Tight Performance: Holding Up Service Commitments

Ma r c h 2 0 0 9
A Penton Media Publication outsourced-logistics.com

Also in this issue:
Green Opportunities in Export Markets
Performance Based
OutsourcingSetting Better Goals
China Stimulus Boosts Yangtze Trafc
Modeling for Maximum Global Prot
Tight
Performance
Wins
Holding up service
commitments
Cover.Final.indd 1 2/17/09 2:54:47 PM
Untitled-1 1 2/17/09 2:35:32 PM
T
he announcement on January 26th of 45,000 jobs elimi-
nated at major US companies sent a shock wave across the
country, but in coming weeks it became just one more tremor
in the shaky state of the global economy.
Among the challenges businesses are facing as workloads
are repeatedly consolidated into a decreasing pool of resources
are the aftershocks these workforce reductions will cause.
Heres a story for our time. I talked to Mike Goldsmith
shortly after he formed KLS Logistics by walking into the of-
fice of his boss after repeated downsizing and saying, I think
I may be about to talk myself out of a job. His proposition
was to contract a number of internal logistics functions to an
outside firm. He said that knowing there would be less need
for his role if the company agreed.
He had a backup plan. He wanted to be the company that
handled that contract, and so KLS Logistics was born. His
phone line was barely installed when his former assistant
(already at another company) called in a panic. Someone had
taken the eliminate waste mantra
to heart and stripped him of
his transportation depart-
ment. I cant move any
freight, he said, I need
help.
Mike and I had that
conversation in 1988,
and both his former
company and that of his
first panicked caller are
still clients of KLS over
20 years later.
Ri ght now,
many logis-
tics de-
partments are busy managing reduced volumes and working
out what impact it has when your inbound containers drop
by two thirds. Its difficult to think strategically about network
optimization and global supply chain visibility when the group
responsible for tactical, day-to-day functions is gone. Despite
this chaos, the heavy expletives wont start until the second
half of the year when the full impact of the reduced staffing
becomes apparent. As Goldsmith observes, in very real terms,
it may be when carriers refuse to haul your freight because they
havent been paid and you suddenly realize the people who
managed freight bill audit and payment have left the building.
Thats also when the interest in outsourcing shifts from
strategic to tactical. But the decision shouldnt wait until you
are mired in expletives, dissatisfied customers and angry
suppliers. The time to build those tactical resources is now.
Dont wait for a full-blown strategic plan to be developed and
agreed to on multiple functional and management levels. By
their very nature, these functions are tactical, day-to-day and,
dare I say it, a bit of a commodity. Thats even more reason
to start planning. You want to apply the best resources, and
you wont have time to vet suppliers properly if youre acting
under duress.
Dont stop thinking and planning strategically. In fact, its
the perfect time to be doing both. Take care of the tactical de-
tails before they escalate into a major problem and use this time
to start developing a broader supply chain strategy and logis-
tics plan. Research the resources available and begin thinking
of how your updated network will look and function.
This economy is driving a fundamental change in the way
logistics will operate. The rapid and severe contraction will
eliminate a number of key players and a multitude of smaller
suppliers. The remaining resources, and the users who will
want to capitalize on an improved supply chain network
strategy, will be driven to a more collaborative approach. Col-
laboration will be a powerful tool for suppliers to balance risk
and for users to achieve substantial gains in supply chain ef-
ficiency. Necessity will break down old attitudes and open the
door for logistics to make a substantial contribution during
the remainder of the downturn and into the recovery.
And, even if Im wrong, youll still emerge from the recession
with more powerful tools and a stronger competitive position.
Dont let yourself wallow in the pain, focus on the gain.
Editorial
Tactical is Practical
Perry A. Trunick, chief editor,
perry.trunick@penton.com
Outsourced Logistics | March 2009 | 1
903LT1.indd 1 2/13/09 3:50:49 PM
6
Global Markets
Faster, Cheaper, Safer: Making Best Practice Legal
Community Voice
China Stimulus Boosts Yangtze Traffic
12
Operations
Credit Crunch Widens Appeal
of Outsourcing Fleets
Community Voice
Prosperity Depends on Infrastructure
35
Logistics Services
Collaborating on a Cure for Pharmaceutical
Distribution Ills
Community Voice
Mid-Market Companies Compete on an
International Scale
Features
18
Special Feature
US Environmental Firms
See Opportunities in Foreign Markets
There's a wide range of US government assistance
available at the doorstep of American businesses.
s
22
Cover Feature
Tight Performance Wins
Remaining a preferred supplier in a tight
economy means keeping the service
dominoes from toppling.
26
Operations
Heal Thyself
There are ten common ailments that
can be cured by Performance-Based
Outsourcing.
30
Field Report
Maximize Profit for Your Strategic
Global Manufacturing and
Distribution Planning Process
Global manufacturing and distribution
firms can optimize profits by modeling
the impact of currency, taxes and other
cost factors.
40
3PL File
Transplace
Departments
1 Editorial
Tactical is Practical

39 Classifeds
Advertiser Index
Mar ch 2009
Vol ume 2, Number 2
2 | March 2009 | Outsourced Logistics
30
March Contents.Final.indd 2 2/18/09 9:12:43 AM
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Untitled-5 1 2/17/09 2:42:20 PM
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Sales
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By Brandon Fried, Airforwarders Association
U
nderstanding that industries evolve at an ever
increasing pace is a lesson crucial to the success of
modern businesses. Most of the time innovation
and efficiency lead the way when the free market is left to
prevail. For example, in the 1970s President Jimmy Carter
deregulated several major industries such as the airline and
trucking industries, which resulted in lower prices and better
service.
But, despite valuable lessons from the past, the government
hasnt always kept up with commercial best practices. Thats
Global Markets
why it was a noteworthy shift in government policy
when Section 355 of the Duncan Hunter National
Defense Authorization Act (NDAA) for 2009 was signed
by President Bush in late October 2008. The new law
requires the clarification of conflicting government
regulations applied to freight forwarders, allowing
government vendors to operate by best commercial
practices. The new law is considered by many in the
industry to be a triumph for military vendors, personnel
and taxpayers.
The National Defense Authorization Act specifically
addresses conflicting regulations governing airfreight
forwarders that were making shipments of freight in the
48 contiguous states less efficient. The inconsistencies
were between Department of Defense guidance and the
Air Mobility Command Freight Traffic Rules Publication
5 (AFTRP 5). Some in government had interpreted
the Air Mobility Command publication to "require"
airfreight forwarders to ship cargo by air even when
it made little economic sense and contradicted other
governing regulations. However, the Department of
Defenses contract airfreight forwarders specifically
allows them to use motor and/or air carriers. This
mode-neutral, time definite delivery model is being
used successfully by the commercial transportation
industry but had not been embraced by the Air Force
Air Mobility Command when they assumed some
minor responsibility for freight forwarders in 1999.
Examining this case of contradictory regulations,
which resulted in vendor confusion and inefficiency in
shipping for the Department of Defense, offers tremendous
insight into the challenges of contracting with the US
government as a whole. For example, in many cases the
government has an immense amount of leverage over private
businesses and doesnt adhere to free market forces and
innovation due to an immense bureaucracy and a natural
resistance to change. The examples outlined below
demonstrate that industries dealing with the government are
more limited in their ability to compete and make processes
efficient. This is because it takes more time and pressure to
effect change in a restrictive regulatory environment.
A letter written by the Chairman and a Ranking Member of
Faster, Cheaper, and Safer:
Making Best Practice Legal
Global Markets.Final.indd 6 2/17/09 2:57:55 PM
charge for services performed rather than services requested on the
Bill of Lading. AFTRP 5 presumes that carriers should perform self-
audits on every shipment and provide rebates without anyone filing
a claim. Commercial best practices in every part of the industry show
that customers are only entitled to rebate of the service requested
if they file a claim. What is even more disconcerting is the fact that
carriers are legally restricted from paying any money for loss, damage,
or delay without the government filing a written or electronic claim. If
carriers were to comply with AFTRP 5 language, they would not only
run counter to commercial best practices, they would violate United
States law.
Businesses contracting with the government should therefore be
aware that the US Government has enormous leverage over vendors.
In the case of National Air Cargo, this was because the company
operated from day-to-day with no long-term contracts. Therefore, it
was entirely dependent on a continuing stream of individual shipment
contracts from the DoD. At the same time, under government statues
and regulations, an indictment based on the claim would immediately
and indefinitely preclude NAC from securing any new government
shipping contracts.
The Duncan Hunter National Defense Authorization Act was also
an important step in a more balanced government/vendor relationship
because it shows that the US Transportation Command recognizes
that the government saves money when it employs commercial best
practices. In this case, when it allows the commercial sector to select
the mode of transportation that makes the most economic sense and
meets mandatory delivery dates for government cargo.
Another important lesson is that it took shipper initiatives and
industry leaders such as The Air Forwarders Association, along with
the American Trucking Associations and other freight forwarders
to push the US Department of Defense to change the conflicting
regulations.
Other than the lack of regulations governing the financial industry
that many are blaming for the current recession, throughout history
we have seen that deregulation results in more efficient industry
practices. In addition to the ones mentioned above, other examples
are the telecommunications industry and the cable industry. Easing
up on regulations in each of these industries resulted in more efficient
companies.
I have confidence that the new administration, which has shown
a propensity to employ the most up to date technologies, will see the
value of best commercial practices and continue to deregulate other
aspects of government contracting. This change will likely result in
more effectiveness and savings for the government, which they will
hopefully pass on to taxpayers, something a struggling economy and a
government facing a ballooning debt could benefit from immediately.
the House Subcommittee on Readiness to the Under
Secretary Office of Defense for Acquisition, Technology
and Logistics noted a single example of these
conflicting regulations significantly increasing the costs
for a shipper moving freight for the Department. The
letter states the AFTRP requirement nearly doubled
the costs for one shipper moving freight [which]
resulted in an additional cost to the government of
$173,140 this amounts to approximately $250,000
in additional annualized costs to the taxpayer for this
one DoD shipper.
Take into consideration that the airfreight forwarding
industry as a whole was altering its shipping practices
based upon these conflicting regulations when dealing
with the government, and these regulations likely
resulted in millions of dollars of wasted government
funds that could have been used more efficiently.
However, the industry as a whole was attempting to
compete based on best commercial practices despite
these conflicting regulations. In the case of shipping
by air when it made little sense, some vendors in
the industry were ignoring the AFTRP 5 regulation
and going with best commercial practices when
determining their rates for the Bill of Lading.
Thats why a shockwave went through the industry
when a leading government contractor, National
Air Cargo (NAC), was hit with a claim filed by the
government related to the conflicting shipping and
billing regulations noted above based upon the
mode of cargo delivery and payment for carriage.
The company ended up paying a significant amount
of money to settle with the Department of Defense
without admitting any wrongdoing.
Despite going against best commercial practices and
Department of Defense policy, the US Attorney took
the position that air freight forwarders such as NAC are
required to transport cargo by air for at least some part
of the shipment. In many cases, this position could
result in a significant amount of waste. For example,
if you intended to ship something from Baltimore, MD
to Washington, DC, the regulation requires that the
cargo be flown for a portion of the trip even if it were
cheaper and faster to drive the cargo the approximate
39 miles. In addition, AFTRP 5 requires that vendors
Global Markets
DHL Opens a Life Science
Competency Center
Located in Carolina, Puerto Rico, the new facility
enhances DHL Global Forwardings abilities by offer-
ing services specifically to meet the shipping needs
of pharmaceutical, biotechnical and medical device
manufacturers.
