1. Best Practices Consortium
Supply Chain
Best Practices Consortium
Outsourced Distribution Operations
and Value-Added Services
Executive Seminar
Track 2, Session G
September, 2006

2. Scope
This session covers strategies for distribution center (DC) outsourcing, pooled operation outsourcing and value-added services in order to achieve a competitive advantage.
Extent of Outsourcing: Number and size of DC operations outsourced, percent of volume outsourced, value-added services, use of inbound consolidation and outbound pool operations, trends
Outsourcing Process: Factors in outsourcing decisions, service provider bid packages and contract terms and conditions
Performance: Performance metrics, satisfaction levels with service providers

3. Extent of Outsourcing
DC Size (Square Feet)
Average Number of
DCs Per Response
Maximum Number
of DCs Per
Response
0K - 10K
11K - 50K
3.8 22
51K - 100K
0.5 3
101K - 200K 2
201K - 300K
0.7 1
301K - 400K
401K - 500K
> 501K
Number of DCs Outsourced?
The percentage of participating companies that have one or more outsourced DCs is 28%.
The average percentage of product or material volume processed by an outsourced DC is 36% of total volume.

4. Reasons Companies Decide to Outsource DCs
Peak season capacity, flexibility and improved service are the three biggest reasons for outsourcing DC operations.
Actual experience indicates that outsourcing is not always the best solution.

5. DC Outsource Contracts
A formal bid process with RFP is used by 88% of participants.
For those who formally bid outsourcing, 57% bid one facility at a time.
A typical bid event includes three to five service providers.

6. Pooled DC Outsourcing Volume
A majority of the volume processed at an inbound consolidation DC and at an outbound pool DC is in a facility shared with other companies.

7. Pooled DC Outsourcing Satisfaction

8. Your Expectations What would you like to learn from this session?
Important issues?
What’s working? What’s not working?
What’s changing?
Shared good and bad experiences?
Reasonable performance expectations?

9. Potential Discussion Points
What factors do you use for DC outsourcing decisions?
How do you measure the success of your service providers? Have you had performance issues with a service provider that caused termination of a contract?
How much technology support is required to effectively source DC operations? Which tools are the most effective?
What are your strategies and rules for sharing DCs with other companies?
To what degree do you outsource services compared to systems and technology and value-added services?

10. Potential Discussion Points (continued)
How many different service providers can you effectively work with at one time? Is your organization adequately staffed to manage the outsource relationships?
How do you determine what services to include in a bid package? How do you identify opportunities to shift more volume to outside providers? Do you bid inbound consolidation and outbound pooling operations differently than your DCs?
Is the performance of the outsourced operation better or worse than company owned and operated DCs?
What led you to use pooling operations for inbound and/or outbound? Is one more effective than another? What are your plans for using pooling operations in the future?

11. Important Takeaways
While there are many DC outsourcing takeaways in Benchmarking and Best Practices, some of the more important are:
Outsourced DC size – Outsourced DCs are smaller than company owned operations. Of the 28% of companies who have outsourced DCs, the average size is between 50K and 100K square feet .
Outsourcing decision making – Companies decide to outsource DC operations in order to meet peak season requirements, gain flexibility and improve service. Actual experience indicates service may not improve as much as expected with outsourcing.
Bid package – A large majority of companies use formal RFP bid packages and generally bid one facility at a time. The number of bidders is limited to three to five service providers.

12. Important Takeaways (continued)
Contracts – Contracts vary greatly in length, but the average contract is 3 years. Most contracts are set up with negotiated rates, financial incentives and commitments for minimum activity or volume. Fees are paid for handling, fixed fees or storage fees.
Pooled DC performance – On average, companies are satisfied with their pooled DCs in the areas of safety, insurance/ liability coverage, financial stability and responsiveness. Surprisingly, they were only somewhat satisfied on average with service providers in technology and management reporting.
Growth trends – Participants indicated that the trend will be towards fewer outsourced DC locations and no change in the level of service provided.

13. Questions?

14. Benchmarking & Best Practices References
Information on DC outsourcing strategies can be found in the following references: