Skip navigation
2011

I recently interviewed Konkala Suryaprakash Goud who discussed how small businesses in India are expanding their market opportunities through collaboration.

 


1. Please provide a brief background of yourself

Suryaprakash Goud is a post graduate engineer in plastics engineering with 16 plus years of experience in (Small and Medium Sized Enterprise) SME promotion and development. His basic degree is in mechanical engineering. He is currently working with the National Institute for Micro, Small and Medium Enterprises (ni-msme), in Hyderabad, India. Goud is associated with more than 25 cluster development projects where they invite SMEs onto a common platform to take them through various interventions. For example, they work together to grasp common opportunities.

 

2. What does it mean to collaborate in business?

 

Goud and his team works in 2 areas: 1 SMEs and 2. manufacturing enterprises. They encourage collaboration for common mutual benefit because sometimes for an individual enterprise to invest requires a large amount of capital to create R&D facilities, etc. It may not be viable for them, even if they have funds available.

 

In cluster enterprises, we encourage entrepreneurs to collaborate for mutual benefit and to come out of their problems. As a group of enterprises they come together at a common facility and utilize the common services to cut down their costs. In rural clusters, we encourage for collective procurement and marketing to cut down cost and improve revenue and profits. Similarly, if they want to reach global markets as individual enterprises, it is difficult. However, when they come forward through the government of India, they support them to participate in global trade fairs where they send them as a group with required materials. Once they get an order, a group of enterprises together execute the order. It can also help the cluster enterprises to handle the shipping, quality and price of products for global customers.

 

We create a common infrastructure with the latest tools and equipment which is difficult for individuals to invest in by themselves.

 

3. How can companies improve their collaboration efforts?

We are implementing number of schemes to support rural craft persons as well as traditional and hi-tech industrial clusters. We use small workshops to help them understand the benefits of clustering. We share our experiences and use the results of other interventions and the interactions of stakeholders of other successful clusters. This helps them understand.

 

In the workshops we invite stakeholders from other clusters and explain how others have done things, how they have taken intervention, and how the cluster approach facilitated them. This includes things such as common procurement, common marketing, creating common facilities, etc.

Once they interact with other stakeholders/cluster enterprises and see the results, they will understand. They will come forward to take advantage of this cluster approach. Initially, the government of India supports them in capacity building to create knowledge about cluster development for the entrepreneurs.

 

Also, in the creation of common facilities, most of the time the government of India will support 70% to 80%, the remainder is the responsibility of the entrepreneurs. There is an advantage which definitely helps the entrepreneurs who come forward.

 

4. Where have you seen collaboration successfully implemented? What were the results?

 

One of the rice milling clusters in the Strait of Haryana a number of associations were supported through cluster development. A number of enterprises took advantage of this. We took up interventions related to energy auditing. Significant savings were reached for the group of enterprises.

Similarly, in the rice milling clusters there were a lot of problems with broken rice. With the intervention many of the units reduced the amount of broken rice dramatically. A savings of roughly 20 Crore Indian Rupees was realized ($4 million USD). They also participated in an investment trade fair and visited China, which is a major competitor for this particular cluster. When they understood the need for technological innovation, the entrepreneurs invested roughly 350 Crore Rupees ($71 million USD) to modernize their technology.

 

This helped them improve the quality of their final products. Productivity improved and costs of production were reduced by roughly 10%. Savings in energy of roughly 3 Crore Rupees ($0.6 million USD) were realized in 3 years for 13 rice mills undergoing energy auditing. Product packaging was also improved.

 

Another important development in the rice cluster was that one of the bankers has looked at the impact of this cluster after intervention. They mentioned that there was roughly 1,300 Crores ($264 million) financed by the enterprises as a result of these interventions. There was a tremendous improvement in the investment path and credit flow. In addition, production improved by 450%, as found by the banker’s investigation.