Although DHL Global Forwarding has been serv-
ing the Puerto Rican market since 1958 with freight
forwarding services that include customs brokerage,
domestic air and ocean services, this 70.000 square
foot facility is the carriers first life sciences and
healthcare center in North America.
Archie Torrado, district manager for DHL Global
Forwarding, explains, This facility was specifically
designed to provide our customers with the highest
levels of service and to meet their increased demand
for facilities that offer high security, standardized
processes, a clean environment, and are regulatory
compliant.
DHL is developing Life Sciences Competency
Centers at select airports around the world at which
there are larger shipment volumes requiring spe-
cialized handling. At the Puerto Rican facility the
company will be adding temperature and humidity
control rooms during 2009 to the existing warehous-
ing space that incorporates the latest in technology
and security systems.
SAS and Lufthansa Cargo Make Tough
Cuts
SAS, the largest Scandinavian airline, will cease freighter busi-
ness. Lufthansa cuts cargo capacity 10%, reduces worker hours.
Scandinavian Airlines saw its revenues rise by 5.1% year over year in
2008, but it experienced an overall decline of $789 million that it at-
tributed to high fuel prices and the poor world economy, among other
reasons. Its new strategy, called Core SAS, not only calls for the reduc-
tion in cargo operations, but divesting itself of non-core companies and
3,000 employee layoffs, as well as a reduction of 5,600 workers due to
divesting itself of businesses and outsourcing some operations.
SAS will divest itself of Spanair and airBaltic, as well as Spirit, Air
Greenland, BMI, Estonian Air, Skyways, Cubic and Trust. It will fur-
ther streamline operations by reducing 10% of its short-haul and 18%
of its long-haul fleet. The goal of the restructuring is to save SAS $338
million over two years.
In addressing the reduction of its cargo capacity as the new year
began, Carsten Spohr, Lufthansas cargo chairman, noted, Demand for
airfreight capacities has fallen sharply, worldwide. The production halt
in diverse industries has hit the entire international logistics business
and especially the air cargo industry. After scaling back our freighter ca-
pacities, flexible adjustment of staffing capacities has become inevitable
in the Companys present situation. We are nevertheless confident that
we will be able to safeguard all jobs at Lufthansa Cargo.
The carrier has had a hiring freeze in effect since the middle of 2008.
In all, some 2,500 employees in Germany will see their work hours
cut. With these measures in force, the company feels it will be able to
safeguard all of its jobs. In December 2008, Lufthansa Cargo saw its
freight volumes decline by 21.4% year over year.
Lufthansas fiscal year results will be announced in mid-March.
Despite its rough December, the airline said that it expects to deliver
an operating profit of 1.3 billion, up from its previously announced
projection of 1.1 billion.
FedEx Opens Its New
Asia Hub
The $150 million facility is the largest FedEx
Express hub outside the US. Located on the
grounds of the Baiyun International Airport at
Guangzhou, China, the company will make it the
center of its operations in the Asian-Pacific area
for the next 30 years. At the opening, Michael L.
Ducker, president, International, FedEx Express,
said, The launch of our new Asia Pacific hub is
a significant milestone for FedEx and reinforces
our long-term commitment to this region.
The Guangzhou facility replaces the one
at Subic Bay. Although that will be decom-
missioned, FedEx maintains presence in the
Philippines where Manila and Cebu are integral
components in its AsiaOne network.
A first for an international air express cargo
carrier is the Guangzhou facilitys ramp control
tower that permits FedEx to manage and con-
trol movements of aircraft. The facility also of-
fers dedicated customs clearance.
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Mexico Cuts Tariffs to Aid
Manufacturing
Recession in the US has significantly reduced demand for exports
from Mexico. The country hopes lowered tariffs will help, in particular,
to support its maquiladoras.
Located close to the US-Mexico border, the maquila is a manufactur-
ing facility that imports components, assembles them and returns the
now higher value final product back to the originating country. Mexicos
finance minister, Agustin Carstens, explains that between 2009 and
2012 there will be reduced tariffs on 5,000 different classes of capital
goods and industrial imports. The measures are timely, he says, tak-
ing into account the difficult economic context we currently face.
Most currently available US government statistics indicate Mexico as
the countrys third largest trading partner in goods, behind Canada and
China. Through October 2008, Mexican trade in goods represented
10.8% of all US trade. Reports indicate that the US receives some 80%
of all of Mexicos exports.
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Untitled-4 1 2/17/09 2:40:23 PM
Global Markets
France Upgrades Its Ports
As the effort to privatize French port operations moves ahead, so do infra-
structure improvements.
Labor difficulties arose after the government announced its intentions of
privatizing container-handling operations at the countrys ports in January
2008. Some months of labor actions were undertaken that effectively dis-
rupted trade. Finally, after unions received assurances from new employers
that they would receive the same working conditions in private hands that
they had previously. While other workers have been employees of private
stevedores for more than 15 years, maintenance personnel and crane op-
erators had continued to be employed by the government, under the port
authorities.
Seven of nine French ports have or are in the process of improving infra-
structure, with particular emphasis on meeting new shipping requirements.
The ports are Bordeaux, Dunkirk, La Rochelle, Le Havre, Marseilles, Nantes-
Saint-Nazair and Rouen. Le Havre and Marseilles have already made invest-
ments in improving transport of bulk raw materialscoal and iron ore
answering needs for freight movement by containers and easing congestion
problems. These two ports have become the countrys main intermodal
interface.
In July 2008, a law was passed aimed at streamlining operations by open-
ing concessions, and allowing port management and development to be run
by private operators or through public-private partnerships.
In commenting on these recent moves, Olivier Cormier, president of
Invest in France Agency, North America, says, The government wants
to reinforce the competitiveness and productivity of French ports. This
means active significant investments ($586 million budgeted up to 2013)
and private operators to increase average annual traffic from 3.5 to 10 mil-
lion containers by 2015.
The Melodrama Ends as
Air France-KLM Joins
Relaunched Alitalia
The strategic partnership comes at a cost of
$427 million by Air France-KLM (AF-KLM), for which
it receives a minority stake in Compagnia Aeria
Italia, the new Alitalia (AZ).
After much declamation, coming together, going
apart, fear of total bankruptcy, threats of crippling
strikes, posturing by politicians, and fear of failing
financing, among other matters, the new AZ sees
the AF-KLM partnership as the best solution to pro-
viding the best possible service between Europe
and the rest of the world. Both British Airways and
Lufthansa had expressed interest in becoming an
AZ partner, but neither really came up with con-
crete investment proposals. AF-KLM now has 25%
ownership in AZ
The new AZ retained major assets of its old self
as well as merging with its Italian competitor, Air
One, which strengthens its domestic coverage.
International success is predicated on a multi-hub
strategy that will include Paris Charles-de-Gaulle,
Amsterdam Schiphol, Milan Malpensa and Rome
Fiumincino on an equal basis.
Looking forward to saving through synergies
over the course of the next three yearsmainly
through network optimization and revenue man-
agementAZ expects the amount to reach $951
million.
The agreement represents an important mile-
stone in the history of Italys flag carrier offering, as
it does, three great opportunities: growth for Alitalia,
increased competitiveness for Italy and an effec-
tive service for all Italian air travelers, according
to Roberto Colaninno, Chairman of AZ, and Rocco
Sabelli, CEO of AZ.
Jean-Cyril Spinetta, Chairman of the AF-KLM
Board, and Pierre-Henri Gourgeon, CEO of AF-KLM,
observe, In view of the many challenges facing our
sector, strengthened cooperation is more than ever
a necessity between carriers and we have now
made a further step towards this. We are very happy
with this extended partnership with the new Alitalia.
It represents a genuine growth opportunity for our
two airlines and our agreement is in the interests of
our shareholders, our customers and our staff.
A jolt of reality accompanied the new AZ on its
first day of operations, January 13, 2009. Airline
workers at Rome Fiumicino, Milan Malpensa and
Linate staged protests, causing delays and some
flight cancellations.
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Easing Cross-Border Freight Congestion
The US Department of Transportation (DOT) has signed agreements with
the States of Washington and California to undertake actions aimed at defus-
ing frustration for people and freight movements at the borders.
At the US-Canada border, the Cascade Gateway Project will use a number
of newer technologies to provide travel condition information and border-
crossing wait time to travelers and trucks using the Washington Peace Arch,
Pacific Highway, Lynden and Sumas ports of entry. Among the technologies
to be employed are sensors that will provide pre-trip and en-route wait times
at the ports.
Senator Patty Murray (Dem), Chairman of the Senate Transportation
Appropriations Committee, claims, With our economy faltering, its critical
that goods and products are moving efficiently through our Northern Border
crossings. This agreement takes innovative steps that will allow freight carri-
ers and drivers to make informed decisions that will reduce congestion along
the Northern Border.
At the Southern Border, a project in the San Diego, CA, area is aimed at re-
ducing congestion and wait times that can run to four hours for commercial
truckers coming into Southern California.
The project is a new port of entry, Otay Mesa East, to be located two miles
to the east of the existing Otay Mesa entry point.
C
hina mounted its own infrastructure investment
strategy to help counter some of the effects of the
global economic downturn, and the positive effects are
already being felt along the Yangtze River.
Accelerating investment in transport infrastructure
in Chinas interior has halted the recent sharp declines
in cargo throughput at ports along the Yangtze River,
according the latest official figures.
In January 2009, the major ports along the Yangtze
trunkline reported a year-on-year cargo throughput
increase of 5.7% to 80 million tons, the first monthly
rise since last August. Container throughput increased
19.6% to 550,000 twenty-foot-equivalent units
(TEUs), compared with 8% in November and 14% in
December.
This is impressive growth in the current climate,
said Ms Zhang Tingting, co-author of the investment
guide Yangtze Transport 2008: Accessing Chinas
Interior. Both the January 2009 general cargo and
container throughput growth levels are on a par with
the same month last year, when the global economy
was in much better shape.
According to statistics released by the Yangtze
River Administration under the Chinese Ministry of
Transport, cargo throughput reached 1.15 billion tons
in 2008, up 9.2% year-on-year. However, there was a
marked downturn in activity towards the end of the
year due to the impact of the worldwide economic
downturn. Throughput increased by 14% during
the first nine months, followed by zero growth in
September, and falls of 17% in October, 21% in
November and 30% in December.
Higher levels of government spending to construct
railways, roads, bridges and metros are driving the
demand for imported iron ore and construction steel,
two of the major commodities shipped on the Yangtze.
According to the recently revised blueprint for the
national rail network approved by the State Council at
the end of October, planned new lines for the period
up to 2020 will more than double from 16,000 km
to 41,000 km. In 2009 and 2010, work will start on
20,000 km of the new lines, including the Chongqing-
Guizhou and Guizhou-Guangzhou lines, two major routes that connect
the interior to the south coast.
Projects to improve shipping conditions on the Yangtze are also
making the river a more viable mode of freight transport, according
to Mr. Tang Guanjun, newly appointed director of the Yangtze River
Administration. Huge investments in developing the Yangtze in recent
years, involving dredging the waterway and modernizing the ports,
have made Yangtze shipping the backbone of the transport network for
industries along the riverbank and beyond, he said.
Detailed January commodity figures are not yet available, but
according to major iron ore-handling ports such as Zhenjiang, iron ore
volumes are picking up as steel producers add to their stockpiles to
take advantage of iron ore prices that have more than halved since their
July 2008 peak. Reconstruction efforts in the aftermath of the Sichuan
earthquake last May, sometimes involving the creation of entire new
towns, continue to drive demand for building materials such as sand,
stone and cement.
