placed will come through a backend order management system and then will immediately be loaded into daily production and automatically print shipping labels. Usually scales are also provided with the system and daily scheduled pick-ups.

Discounted freight rates, based on volume, are the main advantage. When using a 3rd party you are able to piggyback on bulk rate discounts. Trucking companies love to have guaranteed shipments. If they can count on having shipments without waiting for the phone to ring they are more than willing to give discounts. Also trucking companies give large discounts for large volume of shipments. A 3PL will provide massive volumes of guaranteed shipments to trucking companies by pooling together the resources of all their clients. This means that instead of having the buying power of your single company, you now have the buying power of the entire client base of the 3PL you are using. This could be thousands of companies. Tying yourself into that buying power will save on the bottom line.

For example, if you have been paying $100 to ship a pallet to California, with a 3PL you might pay $50 to ship the same pallet. If you ship 3 pallets a week to California, that is $150 a week, $600 a month, and $7800 a year, just on your California shipments. Now say you ship 3 pallets a week to 10 different states, that is now $78,000 a year in savings. Shipping costs add up quickly if you don’t watch your bottom line. Shipping costs will significantly affect your cost of goods sold. As a business owner in this economy you need to do all that is possible to stay above water.

Logistics companies have varying strengths and weaknesses. There are some that completely integrate and manage everything for you, and there are some that are more for the medium to small business that allow for flexibility and a lot more manual control. If you are in a stage where the price of every shipment needs to be managed, instead of having your shipping guy spend all day on the phone with brokers, he could get all the quotes from one system.

This will accentuate the strength of each carrier. Some trucking companies are great to western states, some are great in the south, some are better for short trips, some for long hauls. Every trucking company has their fantastic priced routes, and their outrageous routes. It is very beneficial to utilize the strengths of each company. For large massive daily shipments you would want a more integrated bells and whistles kind of 3PL than a simple quoting system.

Expedia.com is to the world of travel as online freight quotes are to the world of freight. Travelocity does it as well for vacation packages. Essentially they give you one stop shopping for the best rates on the market using their buying power. This is different than partnering with a single trucking company like UPS. Trucking companies will want to get you locked into only using their services. If you only use one trucking company, it is difficult to know if you are always getting the best rates. With an online freight quote pricing you can easily allow all trucking companies to compete for your business without the hassle of calling every single freight carrier in the country.

Disadvantages to a 3PL, you may get one too big for your britches. Often you could be locked into carriers you don’t like. Make sure that your service level remains top notch. Shop around to get the best 3PL for your needs. Most 3PL’s have reliable customer service; make sure you get one that allows for returns and damage claims. Remember a 3PL is like a partner, so look for all the things you would like in a shipping partner. For example the benefits of a 3pl are that they provide instant quotes and 24 customer service hotline. When shopping for a 3PL it is helpful to write a list of wants and pain points you want solved before approaching a 3PL. This way you will be prepared to analyze them according to what you really need or what you really want.

To problem in dealing directly with the carrier are, first is low volume shipments means high retail pricing. The second is time lost. It takes hours to research, get quotes to find the best price for a lane. In general, local shipments it is best to use local small companies, for national shipments you need the big boys. For your immediate surrounding states, regional shippers might be best, but the prices vary between small regional carriers and big freight companies like FedEx. Basically not one single freight company will meet all of your destination needs equally. This is why you should avoid only using one carrier.

It is a misconception that by going directly to carriers, I am cutting out the middle man and getting a better price. In this case that traditional wisdom is not true. The problem with going directly to a carrier is if you have $100,000 or with some companies $1,000,000 or less a year in shipping costs, you are small potatoes to them and they will charge you their highest retail pricing. You are only using your own volume and not the volume of every customer that the 3PL combines together.

A 3pl can be great, it helps you manage your time, makes shipping hassle free, gives you an easy access way to manage costs, and allows for flexibility in shipping controls. A 3PL is a great partner to have especially if you do not have the funds to hire your own drivers, buy trucks and send them all over the country for you. A 3PL will save you money and time. Be smart and use one that works for your needs.

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