 

Over 95% of the entrepreneurs expressed that quality and productivity increased dramatically. Most of the entrepreneurs who were working in small groups came to the common platform to work for the development of the cluster. Due to modernization, many of the clusters came out of the problem, especially in terms of broken rice. This led to opportunities to export to other countries, especially in the Gulf and Middle East.

 

Regarding the energy auditing cluster, there were roughly 221 units. The turnover was 1200 Crores ($244 million USD), of which 700 Crores ($142 million) were exports. Employment numbers were roughly 11,000 before the intervention.

 

In one of the rural clusters where they were producing tribal handicrafts they invited an expert from an NGO from Germany. The designer helped by adding value to the base material. In another cluster related to pottery incomes increased to more than $6 per day. Through clusters were obtain cost reduction, quality improvement, infrastructure development, new designs and processes, new markets and customers are some of the achievements.

 

About  Konkala Suryaprakash Goud

TECHNCIAL ADVISER at NATIONAL INSTITUTE FOR MICRO SMALL & MEDIUM ENTERPRISES

LinkedIn Profile

 

www.nimsme.org

I recently interviewed John Pellizzetti who discussed the first ever SaaS project for freight in Brazil.

 

 

1. Please provide a brief background of yourself

 

My background is the business and strategic application of technology.  I like working on change from the human side -- I not very techie at all. I worked in some big companies such as BP and DHL. I was a project manager for new project implementations in the US and Europe.  I launched my own Freight Brokerage in the US and quickly took an interest in getting involved with Real Time Freight (RFT) out of Chicago. I got in as an equity partner and have been running things in Brazil. I have family connections to Brazil and the timing seemed right to bring RTF to Brazil.

 

2. Can you talk about your project involving SaaS in Brazil? What have you learned?

 

SaaS in Brazil is fairly new, particularly in the freight business. I joined RTF as an equity partner with the intention of bringing the system to Brazil.  We are starting the first SaaS project in Brazil within the freight industry. It has not been easy. My RTF business partners and I visited Brazil and were well received by potential customer and investors -- we had misunderstood the market.  The Brazilian market is vastly different below the surface.  The buying decision making process is completely different. The incentives for buying are different.  Business risk avoidance and need for cost savings weigh differently in the decision process in Brazil. However, the opportunities in business are increasing.

 

3. What has been your marketing approach and how is it different?

 

We really struggled with this. We believed that we had an advantage in that our product is very universal in nature.  Our product is about collaboration internally within a large shipper and with their carriers. There is almost nothing in the product itself which is US-centric. The big difference is the reason to use the product.

 

Therefore the entire marketing and strategic approach had to be changed.  I see the complex sale, marketing and strategy as closely related in this phase.  We are emphasizing some basic functionality which can be quickly leveraged to support the internal freight communication process at large organizations.  In other words, there is value in our product without forcing our shipper clients to sell the concept to their carriers.

 

We also found that top client names such as FedEx, Steel Warehouse and Pop Chips and awards from Food Logistics and Supply and Demand Chain outside Brazil had no influence on buyers in Brazil.  What seems to be more important is local references and an understanding of the local market.  The key word in the local market is risk.

 

The approach to risk is different in Brazil. There is a big emphasis on the need for credibility and demonstrating a track record. There is a whole risk management industry which exists in Brazil which does not exist elsewhere.  It is somewhat like a spin off from cargo insurance. Cargo insurance companies dictate to their clients that they should have people tracking the trucks to avoid theft. It is not really telemetrics, it is theft avoidance. RTF has made a major investment in forming a JV with Buonny. Buonny is the largest provider of risk management in Brazil.  Risk management is the activity of monitoring trucks and cargo to avoid theft and to be proactive if there is a theft.  All partnerships are formed for a number of synergies such as cost savings and name recognition. Our partnership with Buonny has the extra advantage in Brazil of providing a kind of unspoken sense of credibility.

 

As a result of this partnership we have a completely different marketing message. In the US we are going to the market with an emphasis on technology and our tag line is ‘where freight meets capacity’. In Brazil it is ‘Intelligent freight management’ or ‘intelligent freight contract management’ because in Brazil there are credibility and confidence issues. As a result there is a lot less spot market and more of an emphasis on the need to organize, manage and oversee your long term contracts and relationships with suppliers. This has been the focus of our message. We discuss how we are an online tool that supports all of this.

 

4. What recommendations do you have for others?

 

Every situation is going to be different, but we have been very fortunate with the hiring here. There are some really good people to work with in Sao Paulo. You can set up meetings all within a 1 hour radius of Sao Paulo. You cover a large part of the economy. There is plenty of opportunities in the logistics and technology space. There is flexibility and willingness on part of the clients to take a look.

 

However, it isn’t what you expect. A lot of people know it is important to adapt to the local culture. The trick is in figuring out what needs to be adapted. It involves a lot of testing. There is no specific formula. Everyone’s approach and product will be different.

 

About John Pellizzetti

 

JohnPellizzetti.jpg

 

Board Member

Real Time Freight Services, LLC

Sao Paulo, Brazil

LinkedIN Profile

Why is this important or "newsworthy?  Most of the examples we see in the press are big companies with deep pockets and sufficient resources to take on aggressive improvement initiatives.  What about small(er) companies and plants that don't have all those resources?  They need improvement just as much (or more!).  One Jeff’s clients over the past couple of years had 8 small plants spread around the Midwest and southeast (located close to major customers).  The COO was looking for opportunities for improvement. He wanted to take one plant and make it a Lean model plant for the rest of the corporation.  Back2Basics was engaged to lead them through the project and it was successful.

 

 

 

1. Common objectives as compared to bigger operations, but different tactics.

 

At the conceptual level there are a lot of common objectives between the big plants and companies and the small plants and companies. They are all about improvement for competitive purposes; whether it is reduction in cost, reduction in time, increase in velocity etc. Therefore, we have comparable metrics at that level, but the tactics to get there are different. This is where the challenge lies for the smaller companies and plants.

 

2.  What is different about a small plant?

 

When you compare the smaller operation to the bigger operation there are several differences. Some of the differences are positive and some are potential negatives.

 

One difference, which may be the greatest positive is that the smaller plants tend to be nimble. They can change quick and react quickly and get things done quickly. Sometimes this is simply because they lack the formality that some of the bigger companies have.

 

Another difference is that usually you pick up a smaller staff. As such, you need to be creative in how you use the staff in the improvement process. When Jeff discusses staff he refers to everyone at the plant, whether the plant manager, department heads, operations, and material movers. You need to be creative and efficient in how you use them.

 

Finally, the small plants allow you to see the results very quickly. If you are looking for instant gratification the small plant may be the place to find it because you can make changes based on limited analysis and get to results quickly, create some traction and then move on to something else.

 

3.  Are these differences assets or liabilities?

 

It depends on how you look at them. Jeff is the eternal optimist. He looks at them as assets or positives. The nimbleness and ability to see results faster is a positive. You might argue that the smaller staff and lack of bench strength is a negative. However, if you can be creative you can turn it into a positive. Regarding the smaller bench strength compared to a large plant or company, at a small plant you may have one person who is that department or function. You may have one person and as such you don’t have bench strength since you are one deep. You might also have a case where you have one person wearing multiple hats so that you are not even one deep.

 

How you not pull those people away from getting the work done at the same time you are trying to improve is a challenge. Yet, it is a challenge that creates opportunity rather than roadblocks.

 

Jeff points out that when we talk about ‘small’ he frames it as being less than 50 employees. In terms of the footprint it might be 20,000 to 50,000 square feet of manufacturing space. This is not a large place. You can get your arms around it and touch everybody quickly. This is the context for rapid transformation at a small plant.

 

4.  Share an approach you have used

 

In this particular case the COO had identified a number of small plants where they wanted to take one and make it a Lean model plant. The way Jeff and his client approached it was to focus like a laser beam. While it sounds like a cliché, they really did focus like a laser beam at that plant.