The single largest commodity shipped on the Yangtze, iron ore,
accounted for more than 20% of the total cargo throughput in 2008,
increasing 4.7% year-on-year to 210 million tons. Iron ore throughput
grew 22% in the first half of the year, before slowing in the third
quarter and falling by 17% in October, 28% in November and 38% in
December.
Coal and building materials, the second and third largest
commodities shipped on the Yangtze, followed a similar pattern.
Throughput of all the leading three commodities combined reached
557million tons last year, accounting for nearly 55% of the general
cargo total.
Similarly, container throughput during the first nine months grew by
nearly 31% but the pace slowed to 20% in October, 8% in November
and 14% in December. Over the whole year, throughput increased 25%
to 6.92 million TEUs, compared with 38% in 2007.
These slowdowns in the container sector are less pronounced than
in the export-driven ports along the coast. Throughput at Chinas
two largest ports, Shanghai and Shenzhen, fell by 6% and 15.7%,
respectively, in December, the sharpest falls on record. To a certain
extent, we are less affected by the rapid shrinking of foreign trade than
in the coastal ports because of continued robust domestic trade, said
Mr. Gu Qiangsheng, executive deputy general manager of Wuhan Port
Group. He believes, however, that it will take until May or June for
government efforts to stimulate consumer demand to be translated into
sustained and strong cargo growth.
Global Markets
Community Voice
China Stimulus Boosts Yangtze Traffic
By David Lammie, Yangtze Business Services
Flexibility and operational efficiency
When it comes to flexibility, private delivery fleets often
fail to deliver. Companies that maintain a private fleet must
plan and invest in capacity to support their peak shipping
seasonan investment they will pay for during off-peak
periods. For example, a company may need 40 trucks to
meet peak demand, but 35 trucks will carry the volume
for most of the year. Sizing for that peak leaves the com-
pany paying for five idle trucks during non-peak times.
Partnering with an outside provider, instead of paying
for 40 trucks year-round, that same company can pay for
the capacity it really needs.
To give companies maximum flexibility and efficiency,
a good DCC provider will perform an initial six-month
evaluation of the fleet to make sure it is using the right
equipment and the right drivers, and will continue to
reevaluate routes every six months to make sure they are
set up properly.
A private delivery fleet may find it is difficult to sell its
extra tractors and trailers if volume falls and expensive
to buy new ones if demand spikes. A DCC provider, on
the other hand, can right-size the fleet on a regular basis
customer by customer.
Even companies with a long history of managing their
own private fleets can benefit from the expertise of a
third-party provider. In the same way a manufacturing
company would optimize its production processes, a
DCC provider will leverage best practices from its entire
network and apply it to individual customer situations.
And a dedicated contract carrier arrangement can be
fully branded, just like a private fleet, right down to the
driver uniforms.
By Mitch Muehring
W
hen the going gets tough, savvy organizations
often turn to outsourcingfocusing on what
they do best while letting others handle the rest.
In light of the current credit crisis and global
recession, its no surprise that companies are once again focused
on outsourcing as a way to make the most efficient use of every
dollar. One area getting a closer look is outsourcing aging pri-
vate delivery fleets. Running those fleets can cost companies
tens to hundreds of thousands of dollars, making outsourcing
to a dedicated contract carriage (DCC) provider an increasingly
attractive option.
Among the benefits, outsourcing to a DCC provider can free
up credit and capital, provide greater flexibility and operational
efficiency while reducing liability and insurance costs. This frees
a company to focus on its core competencies instead of worry-
ing about transportation logistics.
Freeing up credit and capital
Surviving the current credit crunch is, perhaps, the most ob-
vious benefit to partnering with a DCC provider. For example,
companies may have trucks that are as little as seven years old
which may be showing their age or facing expensive upgrades
to meet new EPA emissions requirementsat a cost of around
$85,000. Alternatively, instead of buying a new tractor at an esti-
mated cost $90,000 to $100,000 or a new trailer at an estimated
cost $25,000 to $28,000, the company could invest that $85,000
in a piece of production equipment for its manufacturing plant.
Operations
A fleet operator makes the case
for outsourcing a private fleet.
Credit Crunch Widens Appeal of Outsourcing Fleets
Operations.Final.indd 12 2/17/09 1:38:51 PM
Peace of mind
Many companies choose to outsource fleet management
simply because they dont want the headaches and risks
associated with running their own fleet. Partnering with a
DCC provider allows managers to focus on their business
rather than deal with driver shortages, new engine tech-
nologies, emissions standards, or some new EPA ruling.
In tight economic times, having the peace of mind that a
companys business is operating as efficiently and profitably
as possible goes a long way. Its all about delivering smart
solutions for challenging economic times.
Mitch Muehring is marketing manager for UPS Freight,
the heavy-cargo division of UPS.
Liability, insurance and compliance
Companies still on the fence about whether to outsource their de-
livery fleets should consider three often overlooked, but costly areas:
liability, insurance and compliance. The cost of obtaining insurance
to start or maintain a private fleet can be prohibitive. Insurance
costs for a delivery driver are substantially higher than for someone
working in a manufacturing plant. And while many large companies
are self-insured, a single bad highway accident can quickly eat into
profits. Adding in the costs of keeping fleets compliant with industry
regulations further impacts the bottom line.
In short, there are several cost variables and unknowns associated
with operating a private fleet that can make business planning dif-
ficult. By outsourcing, a company removes those staff resources from
its payroll, saving on liability and workers compensation insurance
premiums. While a company still pays those costs indirectly through
a third-party provider, the expenses are leveled out and
much easier to predict and risk is transferred to the DCC
provider. Further, a DCC provider will keep a fleet in full
compliance with DOT and EPA regulations.
The right tools for the job
Last, but certainly not least, the changing technol-
ogy landscape impacts the ability to keep fleets current.
Staying abreast of the latest in transportation and logistics
technology is often a challenge for private fleets. A good
DCC provider will have the latest tools to track inventory
and build reports with up-to-the-minute sales informa-
tion, plus data-capture capabilities and signature capture
that add value throughout the supply chain. And since
they are in the business of managing fleets, a third-party
provider will be aware of new technologies and how to
apply them to a companys operations.
Credit Crunch Widens Appeal of Outsourcing Fleets
SEVEN
Signs that Your Company
Needs a DCC Provider
1. Older fleet in need of replacement
2. Underutilized equipment or high empty miles
(vehicles sitting empty in the parking lot)
3. High driver turnover/absenteeism
4. Need for metrics/reporting
5. Dynamic routing requires new technology and routing
expertise
6. Time sensitive delivery requirements not being met
7. Special handling/service requirements not being met
els of service to the America public.
Among the steps being undertaken by the
USPS is the reduction of 100 million work
hours. Some 27 million work hours were al-
ready reduced during the fiscal first quarter.
It will also consolidate excess capacity in the
processing of mail and transportation networks
while maintaining service levels. The USPS will
continue to offer new products and offer price
and volume incentives.
During the first fiscal quarter, the USPS re-
ported customer satisfaction results using a new
national standards rating process. For almost two decades
the Postal Service has outsourced the measuring of First
Class Mail service performance. Its new rating system is
more stringent, and as it explains, includes more than
850, three-digit ZIP Codes and, for the first time, includes
delivery tests and standards for International mail and the
classification of mail that large, commercial mailers rou-
tinely use. Most recent scores showed that 96% of First
Class Mail reached customers on time. Overall 93% of
customers gave the USPS the highest satisfaction marks.
Postal Service has a 9.3% drop in
mail volume in its first fiscal quarter,
October-December 2008. Preliminary
results for the US Postal Service
(USPS) indicate operating revenues
of $19.1 billion for the quarter year
over year, a decrease of $1.3 billion.
There were 5.2 billion fewer pieces
of mail handled. For example, First
Class Mail volume was off by 1.8 bil-
lion pieces and Standard Mail by 3.0
billion pieces.
With retail sales, employment and investment spend-
ing projected to continue their downward spiral, the
USPS is projecting volumes to be down between 12-15
billion pieces for the year. Such a decline could mean a
net loss greater than 2008s drop of $2.8 billion.
In discussing these losses, Postmaster General John
Potter, said, We are taking bold steps to cut costs imme-
diately. At the same time, we are examining, realigning
and streamlining our business to address longer-term
financial pressures while continuing to provide high lev-
Operations
N
e
w
s

B
r
i
e
f
s

M
a
r
c
h

2
0
0
9 US Postal Service Loses $384 Million
Adam Aguilar, Dana Burleigh, Mick Noce and Brian Alexander
of Unyson Logistics, A Hub Group Company
center represents a 103% increase in capability over
the previous center. Services offered customers are
expertise in import and export, pick-up requests,
tracking and monitoring shipments in transit, and
information about DHLs products and solutions.
Opening of new centers in Mexico is part of a DHL
Express $112 million 5-year strategic investment
plan. In addition to building a $4.5 million hub in
Panama, the express carrier has opened a gateway
facility in Montego Bay, Jamaica. Over the next two
years, DHL Express will spend $200 million in Latin
America to upgrade its operational capacity.
During opening ceremonies at the new Mexican
facility, Roger Crook, CEO of DHL Express
International Americas said, Our commitment to
the region remains strong and, although we realize
the current challenges in the global economy, it is
important for DHL to foster and establish a solid base
that will enable commercial trade in the region today,
tomorrow and in the future.
The new $6.2 million facility at Mexico Citys
International Airport combines an advanced logistics
gateway with a customer service call center. The
company says that through its use of advanced
technology and automated systems at the facility it
is the first smart gateway in Mexico and the only one
able to inspect 100% of all imported shipments with
its advanced X-ray system. The center is able to handle
100,000 shipments per month.
Technology at the gateway includes a mechanized
system for sorting shipments and equipment that
automatically classifies and sorts pieces according to
their declared value. The facility has the capability to
simultaneously unload three air shipment containers,
with the ability to unload 25 pieces per minute per
containerthats 1,500 pieces per hour.
The customer call center handles 18,000 calls
each day and provides proactive tracking for more
than 40,000 shipments. DHL claims that 93% of
incoming calls are answered within 15 seconds. The
Operations
DHL Express Expands Its Mexican Infrastructure
To their shipper-clients, the carrier procurement professionals at Unyson
Logistics are LTL heroes. Theyve harnessed the power of SMC
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16 | September 2008 | Outsourced Logistics
Prosperity Depends on Infrastructure
Operations
Community Voice
W
hile policymakers and pundits focus on the financial
meltdown, another crisis is brewing in the US: Our
infrastructure system is silently deteriorating.
We have experienced over 500 bridge failures since 1989
according to one recent study. This in addition to the banner-
headline-making events like the aftermath of Hurricane Katrina
where levee failures destroyed swaths of New Orleans, the tragic
I-35W bridge collapse of August 2007 and further levee breaks in
the summer of 2008.
We must overhaul the broken systems that have led us to
this pointand we dont have a moment to lose, says LePatner,
co-author of Structural & Foundation Failures and author of
Broken Buildings, Busted Budgets: How to Fix America's Trillion-Dollar
Construction Industry.
We all know the nations vast infrastructure problems cannot
be fixed overnight. However, by aggressively moving toward a
solution nowrather than applying a series of ineffective band-
aidswe can begin to make real improvements that will benefit
our country for generations to come.
Tackling our critical transportation and infrastructure prob-
lems will require a national commitment and a strategic plan that
should include the following solutions:
Create a national clearinghouse and database, accessible to
every state transportation agency and the general public. The da-
tabase will identify all design and construction issues affecting the
nations infrastructure. There is a precedent in the Federal Aviation
Administration. The aviation industry receives alerts that immedi-
ately advise all airlines of problems with an aircraft and require
immediate attention before the aircraft can go back into service. A
similar database should be created to require the Federal Highway
Administration (FHWA) and the National Transportation Safety
Board (NTSB) to alert all state transportation departments of any
bridge failure in the nation and include methodologies for reme-
dial design as well as alerts for maintenance problems for all of
Americas 600,000 bridges.
There is already evidence that making infrastructure problems
public can lead to protective measures. In May 2008, nearly a
year after the collapse of Minneapolis I-35W bridge, Minnesotas
Department of Transportation (MnDOT) closed the Winona
Interstate bridge because inspectors had documented rusted and
corroded gusset plates in 2006 and 2007. The bridge had not
been closed until federal officials identified defective gusset plates
as the potential cause of the I-35W disaster. Equally important,
MnDOT officials had no prior knowledge that a failure of gusset
plates similar to those they experienced on the I-35W bridge had
occurred over the Grand River in Ohio in 1996. By June 2008,
MnDOT announced that they would replace eleven major bridges
in the state, some with the same concerns about deteriorated gus-
set plates that had gone undetected.
State governments must do everything in their power to ensure
they have informed their citizenseither through hearings, press
conferences, or news releasesabout bridges that have received
structurally deficient ratings.
In addition, they should be obligated to develop a game plan
for correcting problems within six months of a bridges designa-
tion as structurally deficient. One in four bridges in the US
have been rated as either structurally deficient or functionally
obsolete. The public should receive annual updates on the reme-
diation progress.
We must also act to deal with the shortage of civil and struc-
tural engineers. The lack of these types of engineers on the staffs of
state transportation departments prevents them from adequately
performing the inspections critical to assessing the safety level of
each states bridges. State governments can and must recognize
the ability to reduce long-term maintenance costs rests with these
engineers valued experience.
Invest in advanced technologies that provide more accurate in-
spections. By the time cracks are visible in a bridges structure, the
costs for remediation have skyrocketed. Many of todays inspec-
tion techniques fail to detect cracks until they are visible to the
human eye. The FHWA has acknowledged visual inspections of
bridges are highly subjective and not totally reliable in detecting
cracks in critical structural elements before they become visible.
Technology exists to anticipate bridge remediation years before
rust, corrosion, and cracks in the structure appear. We just need
to fund states to purchase this equipment and train their inspec-
tors to use it. Enabling bridge inspectors to ensure precision and
objectivity in their evaluation process, allows us to catch problems
earlier when they are easier to fix, and save millions of dollars.
We need reforms to help us avoid runaway costs. Boston's Big
We cannot have a prosperous nation without
providing a safe infrastructure system, says
construction expert Barry B. LePatner.
NASSTRAC. Its how youll survive this economy.
For details, to register, to exhibit or sponsor, visit www.NASSTRAC.org
Gold Sponsors:
Silver Sponsor:
Logistics Conference & Expo
April 26-29, 2009 s Orlando, Florida USA
If youre responsible for transportation, you need to attend this event.
Find new ways to manage costs, streamline operations, and increase
the productivity of your supply chain.
s Connect with other transportation decision-makers.
s Expand your knowledge on industry issues.
s Build relationships with providers at the expo.
Closing Keynote
on Trucking:
Charles Shorty
Whittington
Chairman,
American Trucking
Associations
Opening Keynote
on Energy:
Mark Finley
General Manager,
Global Energy Markets
& US Economics,
BP America, Inc.
prominent as an advisor on business and
legal issues affecting the real estate, design,
and construction industries. He is author
of Broken Buildings, Busted Budgets:
How to Fix Americas Trillion-Dollar
Construction Industry. www.brokenbuild-
ings.com
tunity to improve our economy with the
great ROI of a better, safer infrastructure
system that will lead to a stronger nation.
Barry B. LePatner is the founder of the
New York City-based law firm LePatner &
Associates LLP. For three decades, he has been
Dig is the most expensive highway proj-
ect ever. Its original budget, set back in
1985, was just over $2 billion. In 2008,
it was revealed the real cost of the project
will reach $22 billion with a pay-off set
for 2038. According to one report, the
Big Dig has dealt a considerable financial
blow to the state of Massachusetts, taking
needed funds away from maintenance
and repair for the state's deteriorating
roads and bridges and forcing the state to
float more highway bonds and to go even
deeper into debt.
The construction industry is rife with
cost overruns and missed schedules. The
industry itself will have to be reformed
before we can start making progress in
repairing the nations infrastructure. An
essential part of that reform will come
from better contracts that would 1) be
based on 100% complete architectural and
engineering drawings and specifications,
2) include a fixed price for everything de-
signed and approved by the infrastructure
owner, and 3) apportion all the risks that
are expected during construction between
the parties.
The construction industry is the most
inefficient industry in our nation, where
the average project wastes as much as 50%
of the total labor cost. Establishing fixed-
priced contracts on large infrastructure
remediation projects will lead to savings
of billions of public dollars. When you
consider the huge numbers of projects
that must be completed in order to restore
Americas infrastructure, it is clear that
American taxpayers cant afford a business
as usual mindset anymore.
The current financial crisis has focused
attention on what the nations priorities
should be. Repairing the nations infra-
structure should be one of those top pri-
orities. After all, we cannot have a pros-
perous nation without providing a safe
infrastructure system for our citizens and
businesses.
An added bonus is that every $1 billion
in infrastructure spending is estimated
to create 47,000 new jobs. By taking the
steps necessary to tackle our infrastruc-
ture problem now, we have an oppor-
903LT12-17.indd 17 2/18/09 9:24:21 AM
US
Environmental
Firms See
Opportunities
in Foreign
Market
W
ith the global environmental technolo-
gies market expected to reach $900
billion by 2010, US environmental
firms continue to seek diversifica-
tion by exploring new sales
opportunities abroad, sup-
porting American jobs. What many businesses
dont realize, however, is that when it comes
to exporting, they dont have to go-it-alone.
Theres a wide range of US government ex-
port assistance available at their doorstep.
Outsourced Logistics recently discussed some
of the opportunities and challenges of sell-
ing to world markets with Bill Cline of the
US Commerce Departments Commercial
Service. Cline heads the International Trade
Administrations (ITA) Environmental Team of
global trade specialists.
Special Feature
Green Feature.Final.indd 18 2/17/09 1:49:13 PM
Q: Any specific projects of note, foreign
government initiatives, etc., that are creat-
ing opportunities for US companies?
A: Recently, the Kuwait National Oil Company has been
issuing numerous tenders, from remediation technologies
to pipeline inspection services. China also continues to
grapple with drinking water supplies and wastewater treat-
ment, as does India. Australia remains keen on desalination
and Indonesia seeks to develop its geothermal resources.
To receive regular updates on new projects and oppor-
tunities, Id suggest subscribing to our e-Market Express
service-free monthly notices on trade events, opportuni-
ties and news at www.buyusa.gov/eme/enviro.html.
Q: What are the challenges for US environ-
mental firms in selling environmental tech-
nologies internationally?
A: Lax environmental enforcement is an issue in many
countries. To the extent the environmental market is
driven by public policy, and the public sector is the pro-
curer of services and products, lead time is surely another
challenge. It can be months, even years for a project or
procurement to finally come to fruition.
Another issue is partnering. Many of our clients are
small and medium-sized firms. They need to find ap-
propriate partners, whether thats joining forces as a
sub-contractor with the big multi-national general on a
project, or finding a local distributor or strategic partner
to team with. Partnering is often fluid, ever changing. The
partner for one bid opportunity is not the logical one for
the next. These are challenges faced by businesses in our
sector. The US Commercial Service and Environmental
Team members offer the means to help meet these chal-
lenges, whether its through our background check ser-
vice-our International Company Profile-or through our
partner-find services like the Gold Key Matching Service
or International Partner Search.
Q: Global climate change is becoming a
bigger priority. Do you see any trends in
this area with regards to environmental ex-
ports?
A: We see a marked increase in the number of compa-
nies attracted to our trade missions. Last September, we
led a delegation of 19 US businesses to China and India
on a clean tech mission. On our upcoming trade mis-
sion to Croatia, Italy and Greece, weve expanded our
Q: Given the current world financial
situation, how are US environmental
companies faring when it comes to
exporting? Are they cutting back, or still
pursuing international markets?
A: Judging from interest expressed for our programs
and services, interest remains high. We are currently see-
ing demand for participation in our trade mission to Italy,
Croatia and Greece, for example. Participation in key
industry trade shows-both domestic and international-
remains strong. Also, with the high-level focus on green,
there appears to be a sense of optimism in the sector.
Overall, US companies understand the importance of
market diversification to the bottom line, and are working
to adjust to the economic situation by being flexible with
buyers, putting customers in touch with financing and
other resources to help complete sales, and ramping up
service and personal relationships with customers.
Q: Are there certain areas of the world that
would offer more potential than others for
environmental firms seeking to export?
What are some of the key growth areas for
solid waste, water, remediation, and air
pollution technologies?
A: Interesting that you ask. One of our team members,
Erica Ramirez in Ontario, CA, just compiled a markets
overview matrix. China and India are two major markets
offering opportunities for US firms in these industries,
but demand exists worldwide. Leading opportunities for
solid waste technologies include markets such as Croatia
and Greece; and Europe and Latin America lead for water
pollution equipment. While Canada, Japan, Mexico and
Brazil have traditionally been among the key markets for
US air pollution technologies, our matrix identified other
promising markets, including Bulgaria, Hong Kong and
Colombia. The matrix is quite extensive and covers pollu-
tion control equipment, water resources equipment, wa-
ter treatment technologies and renewable energies. Its just
one example of the resources our Team makes available
to our environmental technologies exporters. For more
information, visit www.buyusa.gov/environmental.
US firms supply 80% of the market. Our
message is, if you can sell it here, you can
likely sell it abroad. Lets take a look and
see if we can help.
Q: What would be some of the
common mistakes that com-
panies make with regards to
exporting?
A: Yes, the attractiveness of the inter-
national pursuit may detract focus from
other needs that are also important to
the firm. A balanced approach is needed.
Another issue is financing. Too often,
it is the after-thought, ...ok, now how
do I pay for this... rather than knowing
your financing needs and incorporating
that into your quote/bid spec up front.
Another is trying to do it from behind
your desk, as I say. You have to travel to
the market, develop familiarity, take on
partners and learn the places you seek to
do business in.
Q: Could you give us some dif-
ferent scenarios as to how the
Environmental Team assists
businesses? For example, a
new-to-export company vs. a
more experienced exporter?
A: Its definitely NOT a one-size-fits-all.
We seek to customize our services to the
exact needs of each client. We may offer
our Gold Key Service to all, but even then
the focus is on the goal of each client. As
for new-to export companies, we offer ex-
tensive counseling and perhaps greater fo-
cus on domestic programs, services, activ-
ities and events first. For example, getting
the client to domestic trade shows where
they can be introduced to foreign buy-
ers or our own US Commercial Service
representatives from our Embassy and
Consulate offices abroad. For more ma-
ture exporters, we are involved at a higher
level, assisting them with background
checks on potential new foreign partners
or buyers, mobilizing them for participa-
Q: Are there any misconcep-
tions about exporting that
your Environmental Team sees
among business clients that
come to you for assistance?
How about among new-to-ex-
port companies?