 

Another thing which was a positive was the way the COO and plant manager approached it was to set a specific time frame. It was a time frame that allowed for methodical approach and implementation. This wasn’t a matter of doing Kaizen and then going away. It also wasn’t a matter of going on indefinitely. They said they had limited resources and decided to take 6 months to go as far as they could with the rapid transformation. They then designed the process to make that work.

 

With that in mind Jeff and the team started with an assessment. They had some challenges at the small plant because as you begin to do your process mapping it is difficult to pull a large group of people (around a half a dozen) together to do the process map because at a plant of 30 people you would have to shut the plant down. In response, they set up butcher paper in a large hallway and were able to grab people for around 20 minute increments. Ultimately, they were able to get to the same place as if they had done it all at once with a large group of people.

 

It worked well for the small plant because everyone had their fingerprints on the process map. Given that it was in the hallway they were all walking by it. A lot of questions and comments were raised.

 

The other thing which was unique at the small plant was the approach they took to training. They couldn’t do training with a large group of people so they had to create a flexible way to get people the knowledge needed for the basis of the Lean transformation. They did this with a flexible training at Gemba. They trained in very small groups at Gemba out on the floor in a very hands-on fashion.

 

The positives were that the people were able to apply what they were learning right away. They were able to get some limited results right away. Everyone could see what was going on. The transfer of skill and knowledge was pretty effective.

 

One of the things in the approach that was observed fairly quickly was that flow was an important issue. Flow in general. With a small plant you can see the entire plant. We are talking about a relatively small footprint. You can see the way material moves and navigates through the overall series of operations as well. It became obvious that the flow was an issue. This Lean model plant had roughly fifteen machines. By the time they finished working on the flow, every machine except one had moved. Some had moved a little bit and some had moved completely to another side of the plant, which is substantial in a plant with limited resources in a make it today ship it tomorrow type of environment.

 

They also enhanced the flow by cutting a large hole in one way which facilitated the flow of materials and people. It was almost as if looking at fluid dynamics and the way water moves through pipes. When the hole was cut in the wall the flow just changed. It was a very big deal.

 

What they observed fairly quickly was that in order to make today what is shipped today or tomorrow, the plan anticipated and held finished goods. They recognized a lot of variety in their finished goods but they didn’t know for sure what orders were coming in. It was a real ‘crap shoot’ in terms of holding finished goods.

 

In most cases they didn’t have the right things in stock, so they would take materials, space, congestion, and still didn’t have the right items available. As a result, they looked at what to do to enable them to make it today and ship it today. They introduced the supermarket about mid process. By having that supermarket you got them out of the scheduling business on the front end so that it was a matter of simply replenishing that supermarket. At the back end they pull from the supermarket much like when we go to the grocery store and pull from a supermarket. They were able to configure a product and get it out of the door and meet the requirements of ‘make it today, ship it this afternoon’. The speed was faster and they had much simpler processes.

 

Given that they had 30 or so people in the plant, everyone was involved in one way or another.

 

5.  Discuss sustainability

 

Whether it is a big plant or small plant, sustainability is a critical issue. The small plant has some advantages over the big plant. The small plant can create metrics that are meaningful and post those metrics so that the whole plant sees and understands them. You can have very effective employees with a small group like this.

 

One point which is especially appropriate at the small plant level was the 5-S Traveling Trophy. The embraced 5-S early on in the Lean transformation. They introduced the idea of internal audits of the 5-S process. This was done with peer audits. Every department each week participated. A department was chosen to get the traveling trophy each week based upon the results. In that small plant everyone know where that trophy was and everyone wanted it. It was amazing how much traction it got.

 

They were able to reduce unit costs, increase their speed and what was very important was that their inventory levels were predictable. They could get more product out the door to meet their customers’ needs without large up and down inventory situations.

 

Conclusion

 

Rapid transformation for a small plant is critically important because we have so many small plants across the country. The press is probably biased towards the big companies. Somewhere along the line we need to make sure we have helped the small back bone manufacturing company in this economy be successful. With the kind of things seen in this situation, we can get that done.