A: Perhaps now, the biggest myth re-
cently has been that environmental regu-
lations will be sacrificed in the face of this
economic climate. We have seen noth-
ing to suggest that at all. Indeed, the ap-
proach to securing our economic future
by development of the green economy
seems rather the reality, a global theme. As
for new-to-export companies, its getting
them to make the move. Only about 40%
of the global environmental technologies
market is in the United States. Of that,
sectors covered to be sure to include clean
tech due to the overwhelming interest in
those markets. That mission is fast ap-
proachingMarch 30 thru Apr 4. Theres
also the COP15, the UN Climate Change
Conference scheduled for December
2009 in Denmark. The program for
Scandinavia also covers the renewables
and clean tech area and were seeing
strong demand for participation in that
event. Additionally, climate change con-
cerns are creating expanded opportunities
for traditional environmental industries.
The Office of Energy & Environmental
Industries has recently released a com-
petitiveness report highlighting potential
benefits for the air pollution control sec-
tor, for example. That report is available at
www.export.gov/envirotech.
Contact the Environmental Team
US firms looking to increase their bottom line by making new sales abroad
can benefit from the export services and programs of the International Trade
Administrations Environmental Team. As part of ITA, the US Commercial Service
provides a network of 1700 trade specialists in
more than 100 US cities and American embassies
and consulates in 80 countries, offering a number
of export programs and services. In addition, ITAs
Manufacturing and Services industry specialists help
US environmental companies address issues related
to market access for foreign markets, competitiveness,
proposed domestic regulations, industry statistics,
and interagency assistance. Together, these resources
enable environmental exporters to benefit from a range of services, many at no cost.
These include:
Export counseling
World-class market research
Trade events that promote products or services to qualified buyers
Introductions to international partners, including pre-screened business
appointments abroad
Market access, counseling and advocacy
Policy issues
Capacity-building in developing nations
Environmental trade trends and analysis
For more information, contact the Environmental Team at www.buyusa.gov/
environmental. Visit the nearest US Commercial Service office at www.export.gov
or call 1.800.USA.TRADE.
Special Feature
open and transparent way and frankly,
graft and corruption at foreign ports can
be an issue. Not often but when it hap-
pens to you.....well.
For example, a client called asking why
its product had been delayed for three
months at a foreign port. The buyer/im-
porter was too embarrassed to admit he
was being shaken-down. Once they let
us know an unexpected inspection fee
was all of a sudden required, a phone call
from our embassy to that customs service
resulted in virtually immediate release.
We cant promise that sort of response all
the time, but we can try. Attention upfront
to terms and conditions of sale, logistics
and documentation, and doing homework
on your destination market are imperative.
These too are areas the US Commercial
Service can advise its clients on.
tion in foreign trade shows and missions,
and organizing our "single company pro-
motions" for them, or undertaking ten-
der advocacy (bid) or trouble-shooting
services.
Q: Could you discuss the physi-
cal movement of environmental
products to foreign countries,
what are some different sce-
narios and challenges?
A: A lot of our environmental clients
end up doing work in very remote areas
of target markets. For example, a wind
power clients products are intended for
emergency and disaster relief areas, or
to serve mining camps, remote, off-the-
grid. Its not just the typical challenges of
getting the item to port, but once there,
getting it to where its needed. Not all
countries, shall we say, operate yet in an
Bill Cline of the US Commerce
Departments Commercial
Service.
New Mexico Company Finds
Success in World Markets
For a company improving the quality of water around
the world, its essential that its products and equipment
are in the right place at the right timea logistical feat
that often depends on the expertise of the distribution
partner and the freight forwarder.
I think one of the largest challenges weve experienced
has been finding the right kind of freight companies and
broker agencies, said Ioana Engstrom, vice president
of international market development for MIOX Corp.
Establishing a relationship with a new distribution
partner can present difficulties as well. The challenges
have come in understanding costs and who takes
ownership of what.
MIOX is an Albuquerque, NM, manufacturer and
distributor of water disinfection systems for potable
water, wastewater, commercial swimming pools and other
commercial and industrial applications.
According to Engstrom, US Commercial Service
Environmental Team members have been instrumental
in helping to identify the best distributors. For example,
MIOX was recently put in touch with a French distributor
that was experienced in Europes water industry.
The connection has since led to talks on creating the
companys first joint venture, MIOX Europe, which would
help them more quickly penetrate the European market.
Altogether, were now selling to more than 30
countries, she said. Through targeted US Commercial
Service export counseling, trade events, market research,
and pre-arranged Gold Key business appointments in more
than a dozen countries, weve been able to attain a higher
level of export sales that might otherwise have taken us
much longer to achieve.
Engstrom says that exports now account for more
than 20% of MIOXs total sales and, over the years, have
supported the addition of new staff at its headquarters.
She says that internationally MIOX has not yet felt the
impact of the current economic climate, beyond one
customer delaying an order for a few months.
Market diversification has been a core strategy for our
company and will continue to be in the future, as it helps
us weather changes in the global economy, she said.
In fact, we are looking at the international market as an
excellent place to be right now. What were offering is not
a luxury; its a necessity, without clean water you die.
Engstrom advises other companies interested in
exporting to Go get your US Commercial Service officer
in your region and use every program available. Take
advantage of these services, theyre your marketing arm.
Tight
Performance
Wins
orders to measure shipment performance levels takes on
a new, heightened importance for supply chain execu-
tives. Lower consumer demand and capital constraints
have an increasing number of companies slimming
inventories. This, in turn, makes exacting service perfor-
mance even more of an operational imperative.
In light of these heightened demands, the supply
chain execution solutions space (transportation and
warehouse management systems) is on the rise. That
technology/service sector was performing strongly and
is bullishly forecast for future growth, according to a
November 2008 report by Gartner Inc. With constant
pressure to squeeze supply chains, its becoming in-
creasingly clear how important it is to meet required
service levels with solid and consistently repeatable
performance, and track service levels in such a way that
By Matthew Menner
D
emand driven and service focused
suppliers are winning and keep-
ing customers. Achieving customer
goals requires close, careful mea-
surement and monitoring and fre-
quent adjustments to operations.
In an economic climate where even the healthiest
companies need to be more cost conscious, monitoring
Cover Feature
Performance Final.indd 22 2/17/09 3:00:13 PM
Remaining a preferred
supplier in this tight
economy means
keeping the service
dominoes from toppling.
at the right time, it is imperative service performance
metrics are developed at a detailed level and reviewed on
a regular basis. Data, converted into information, is an
extremely valuable and powerful tool. In order for this
to occur effectively, as many parties within the supply
chain as reasonable need to gather and agree on perfor-
mance standards. They all must understand the current
benchmark performance and how these measurements
were derived. And, moving from the data perspective,
it is imperative to understand, as deeply as possible, the
service performance variables and how they act and be-
have given certain changes within the supply chain that is
being analyzed.
A good place to start is in collecting data, analyzing it,
and applying it meaningfully to improve supply chain
practices and change sub-standard behaviors. Next, com-
panies should consider deploying a continuous improve-
ment framework, as service performance is achievable
only for a short time unless something like a Lean Six
Sigma (LSS) approach is applied to change outcomes
positively and consistently over time.
For those who are challenged for capital to develop
deeper capabilities, the companies that provide transpor-
tation management services and logistics technology have
the ability to share a plethora of information via robust on-
demand dashboards, gauges and reports. These reports
track shipment information and contain the critical data
that allow analysis and review of key performance levels.
Additionally, those companies can typically work with us-
ers to develop specialized reports to analyze performance
metrics, provide a detailed and proactive view of all ship-
ments, as well as pinpoint potential service violations that
may occur prior to delivery. The reports identify where
the problem occurred and what actions should be set in
motion to remedy the problem.
companies can further improve and reap cost savings
while positioning for future revenue growth with their
customers.
But there are still more compelling reasons to monitor
performance levels. One area to improveand where
manufacturers and their customers typically incur addi-
tional costsis when performance requirements are not
met. This can have a domino effect where the customer,
say a retailer, may decide to reduce shelf space allocated
to that manufacturers product line or seek private-label
alternatives where they can control the service perfor-
mance more directly.
Information Equals Insight
With so much pressure on manufacturers and retail-
ers to have the right amount of product at the right place
tion and feedback that come with the
role can be shared among the team. The
on-site customer service manager also
develops a better understanding of the
companys culture and inner-workings,
and ultimately what drives the custom-
ers business.
In todays market, where service is
a top priority, shippers that have the
flexibility to adjust to meet high per-
formance levels are the ones that will
succeed in both good and bad economic
times. Close collaboration with custom-
ers such as setting frequent meetings to
review data, stationing a key associate
on-site and heading off problems before
they get out of control are just a few ways
to ensure predictability and boost perfor-
mance metrics.
A High Performance
Example
A leading consumer packaged goods
manufacturer has a simple mantra:
Service to customers prevails above all.
This Fortune 500 company realized the
importance of implementing some of the
concepts described here and had the fol-
lowing goals in mind:
1. Become more demand driven.
2. Improve planning and collaboration.
3. Assure capacity in a volatile market.
4. Effectively manage risk.
This manufacturer is focused on in-
vesting in transportation technology and
managed services to improve its sense
and respond abilities on the demand
side. This was and continues to be ac-
complished by working with key cus-
tomers and getting store-level demand
data. The company was able to improve
its responses to improve what is com-
monly referred to as the customer bill of
rights, namely, having the right inven-
tory at the right place and right time.
From there, the company combined
effective execution practices and close
collaboration to improve and strengthen
pected actions/outcomes in the transpor-
tation management system is also a good
option. Such signals can alert companies
accepting loads to on-time pickup, ship
and delivery issues and other factors
they need to deal with to boost on-time
percentages and standing with the cus-
tomer. Many companies measure success
according to meeting the customers first
delivery date each and every time and
signals help companies discover why
they might not be meeting those require-
ments. In the same vein, supply chain
predictability is another crucial building
block for creating a successful partner-
ship with retailers. Enabling a customer
to focus on their core competencies frees
up their time to be more strategic and
positions the manufacturer as a valuable
partner.
On-site associates
Another opportunity that can drive
improvement across a series of perfor-
mance metrics is derived from putting a
customer service manager on site with
the customer. The improved collabora-
Results of on-time
performance
When shipments are consistently de-
livered on time, manufacturers begin to
establish a reputation of predictability,
which can lead to an invitation to join
a retailers preferred supplier network.
From there, further opportunities exist in
being viewed as a strategic partner that
can contribute by improving their bot-
tom line through enhanced operational
efficiencies. To reach this level of high pre-
dictability, shippers should align their per-
formance scorecards with their customers
goals and set up meetings regularly with
the objective of assessing opportunities to
reduce avoidable costs and address linger-
ing performance gaps.
After comparing and aligning score-
cards, turning data into actionable intel-
ligence is key. Data fosters improved
communication, visibility and potential
collaboration into purchase orders and
shipment pickup and delivery. It also has
the benefit of providing 360-degree vis-
ibility into the supply chain.
Setting listeners or triggers on ex-
Cover Feature
Poor Retailer
Scorecards
Distribution
Support for
Promotions
Charge
Backs
Seasonal
Spikes
Direct-to-
Store
Delivery
Signs That You Need
the CPG Logistics Specialists.
Discover Kane is Able: third-party logistics specially designed
for consumer packaged goods (CPG) companies. Nationwide, our
integrated warehousing, packaging and transportation services
help cut your operating costs and improve service to your
toughest retail customers.
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companies already know: The people of Kane is Able are the
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relationships with its customers, ensur-
ing the right resources were devoted
to projects important to the customer.