 

Jeff Sipes has a consulting firm called Back2Basics, LLC where he focuses on Lean operations improvement, manufacturing strategy and BPM. Most of his work is with manufacturing companies.

 

 

JeffSipes.jpg

 

Jeff Sipes

Back2Basics, LLC

LinkedIn Profile

Kwame Varga has roughly 15 years domestic and international experience with process management, supply chain development, metrics management, metrics creation, change management and strategy. He has done large supply chain work for companies such as Johnson & Johnson, smaller work for start-ups, and he has done business process re-engineering for companies such as Polaroid, Ralston Purina, Hungarian Oil Company and more. Kwame is a generalist in many ways, but he also is very specific in certain areas.

 

 

Currently, Kwame has been in discussions with some people in Seattle about sustainability and sustainability issues. They are looking at green supply chain/sustainable supply chains. One of the ways, either now or in the future, is to look at environmentally friendly supply chains and the metrics around the supply chains. For example, with energy and water raw materials and sales we can go further down into our suppliers to understand that the materials we are getting are actually coming from a green background and a more sustainable manufacturing capability.

 

In essence, what they are hoping for is that from anything from the fish and cereal we eat, to the gasoline we buy (since it has ethanol in it), that 100% of the inputs into the product are coming from a sustainable supply chain base. The question is how to quantify this monetarily versus your traditional supply chain. This is where we get into some of the more finer points, meaning from a cost point of view if you have a sustainable supply chain it doesn’t mean it is necessarily more expensive than a supply chain which is not 100% green.

 

With the foreign competition involved in developing areas where there is a less of philosophy of doing things green and using sustainable initiatives we need to ask ourselves if we are putting ourselves in a competitive advantage or disadvantage. This is currently where Kwame and many others are in understanding this.

 

In the developed countries of Europe and the US, as well as partially in China the philosophy of doing things green works and you can benchmark it to get into other environments in the world. The equation first has to get to a clean environment before you can start looking at a sustainable supply chain.

 

Green supply chain is very new. There are some people who have done some things in Europe, as well as at MIT. Things are very much in their infancy in terms of really plugging into a model to see where the fish on the counter come from, where the feed for the water management comes from, etc. in order to determine its sustainability and the ability to benchmark the initiative.

 

Considering the way global warming is happening, many believe that in 5 years time these types of things will become standard sooner rather than later.

 

Examples

 

Some of the European companies such as Airbus drill down to get full visibility into suppliers and supplier’s suppliers to understand what they are doing to make sure their products are as green as possible.

 

Many of the pharmaceutical manufacturers, as Kwame saw while working at Johnson & Johnson, is that they have their own water treatment facilities on-site. This helps ensure that the water going out into the environment is grey water or virtually clean water.

 

In Washington around many of the fisheries a lot of the hatchling fish, as well as the feed and waste materials become grey and white water.

 

Increasingly we are seeing in certain areas and with certain companies this type of practice being embraced. Kwame and others are now trying to drill down even further. For example, they are looking into food distribution, since food will be an interesting area as populations grow around the world.

 

Recommendations

 

The first places to look at the sustainable supply chain are raw materials, water and energy. Start with the following benchmarks if you can: Get a very good idea of the raw materials you are getting, how those materials get to you and how they are made, the water management around the manufacturing, as well as the energy consumption. You might also want to look into types of environmental cost accounting rather than activity based cost accounting to get a different picture. Set up a benchmark comparing your current to what you think.

 

Connect with Kwame Varga

Varga.jpg

 

LinkedIn Profile

I recently interviewed Bruce Spurgeon who discussed supply chain risk management from the perspective of the medical industry. Bruce went to studied agricultural business management in college and from there went on to work in the food industry, high tech and various other sectors. He is currently a Supply Chain Manager at OSspray Ltd which is a company that has developed a biomedical product that rebuilds the enamel on teeth.