Closer work with transportation ser-
vice providers allowed refinement of
bi-lateral capacity-to-volume commit-
ments. Finally, the company dealt with
any posed risk via quarterly financial
reviews of carriers. In doing so, it was
able to spot problems before they esca-
lated and work to resolve them.
The tangible results have yielded
improvements, such as:
1. Achieved 30% item out-of-stock re-
duction at the distribution center level.
2. Brought on-time delivery perfor-
mance level to 98%.
3. Received recognition by the one of
the largest retailers as a top supplier
twice within 18 months.
4. Reduced costs for expedited/pre-
mium freight dramatically over previ-
ous year.
5. Incurred zero delays at manufac-
turing facilities due to transportation
equipmentrelated issues.
Monitoring a companys per-
formance levels can have multitude
benefits for 3PLs, manufacturers and
retailers alike. By implementing strate-
gies to help manage shipments more
efficiently, shippers can increase their
predictability factor with faster, more
consistent on-time deliveries and reap
the benefits of becoming a preferred
supplier to its customers. And it all
adds up to positive impact to the bot-
tom linewhere every penny counts
in this current market.
Matthew Menner is senior vice presi-
dent, sales and alliances, for Transplace.
Transplace describes itself as a lead lo-
gistics provider. It serves a number of
customers across a variety of industries,
offering third party logistics, freight ser-
vices and supply chain consulting. www.
transplace.com
There are ten common ailments that can be cured by Performance-
Based Outsourcing. The authors of a new book offer an introduction to
the discussion.
Heal Thyself
centives have unintended and undesirable effects that go
against the interest of those who established the incen-
tive. Perverse incentives by definition produce negative
unintended consequences.
A classic example is from Hanoi when a French pro-
gram paid people a bounty for each rat pelt handed in.
The program was intended to exterminate rats. Instead,
people began the farming of rats to collect the bounty.
How does the concept of perverse incentives relate
to outsourcing relationships? Our research has exposed
10 of the most common issues we often refer to as dis-
Excerpted from an upcoming book
by Kate Vitasek and Mike Ledyard
N
o matter why a firm outsources, almost all have room
for improvement. Outsourcing deals have often been
structured with fundamental flaws in the business model
and the relationship. The flaws result in either direct
negative behaviors or unconscious behaviors that drive
unintended consequences. These inherent flaws are analogous to toxins
that cause disease or illness. These flaws in how companies structure
agreements lead to what is known as perverse incentives. Perverse in-
Operations
PBO.Final.indd 26 2/18/09 9:17:10 AM
notice they would not longer manufacture their products and eventually
went into bankruptcytanking what was once a successful and profit-
able $1 billion firm.
Organizations that have this disease are the ones that give outsourcing a
bad nameand should not be outsourcing in the first place. Their myopic
focus might have good short term payoffs, but this approach has proved
time and again it does not pay to be Penny Wise and Pound Foolish.
The Outsourcing Paradox
Another trap that many companies fall into is developing the perfect
set of tasks, frequencies and measures. The experts within the company
attempt to develop the perfect Statement of Work. The result is an im-
pressive document containing all the possible details on how the work
is to be done. However, this perfect system is often the first reason that
the company will fail in its outsourcing effort. Thats because its the com-
panys perfect system, not one designed by the provider of the services.
During a site visit to a 3PL that provides warehousing for spare parts,
we saw approximately eight people servicing a facility that on average had
less than 75 orders for spare parts per day. When asked why they had all
these resources for so little activity, the manager responded, that is what
the client company requires per our statement of workso I have staff-
ing at that level to meet the contract requirements.
We are continually amazed to find that companies have chosen to
outsource to the experts yet they define the requirements and scope of
work so tightly the outsource provider winds up executing the same old
inefficient processes.
The Activity Trap
Traditionally, companies that purchase outsourced services use a
transaction-based model where the service provider is paid for every
transactionregardless of whether or not it is needed. There is simply no
incentive for the outsource provider to reduce the number of non-value-
added transactions because a reduction of transactions would translate to
a reduction of revenue. Even if the outsource providers profit is a fixed
profit level, the typical outsource provider will
be penalized for investing in process efficien-
cies to drive costs down.
Perverse incentives also creep in. 19th
Century paleontologists traveling to China
used to pay peasants for each fragment of
dinosaur bone (dinosaur fossils) that they pro-
duced. They later discovered that peasants dug
up the bones and then smashed them into mul-
tiple pieces to maximize their payments.
On one recent site visit, we asked the
General Manager of a 3PL what the large area
full of orange tagged pallets was for. She
replied, Thats some of our customers old in-
ventory I need to move to an outside storage
facility. When we dug further we found out it
eases that sicken an outsourcing relationship. In some
cases, the disease can simply cause negative side effects.
In these cases, companies or outsource providers often
battle the effects on a daily basis, and simply learn how
to live with it. In other cases, the disease goes hidden
deeply within the relationshipand neither the pro-
vider nor the user may know they have the disease. In
the worst cases, the disease is so severe that it eventually
causes the death of the relationship, which causes the
company to either bring the outsourced services back in
house or switch vendors.
The first step to improve the health of your out-
sourcing relationship is to get the proper diagnosis.
Unfortunately many organizations that are involved in
outsourcing relationship dont always know they have
a problem. This article outlines the first 3 of 10 of the
most frequent flaws of outsourcing business models that
lead to perverse incentives.
Penny Wise and Pound Foolish
Too many companies profess to have an outsource
partnership but behind the scenes they focus solely on
beating up their service providers on price. The danger
in focusing on the cheapest offer is like anything else
you make tradeoffs in quality and/or service.
In one extreme example we witnessed a company re-
bid their transportation services every three months. In
this case, the company had churned through virtually
all of the top 20 suppliers over the course of a 5-year
period and were now forced to work with suppliers of
lesser quality.
Another company (referred to by their suppliers as
the 800 Pound Gorilla) decided to outsource all of
the manufacturing to allow them to focus on their core
competencies. They went
through several rounds
of extreme negotiations
to save the last possible
dime on a book of busi-
ness worth roughly $100
million. They awarded
the work to a $1 billion
outsource provider. The
problem? The outsource
provider bought the
business, and eventu-
ally could not sustain the
losses of handling the ac-
count. They gave the 800
Pound Gorilla a 30-day
PBO.Final.indd 27 2/18/09 9:17:17 AM
NOT about answering 95% of all calls
in 20 seconds versus 30 seconds
NOT about achieving quality defects
from 3000 DPPM to 3.4 (six sigma)
DPPMs from your contract manufacturer
NOT about ensuring that janitorial
service providers clean the toilets every
2 hours
and the list can go on and on.
PBO is a fundamental business model
paradigm shift in how the company that
is outsourcing and the service providers
do business. Unfortunately, many people
on both sides of an outsourcing rela-
tionship simply do not understand the
fundamental business model concepts
behind PBO. A common mistake occurs
when an organization thinks they have
a PBO because they have taken their
existing contract and simply added that
if service provider achieves the metrics
they are paid a bonus. This completely
misses the mark. PBO is a fundamental
business model paradigm shift in how
the outsourcing company and the service
providers do business.
The University of Tennessee and the
authors believe that PBO is a power-
ful strategy. We also feel that any com-
pany wanting to improve their relation-
ships should be able to have a sound
guidebook for helping them and have
therefore published this free book on
their findings, available at http://
PROResources.utk.edu
The University has also launched
a new class titled Performance-Based
Outsourcing: Buying Results, Not
Activities! offered as a three-day open
enrollment class at the University
of Tennessees Center for Executive
Education. (http://thecenter.utk.edu/
cms/Performance-Based+Outsourcing+
%3A+Buying+Results+/43.html)
placed in the kit. The contract manufac-
turer knew that the particular box design
was not efficient, but simply did what
they were told rather than proactively
offering solutions for an improved box
design, which could eliminate touches.
The Rise of PBO
With a better appreciation for a few of
the typical diseases that plague outsourc-
ing relationships, you are likely to ask
yourself Is there a better way? The good
news is that thought leading companies
have been challenging traditional out-
sourcing models for over 10 years. The
result has been an evolution to a next
generation outsourcing model we call
Performance-Based Outsourcing (PBO).
The heart of the PBO is the agreement
on what we term desired outcomes.
Desired outcomes explicitly state the re-
sults on which both companies will base
their outsource contract. A PBO partner-
ship clearly defines financial penalties
or rewards for not meeting or exceeding
agreed upon, desired outcomes. In a
PBO agreement, regardless of what is be-
ing outsourced, the outsourcing partner
has the ability to earn additional financial
value (e.g. more profit) by contractually
committing to achieve the desired out-
comes. Simply statedif the outsource
provider achieves the desired outcomes
(achieves results), it receives a bonus.
Note that it is important to understand
that PBO is NOT gainsharing.
The Mind Shift Change
of PBO
Its important to digest that PBO is
much more than doing an activity at a
higher level of service. For example, it is:
NOT about achieving 99% fill rate for
your warehouse provider vs. 95%
was product that was well over five years
old. At the rate it was moving, it would
last 123 years. We asked why they didnt
work with the customer to scrap the ma-
terial. The response was Why? I charge
$18 per pallet per month to store it. Id
lose revenue if I did that!
The next example comes from IT/Sales
Support. A large technology company
was transferring sales support activities
from one outsourced provider to an-
other. They found that the data required
to run certain reports was no longer cur-
rent, and the new data was being stored
in a new format in a different location.
This had not been made known to the
current provider, so the reports that they
had produced for the past five months
were, in fact, wrong. In a damage control
drill, the team also learned good news
and bad newsthe sales manager who
had requested this had been transferred,
and the new sales manager did not use
this (now inaccurate) report. But it was
still a required activity, and the outsourc-
ing company was being charged each
month to generate the report.
The third example comes from out-
sourced manufacturing. The particular
contract manufacturer performed final
kitting and assembly pack-out as a
value added service for their customer.
The customer had given the contract
manufacturer the Bill of Materials with
detailed instructions to use a specified
finished goods pretty box for the prod-
uct. Each kit had multiple parts orga-
nized in a box. The contractor needed
to assemble the box and then insert the
parts in an organized manner. To build
the box required the contractor to have
12 touches for which the 3PL charged
a flat fee per touch to assemble the box
carton and 1 touch for each item
Operations
The heart of the PBO is the agreement on
what we term desired outcomes
PBO.Final.indd 28 2/18/09 9:17:25 AM
812LT25_Mattech.indd 1 2/17/09 2:43:36 PM
Maximize Profit
For Your
Strategic Global
Manufacturing
And Distribution
Planning Process
manufacturing and distribution plans for the global sup-
ply chain of such a firm represents a formidable planning,
as well as organizational, undertaking. Moreover, to de-
velop and execute plans that are not only integrated, but
which maximize profits on a global basis presents a chal-
lenge of far greater magnitude.
The good news is that the methodologies and technol-
ogy to support integrated profit maximization planning are
well established, and the required resources are not exorbi-
tant. Further, this represents an area of terrific opportunity
for many firms because very few employ these techniques
in their current strategic and tactical planning processes.
A well-constructed and maintained decision support
system (DSS) represents a critical tool to facilitate coor-
dinated supply planning and execution. A supply chain
planning DSS typically has numerous components and
will vary significantly by firm and supply chain. For
global manufacturing and distribution planning, inclu-
sion of mathematical optimization models within a DSS
By Tan Miller
and Renato de Matta
I
n a recent article in the Journal of Business Logistics,
we presented a strategic planning methodology
for multi-national manufacturing and distribution
firms to maximize profits utilizing mathemati-
cal optimization models. Specifically, the article
demonstrated a practical approach where firms
could formulate integrated global manufacturing and dis-
tribution plans that incorporate the impact of exchange
rates, local taxes and intra-company transfer prices in
their planning process. This facilitates the development
of global production plans that truly maximize profits by
accounting for these factors plus the pertinent manufac-
turing and distribution capacities, costs and demands.
Here, we will provide a brief non-technical overview of
this approach. For more details on the methodology, see
the Journal of Business Logistics, Miller and De Matta, 2008.
We would like to acknowledge and thank the Journal of
Business Logistics (JBL) for allowing us to excerpt a lim-
ited portion of the original paper for presentation in this
article.
In a large firm with a presence spanning multiple
countries, one often finds an organization consisting of
many different manufacturing and distribution units.
Developing integrated strategic, tactical and operational
Field Report
Global manufacturing
and distribution firms
can optimize profits by
modeling the impact
of currency, taxes and
other cost factors.
Field Report.Final.indd 30 2/18/09 9:13:55 AM
echelon of plants, a single echelon of distribution centers (DCs), and
external customers. In this example, a global firm owns plants in a
number of countries. It also owns DCs in a number of countries, and it
has external customers in each local country where it sells its products.
Note that the firm may not have plants and/or DCs in every country
where it generates sales (i.e., the firm may export directly from one
country to external customers in another country).
In this model, the global firm has a home country of registry (e.g.,
the United States) and local affiliates in all other countries where it has
a presence. Presence may take the form of a number of different enti-
ties (e.g., a plant; a DC; a sales office and sales force; or an autonomous
operating unit with manufacturing, distribution, sales, finance and all
other attributes of a stand-alone company).
Plants of local affiliates/countries (and plants of the home country)
ship finished products to distribution centers of local affiliates around
the world. Distribution centers receive finished goods from plants and
subsequently ship products to the firms external customers. This flow
from the DC to the external customer represents the actual sale by the
firm to its paying customers.
As Figure 2 illustrates, the price or value of a unit of product increases
as it moves through the network. A plant in a local country ships (sells)
a product to another local affiliate (country) at an agreed upon price.
This price, at the minimum, includes the costs of production and distri-
bution, as well as a markup on the production and distribution costs of
the producing plant (country). This price, which also typically includes
additional cost components such as administrative overhead, represents
the transfer or intra-company price that a plant charges the local affiliate
to which it delivers the product.
After it acquires the product at an intra-company transfer price, a
local affiliate then sells this product to an external customer at the local
selling price. The difference between an affiliates acquisition price and
its selling price consists of the distribution, sales, and other costs of the
local affiliate, as well as a markup or profit margin that the local affiliate
adds to its acquisition and delivery costs.
In summary, the global profit maximization model illustrated in
Figure 2 evaluates and accounts for the incremental cost or value added
to a product from its cost as finished goods inventory at a plant to its
selling price to the firms external customer. In the model, the combina-
tion of all costs accounted for after production through delivery to the
external customer, (i.e., all costs added to the base production cost of
a unit of finished goods inventory), plus the markups on costs recom-
mended by the model, increase the product cost of a unit of finished
goods inventory at a plant to its ultimate selling price to the local ex-
ternal customer. The selling price to the external customer is an exog-
enous, pre-determined input to the model.
structure can represent the difference between a DSS that
provides information and a DSS that truly facilitates inte-
grated planning and execution.
Specifically, a global manufacturing and distribution
optimization model that includes all of a firms manu-
facturing facilities, distribution locations, transportation
routes and modes, and customer demands; can facilitate
the development, implementation, and maintenance of
globally coordinated plans and schedules. A cost minimi-
zation methodology represents the most common optimi-
zation modeling approach for integrated manufacturing
and distribution planning. Particularly in single-country
domestic applications or in environments where tax rates
in local regions do not represent major decision factors,
a cost minimization methodology can help formulate an
effective integrated plan. However, when planning flex-
ibility or alternatives exist because of differing local coun-
try tax structures and rates and because of intra-company
transfer pricing options, cost minimization methodologies
generally cannot identify profit-maximizing global pro-
duction and distribution plans. Instead, a profit maximi-
zation model that explicitly evaluates decisions such as
where to incur tax liabilities and how to set intra-company
prices may be required to develop the optimal, integrated
global manufacturing and distribution plan.
To provide additional perspective on the problem,
we consider a well-known hierarchical production and
distribution planning paradigm (Figure 1). Briefly, the
hierarchical production planning process stratifies manu-
facturing and distribution planning and scheduling ac-
tivities into three levels: strategic, tactical (which includes
annual) and operational. As Figure 1 illustrates, the meth-
odology we describe in this article supports the strategic
planning level, and has applications at the tactical level.
How does global profit
maximization work?
A global profit maximization model should evaluate the
trade-offs between factors such as production costs and
capacities, distribution costs, taxes, local country profits
and exchange rates. These evaluations and trade-offs
facilitate the development of an integrated global supply
chain production and distribution plan that maximizes
global profits. Figure 2 illustrates this process.
The figure depicts a basic network consisting of a single
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There are two markups on cost that create profit margins
and profits. These markups occur at the point of shipment
(sale) from the producing country to the receiving local
affiliate, and at the point of shipment (sale) from the local
affiliate to the external customer. The model recognizes and
evaluates the local taxes paid on the profits recorded by the
plant (country) selling to another local affiliate, and on the
profits generated by the local affiliate selling to the external
customer. The model utilizes the appropriate exchange
rates between local affiliates and the home country of the
firm to project the total global profit of the firm. Note also
that this modeling methodology can explicitly account
Field Report
References
Bitran, Gabriel R. and Arnoldo C. Hax (1977),
On The Design of Hierarchical Production Planning
Systems, Decisions Sciences, Vol. 8, No. 1, pp. 28-55.
De Matta, Renato and Tan Miller (1993) A Note
On The Growth Of A Production Planning System: A
Case Study In Evolution, Interfaces, Vol. 23, No. 4,
pp. 116122.
Hax, Arnoldo C. and Harlan C. Meal (1975),
Hierarchical Integration of Production Planning and
Scheduling, Studies in the Management Sciences,
M.A. Geisler, Editor, Vol. 1, Logistics, North Holland,
Amsterdam.
Liberatore, Matthew L. and Robert Nydick, (1998),
Decision Technology For Business Application,
McGraw-Hill Companies, Primus Custom Publishing,
Villanova, PA.
Liberatore, Matthew L. and Robert Nydick (2000),
Introduction To Decision Technology Modeling.
Software And Applications, LN Publishing,
Villanova, PA.
Miller, Tan (2002), Hierarchical Operations And
Supply Chain Management, Springer-Verlag: London.
Miller, Tan and De Matta, Renato (2008). A Global
Supply Chain Profit Maximization And Transfer
Pricing Model, Journal of Business Logistics, Vol. 29,
No. 1, pp. 175-200.
Raimondos-Moller Pascalis and Kimberly Scharf
(2002), Transfer Pricing Rules and Competing
Governments, Oxford Economic Papers. Oxford:
Vol.54, Iss. 2, p. 230.
Sahay, Savita (2003), Transfer Pricing Based on
Actual Cost, Journal of Accounting Research, Vol. 15,
177-192.
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to-warehouse to country (customer) as-
signments. In this tactical application, the
model assists in determining the global
plan that maximizes profit using existing
supply chain infrastructure
This methodology provides excel-
lent sensitivity analysis capabilities for
an integrated production and distribution
framework for developing global supply
chain plans for a 12 to 24 month planning
horizon. Typically, planners would run this
model once a quarter or every six months
to update production plans for each plant
and sourcing plans that recommend plant-
for cost factors such as freight duties,
insurance on freight, and other customs
charges.
Global operations plan
developed
This model generates an integrated
global operations plan that maximizes
the firms global after tax profits subject
to satisfying inventory, production capac-
ity and customer demand constraints.
The model develops a profit-maximizing
solution that takes into account manufac-
turing costs, distribution costs including
customs and duties, taxes and exchange
rate impacts. The plan maximizes the
after tax profits of plants plus the after
tax profits of markets which are based
on the product landed costs. The out-
put of the model includes a production
plan for each plant by production line.
Additionally, the model creates a global
shipping and sourcing plan that indi-
cates plant-to-market-to-customer assign-
ments. Finally, a model solution develops
recommended intra-company transfer
prices (i.e., markups) between plants and
markets, and between markets and cus-
tomers taking into consideration local
tax rates and foreign exchange currency
impacts.
We should note that a multinational
firm often has internal guidelines or poli-
cies regarding the range of markup per-
centages it will allow on transactions be-
tween its plants and local markets around
the world. In many cases, local coun-
try regulations also heavily influence or
dictate these corporate guidelines. The
methodology described can easily ac-
count for these types of constraints.
Applications
and benefits
In summary, there exist a number of
potential applications for the global profit
maximization model. We will briefly
highlight several applications which ad-
dress the strategic planning horizon, and
also discuss how our model can be em-
ployed for tactical planning purposes.
This modeling methodology provides
This methodology can also support
strategic decisions such as potential
changes in production strategies using
existing plants. For example, decisions
regarding potential shifts in production
of major products from one plant or set of
plants to others can be evaluated.
One can also address questions such as
the impact of duty drawback opportuni-
ties and local content type production
and distribution regulations.
There exist numerous other potential
applications of the global profit maximiza-
tion model. These few examples provide
a brief glimpse of the potential broad per-
spectives and applications that this type of
planning methodology can facilitate.
In this article, we have stressed that
the global profit maximization model ad-
dresses the strategic and also tactical plan-
ning levels. We believe that models such as
this can play a particularly important role
in guiding the overall operations of large-
scale manufacturing and distribution net-
works at these longer-term planning levels.
There are relatively few reported imple-
mentations of global profit maximization
models for large-scale networks. Thus, we
believe that the implementation of global
profit maximization models represents a
potentially significant unrealized oppor-
tunity worthy of serious consideration by
many firms. This methodology remains
heavily underutilized in private industry.
Further, as previously noted, the invest-
ment and resources required to develop
this capability within a firm are relatively
modest, and the potential return on invest-
ment is extremely high.
Tan Miller is Harper Professor and Director
of the Global Supply Chain Management
Program, Rider University tmiller@rider.
edu. Renato de Matta is Associate Professor
of Management Sciences, College of Business
Administration, University of Iowa renato-
dematta@uiowa.edu.
recommended production plan is. Do
production and sourcing decisions re-
main relatively constant over a wide range
of exchange rates, or do plans vary sig-
nificantly with relatively minor changes in
exchange relationships?
At the strategic level, the potential impact
of exchange rates or changes in local tax
policies on long-run plant and distribution
center location decisions can be evaluated.
both tactical and strategic planning.
Specifically, planners can employ these
models to evaluate the impact of potential
changes in exchange rates and local coun-
try taxes on medium and long-term plans.
Examples include:
At the tactical level, once an initial
global plan is developed, the model can
be run with alternative exchange rate as-
sumptions to determine how robust the
Field Report
Figure 1. The Hierarchical Production and Distribution Planning
Framework.
Figure 2. Global Profit Maximization Model.
plans for distribution direct-to-consumers, direct-to-wholesalers
and by working with third party suppliers. Results indicate that
66% of larger manufacturers are planning to make distribu-
tion model changes with 46% of them planning to increase the
amount to be outsourced.
One major manufacturer taking measures to change its dis-
tribution model is Merck & Co. In fact, it has taken a rare step
in outsourcing because it has turned over two of its distribution
centers entirely to a third-party supplier to manage movement of
its sensitive products. In this instance the supplier is UPS.