 

 

Supply chain risk management in the medical industry

 

In the medical industry you want close to zero risk for the patient. This has been the directive from OSspray’s board of directors. They are building a no to low risk supply chain. It is an interesting situation because they have a new technology and it is very expensive to get into the technology. The company needed to work hard at building a combination of suppliers and quality systems which go beyond even what the FDA and other regulatory agencies would require.

 

One of the things they do to mitigate supply chain risk is to build inventory ahead in order to be able to do necessary testing with time to spare. This would result in a near zero risk situation when the product hits the marketplace. Being a startup they have faced some challenges. One of the risks of being a start up is that you are not a big buyer to anyone in the supply chain. As a result, the company needs to work very hard. Part of what is needed is to sell the vision of the company to their suppliers.

 

The company works far ahead in terms of their forecasting. They are doing a good job at this partly because they are good at keeping the engineering, technical, quality and supply chain together. Every week they discuss not only the supply chain, but also product development and potential changes for improvements. This helps to mitigate the supply chain risk.

 

Recommendations for other start-up companies

 

The key is getting the runway and working ahead. Part of the supply chain job is to be a salesman to your own board of directors on what it really takes to get there and explain to them the risk management side of the business.

 

You also need to be a salesman to your suppliers to let them know and get them to have a vision of your business. At times Bruce will even bring in their President and VP of Marketing to help them meet with suppliers in order to get that high level buy in on both sides. This helps them get the best suppliers, leading to mitigated risk.

 

Supply chain risk management is becoming increasingly important. Bruce encourages companies to drill down to the supplier’s supplier. In the medical industry it is very important to know the purity of everything that goes into the product. They drill down several levels, not just with their suppliers, but also raw material suppliers.

 

We have seen with the earthquake and tsunami in Japan how critical it is to manage supply chain risk.

 

The critical thing for OSspray has been a board of directors which understands supply chain, many of which have spent parts of their careers in this field. As a result, Bruce can go back to them and discuss drilling down to raw materials. The board of directors will allow them to time to do this because they understand the supply chain.

 

About Bruce Spurgeon

 

Bruce.jpg

Supply Chain Builder and Manager

LinkedIn Profile

I interviewed Kwame Varga, a former senior operations manager with Johnson & Johnson. Kwame knows Russia from border-to-border. He also knows what it takes to import and distribute goods in the region. In this interview, Kawme Varga shares his in-depth knowledge of maneuvering through Russia's customs and importation system, and why company's should not attempt to go it alone.

 

 

 

 

 

Developing a Supply Chain Strategy for Russia

 

When developing a supply chain strategy for Russia, Kwame Varga says the first action item to be addressed is getting products into the country. Customs clearance is relatively straightforward as long as you have a good customs broker who knows how to navigate the procedural labyrinth. The broker you choose should be someone who knows the territory -- metaphorically and literally -- "someone who can into those who need to be dialed into," and "hold your hand" through the process.

 

 

Needless to say, some products require more maneuvering than others. Chemicals, for example, require testing that can weeks or even months. A broker who is in-tune with the system will likely be able to keep the testing process closer to weeks than months. "It's all on the up-and-up," Kwame says, "it's just that rules and regulations change so frequently that you really need someone who knows how they are maintained and updated, and how they’re evolving."

 

 

For example, in the summer of 2009, the federal government closed down all Moscow customs stations and moved them from the Moscow city to the Moscow region. As an importer, Kwame says, you need to build agility into your strategy, which in this example, would mean working with a broker who makes certain your products are registered at more than one customs station to avoid unforeseen blockages that can crop up. Without this type of flexibility and specialized knowledge, your products could sit at the border for months on end, which Kwame warns can, and does, happen.

 

 

Avoid Problems by Working with a Local Brokers and Distributors

 

Kwame advises investing in a customs broker who has in-depth knowledge of processes in the United States and Europe, as well as specific knowledge of Russia. Citing his experience with Johnson & Johnson, Kwame says, between Finland and Moscow alone, the company's products were checked as many as 60 times. If your documentation is not "spic-and-span," customs agents may find a mistake and your shipment could be impounded. "The best business decision you can make is to invest in a broker who knows what they are doing, because to go in blind and try to work the Russian customs and importation systems is not a wise maneuver," Kwame stated.

 

 

Once your goods are inside the Russian border, it comes down to your business strategy -- more specifically, your distribution strategy. Johnson & Johnson, Kwame recalled, leveraged a local distributor who moved goods from its Moscow warehouse to locations across the country. Cold chain and life-critical products require a 14-day lead time, which is just one reason Kwame advises working with someone who understands what is required. According to Kwame, It is cost-prohibitive for a company to establish a hub-and-spoke distribution system in Russia. You have the train line, he explained, but the road networks are not great and there are very few places for truck drivers to sleep, not to mention the fact that there are thousands of kilometers between Moscow and other cities. Again, Kawme Varga reiterated that it would be very costly for a foreign company to build a local, company-owned, supply chain.

 

 

Signs of Supply Chain Integration

 

In Russia, just as we have seen in other countries, supermarkets and retailers are beginning to combine their supply chain operations for economies of scale. In the past, Kwame said, every warehouse or factory was its own kingdom, and because the economy was booming, there was no need for integration. "Today," Kwame explained, "people realize that every ruble saved is a good ruble, and we are starting to get to the point where supply chain competence and supply chain capabilities are a value-added business seller that companies can leverage in terms of how they do business and how they sell."

 

 

In addition to supply chain consolidation, Kwame Varga is seeing more collaboration in the areas of upstream information gathering and sharing between providers, customers and sellers in the Russian market. "It is still in its infancy," according to Kawme, "because data sharing process improvement is slow in Russia. People sill grab on to their territory and really find it difficult to shake loose of it. It's a process that is evolving, which means there are opportunities to create a relatively cost-effective, robust supply chain."

 

 

 

 

About Kwame Varga:

 

 

Varga.jpgKarme Varga worked for Johnson & Johnson from 2006 to 2008 as a senior operations manager. He also worked for a Russia-based medical health care company, where he specialized in importing medical devices and premium eyewear products into Russia from across Europe, and as an entrepreneur, Kawme imported chemical-based consumer cleaning products from Blegium and Italy, through Hungary, into Russia.

 

 

LinkedIn Profile

I interviewed Tom Boersma who discussed the state of the 3PL industry. He discussed that as demand drops and manufacturers continue to pull inventory back to their source plants, will 3PLs survive? 3PLs don’t have much room for cost cutting and base their rate structure and quotes on the cost of the building from the landlord, the cost of utilities and the cost of payroll. If they're lucky they see a 7 to 9% profit, so they are already running on very thin margins.

 

 

 

 

3PLs – In the past and present

 

 

Tom Boersma has worked in the supply chain and logistics industry for 45 years, and has watched the third-party logistics (3PL) industry evolve from predominantly family-owned operations into regional 3PL services that were attractive to foreign logistics companies and investors, and that is when the industry exploded. There was a time, Tom said, when there was one major player in a given city, today there are as many as 100 to 150 different 3PLs in a major metropolitan area.

 

 

What Happens When Manufacturers Bypass 3PLs?

 

 

The recession caused many manufacturers to their pull inventories back to the source plant -- minimizing the throughput, if not totally eliminating the need for a regional 3PL warehouse or 3PL truck line. To be clear, Tom Boersma said he is strictly talking about the 3PL warehouse and trucking industry -- both asset-based or non-asset-based. In other words, warehouse and truck lines that are used by manufacturers to distribute their goods, regionally, on a timely basis.

 

 

Typically, Tom said, a manufacturer will have inventory strategically located in 12 to 15 locations that service the United States, including the northeast, the southeast, central states, the south, Chicago, the southwest, the northwest, and California. What he and his industry peers have witnessed is manufacturing firms pulling inventory back from those locations, in favor of shipping direct to the customer -- essentially bypassing the 3PL warehouse network. Unfortunately, this is a trend Tom Boersma doesn't see changing until the dollar inventory investment   decreases, either by borrowing money, or by reducing the cost of materials wrapped up in finished goods.

 

 

To make his point, Tom laid out this scenario and follow-up question, "If you have a manufacturer based in Chicago, they’re shipping direct from Chicago to LA, Chicago to Dallas, Chicago to Atlanta, and probably on a Less Than Truckload (LTL) basis, is the increased cost of transportation small enough to offset going through a warehouse where they would once ship full truckload into a warehouse in Atlanta, for example, and then distribute into the entire southeast, reaching as far south as the Miami market?"

 

 

Tom also wonders what his scenario means in terms of customer service? A manufacturer in Chicago, for instance, would typically keep inventory in Atlanta just in case Chicago experienced a blizzard and couldn't ship --  with one call or email to its 3PL warehouse in Atlanta, products would ship without interruption to service. "When manufacturers break away from this regional concept of using 3PL warehouses," Tom said, "you’ve got the cost of dollar inventory, you’ve got the increased cost of transportation and you’re more vulnerable to service failures."

 

 

Running on Thin Margins

 

 

With a decrease in demand, manufacturers are having to do whatever it takes to cut costs and survive, but for 3PLs there isn't much room for cost cutting. 3PLs, Tom said, base their rate structure and quotes on the cost of the building from the landlord, the cost of utilities, the cost of payroll. If they're lucky, he says, they will see a 7 to 9% profit, so they are already running on very thin margins. Reducing costs is all, but impossible for 3PLs.

 

While he admits that it may a stretch, Tom Boersman says 3PLs could consider broadening their service offerings to include producing products from raw materials for manufacturers -- leveraging those same strategic locations their clients once used as warehousing into "sub-manufacturing" locations -- or perhaps getting into labeling, or something along those lines  to make the business more viable.

 

 

The cold, hard truth is there is very little a 3PL can do to influence a manufacturer's decision to pull back on inventory. In this business environment, if a manufacturer has inventory spread out across the United States that isn't selling, or is perhaps only turning twice a year, when it used to turn nine times per year, it is essentially duplicate inventory that is costing the company money. Pulling inventory back to the point of manufacturing allows manufacturers to keep fresher inventory in smaller quantities that can be shipped on an as-needed basis. The question remains, however, does the increase in transportation costs merit the change?

 

 

The Empty Space Phenomenon

 

 

As he looks at the big picture, Tom Boersman is struck by the empty industrial space phenomenon he is seeing in nearly every major metropolitan area in the United States. Money sources cut off, bankruptcies, builders going unpaid and walking away from new warehouse construction projects in various states of completion; 50 to 10-year-old warehousing properties sitting vacant; and news reports saying empty space in the industrial market will make the housing market foreclosure rate look like a slight slump. In Atlanta alone, Tom says, there is approximately 90-million square feet of vacancy.

 

 

"All these big boxes sitting vacant for years now," Tom said, "there will to be repercussions. Is it going to increase the cost of real estate to the 3PL survivors, or is this just going to be the lay of the land? There will be less space -- is that going to decrease the cost of space. I don't know."

 

What Tom does know it that things are  "tight all over." He also knows of several third-generation 3PLs forced to close simply because of inventories being pulled out. The food-handling and grocery sectors seem to be on safe ground -- at least for the moment -- but the rest of the industry, Tom says, is hanging on by a thread. From the mom-and-pops all the way up to much larger 3PLs, Tom Boersma says it is going to be hard to survive, but interesting to see what will happen to the industrial real estate market.

 

 

 

About Tom Boersma

 

 

Tom has worked in the logistics and supply chain industry for 45 years, which he breaks out as roughly 30 years in a 3PL and 15 years in a small manufacturing environment, predominantly on the operations and sales and marketing sides of the business.

 

LinkedIn Profile