Outsourcing is nothing new for Merck. It explains,
Historically we have employed a mixed model of internal and
3rd party providers for storage, picking and delivery. Were con-
tinuing to use this mixed model. What is happening in this in-
stance, explains Merck, is that, UPS is assuming responsibility
for the storage and distribution of most of our pharmaceuticals
and vaccines in the US.
UPS has assumed control of the two Merck distribution centers
(DCs) that handle the majority of the manufacturers pharma-
ceutical and vaccine product flow in the US.They are located in
Atlanta and Reno. Merck explains that given its current product
and customer profiles, these two facilities are in the right loca-
Logistics Services
By Roger Morton
T
o gain insight into the current state of healthcare
and transportation services, UPS did some basic
research. It published findings for its first-ever
study of the subject last September, the UPS Pain in the
Healthcare (Supply) Chain Survey. The top business
concerns uncovered in the survey are common to many
industries. The first four are new competition, product
quality assurance, regulatory concerns and industry con-
solidation. The fifth most important matter is evolving
distribution channels.
While managing costs is of great concern, 60% of
respondents indicated they expected to increase supply
chain spending over the next 18 months, with the aver-
age gain to be 23%. Reasons for the increases are to drive
operational efficiencies and derive competitive advantages
to translate into a fatter bottom line.
In seeking to boost share of market and increase supply
chain efficiency, survey respondents will make changes in
distribution models, primarily in three ways. They have
Collaborating on a Cure
for Pharmaceutical
Distribution
Ills
By turning over two
proprietary facilities to
a third party provider, a
major pharmaceutical
manufacturer seeks to
improve its distribution,
flexibility and bottom line.
Logistics Services.Final.indd 35 2/17/09 12:40:26 PM
with Mercks quality standards and secu-
rity needs.
For Hook there are two major under-
lying reasons, among others, that give
confidence to Merck in the ability of UPS
to handle its products. First, weve been
able to integrate the various supply chain
components through technology and
our network in order to offer companies
and providers an integrated solution in
healthcare, he claims. Secondly, inter-
nally we have taken a very segmented
approachwhether high tech, health-
care or retailand have acquired in-
depth knowledge and expertise in these
markets. So for compliance in health-
care, we are extremely knowledgeable
in regulatory trends. We are at the very
high end of compliance.
Merck agrees, saying that, UPS of-
fers the healthcare logistics expertise in
shipping, warehousing, order fulfillment
and storageand an existing healthcare
distribution networkto effectively and
efficiently distribute our pharmaceuticals
and vaccines in the US.
Hook observes that the trend to out-
sourcing in healthcare is growing. In
fact, he notes that the economy is in-
creasing the urgency for companies to
look to engaging with a third
party supplier. He does note,
however, that, Its only been in
recent years that some of the
big pharmaceutical and biotech
companies have begun to have
confidence there are compa-
nies that can actually meet their
quality standards. Another as-
pect is interest by companies to
try to take out different touch
points and breakages in the sup-
ply chain and try to integrate
both from a visibility and cost
standpoint, and in healthcare
from the standpoint of continu-
ity and compliance.
cases product movement is on our assets.
But we also utilize one particular partner
that has trailers for less than truckload
movements. We will move Merck prod-
ucts on our brown package cars but well
also leverage one outside vendor whose
capabilities we have validated.
Obviously, the manufacturer has con-
fidence in UPS, noting, Procedures and
processes used have not changed as a
result of this agreement. UPS offers the
healthcare logistics expertise needed to
manage the distribution of our phar-
maceuticals and vaccines in accordance
tions.
Bill Hook, vice president global strat-
egy for UPS Healthcare Logistics looks at
the innovative aspects of the partnership.
UPS has taken over the facilities, ac-
quired the assets there and hired Mercks
employees. For its part, UPS is reorganiz-
ing the DCs to create more capacity and
make them into multi-client facilities.
As Hook explains, UPS can reconfig-
ure the space where Merck couldnt do
so to work with other suppliers. We can
provide a more cost effective solution
and also create an environment where
they can be much more flexible and
nimble, he notes. Ultimately we can
move product to other facilities if that
makes more sense for their customer and
theyre not stuck to a bricks and mortar
scenario where they dont have the op-
portunity to change.
UPS sees the advantages for Merck in
cost savings, not only because the manu-
facturer is handing the buildings, people
and management off to someone else. As
Mercks business changes it wont have
to spend money to build new infrastruc-
ture. Further, if inventory turns improve,
the manufacturer wont be stuck with
fixed costs in the old model.
Hook points out that for the
end user, the advantage is vis-
ibility. The carrier is already ship-
ping to most of Mercks custom-
ers. For them, he says, there is
continuity in having UPS trucks
coming to the doors already. Its
another package or skid arriv-
ing. With a broader employee
base we can more quickly bring
skilled labor to bear during peak
timeslike during the flu vac-
cine season.
As col l aborat i on grows
throughout the supply chain,
even third parties use there own
third parties. For example, Hook
notes that, In the vast majority of
Bill Hooks, UPS Healthcare Logistic
How the UPS Survey Was
Conducted
Lumped together in the healthcare sector are
providers of pharmaceuticals, bio-technology,
medical and surgical devices. The survey was
conducted in two phases.
First, Harris Interactive conducted blind,
in-depth telephone interviews on behalf of
UPS with more than 300 small-to-medium
healthcare companies. Second, targeted on-line
surveys were conducted with large healthcare
companies having annual revenues of $1 billion
or more.
Canada-Europe Air to Grow as
Industry Projections Remain Dire
The European Union and Canada have reached agreement
to permit all European airlines to fly directly to Canada from
anywhere in Europe with all restrictions eliminated. Benefits
from the Canadian perspective include unrestricted direct air
services between Canada and the 27 EU Member States; flex-
ible pricing arrangements; and improved flexibility for cargo.
The agreement also covers eight EU Member StatesCyprus,
Estonia, Latvia, Lithuania, Luxembourg, Malta, Slovakia and
Sloveniawith which Canada did not previously have air
agreements.
The successful conclusion of air transport negotiations
with the European Union is another step forward in our
ongoing efforts to facilitate growth in trade, investment and
tourism for Canadian business, said Minister Baird. In these
uncertain times, closer global partnerships will help stimulate
our economy and expand commercial links, says John Baird,
Canadas Transport Minister.
This coming summer, KLM will launch scheduled service
to Calgary, Alberta, Canada. In addition to serving passenger
traffic, the airline expects that cargo traffic will get a boost,
serving this important oil and energy market area. KLM
President & CEO, Peter Hartman, observes, Under the pres-
ent economic situation, its even more important to choose
destinations that meet a strong demand. By introducing
Calgary to our network, we further enhance our product of-
fering to our customers, who can now reach this important
region in Canada on a direct flight from Amsterdam.
Forecasting a loss of $2.9 billion for the world airline indus-
try, the International Air Transport Associations (IATA) direc-
tor general and CEO, Giovanni Bisignani, says, The outlook
is bleak. The chronic industry crisis will continue into 2009.
We face the worst revenue environment in 50 years. Cargo
traffic in 2009 is projected to decline 5%.
Logistics Services
N
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w
s

B
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i
e
f
s

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2
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0
9
Averitt Expands Asia-US Freight
Options
Averitt Express is growing its Asia-Memphis service
to reach two new origin pointsHong Kong and South
China. The less-than-containerload (LCL) Express ser-
vice has been growing since July, when it was initiated.
At the outset the focus was on freight moving from
Shanghai and Shenzhen.
What makes the service unique is its tight integra-
tion with a less-than-truckload (LTL) ground network.
Containers are loaded in Asia, move directly through the
Ports of Los Angeles and Long Beach to the carriers CFS
Bonded Distribution Center in Memphis where they are
deconsolidated and move over the Averitt Express LTL
network to consignees.
Charlie McGee, Averitts vice president of International
Development, says, This next phase of expansion shows
the continued demand for consistent, reliable LCL ser-
vice from Asia. We expect to add more origin points in
the future.
Since shipments are not held at the California ports
and move directly to Memphis, Averitt claims that the
service can cut LCL transit time by as much as 10 days.
The carriers customer service specialists monitor ship-
ments through transit. Shipment visibility is available to
customers via a Web-based connection.
Earlier this month the carrier expanded coverage in
the Atlanta area with the opening of a new distribution
facility that doubled the amount of dock space and of-
fers almost twice as many dock doors as the building it
replaced. Averitt now has three facilities in the Greater
Atlanta area, at Norcross and Marietta in addition to the
newest distribution center. The new addition features the
most current technology to provide complete shipment
visibility and efficient operations.
Virginia Ports Reaffirm Alliance with Canal
The Panama Canal Authority (ACP) and the Virginia Port Authority (VPA) reaffirmed an alliance that will help to
increase growth and trade, facilitate the flow of information sharing and promote the All-Water-Route (the route
from Asia to the US East Coast via the Panama Canal). During an official ceremony in Panama, ACP Administrator/
CEO Alberto Aleman Zubieta and VPA Executive Director Jerry A. Bridges signed another Memorandum of
Understanding (MOU). The agreement further enforces the alliance between the Canal and the Port Authority, first
initiated in June 2003.
Our partnership with the VPA is more important than ever, said Zubieta. As we embark on the next phases
of the [Panama Canal] expansion project, data sharing and market studies exchange will continue to be essential
elements of our collaboration, he continued. As the only US East Coast port with the existing capability to handle
post-Panamax vessels, the Port of Virginia is prepared for the waterways expansion.
Sharing information and best practices related to modernization and improvements are key benefits of this
agreement, say the two executives. Both the ACP and the VPA continue to implement measures to increase capacity
and spur growth.
M
id-market technol-
ogy companies are
aggressive by their very
nature, constantly striv-
ing for the next level of
innovation: the latest
product offering, market
expansion, or new cus-
tomer acquisition. Global
initiatives can help broaden
market penetration and the pool
of potential new business, yet many
mid-sized companies face significant person-
nel, resource and infrastructure limitations
that make this endeavor cost-prohibitive.
In the face of larger and more established
competition, it is challenging to enter new
markets internationally without great expense
and the investment of years to cultivate market
knowledge and relationships. However, forward-
thinking mid-market companies can leverage the
expertise and available resources of a third-party lo-
gistics (3PL) provider, and this can rapidly accelerate
growth and open new distribution channels, without
significant expenditures in real estate, personnel and
a variety of other necessary resources.
Growth minded companies should take advantage
of the economic downturn by offering a wider geo-
graphical footprint and scope of services when many
of their competitors may be scaling back. This helps
distinguish those companies as stable leaders, with
an eye on the future that is attractive
to both current and prospective
customers.
International expansion is no
small task. There are myriad
challenges that must be closely
analyzed and addressed, in-
cluding cultural, regulatory and
taxation issues. An experienced
3PL can lend significant expertise
to help understand and overcome
these conditions, offering best prac-
tices and creative solutions. Further, a
reputable and qualified provider will have
the technological infrastructure, access to se-
cure warehousing and transportation space,
along with overall capabilities for
successful market entry,
allowing a company to
flourish.
An established 3PL can offer these resources at
a reduced, variable cost, providing far more flexibility
and efficient implementation in the target market. The
most critical aspect of a successful logistics operation
is comprehensive, real-time access to data, which is
fundamental for identifying and determining stocking
locations. By strategically positioning inventory, the
supply chain can be streamlined so companies can re-
duce costs without compromising service to end-users.
The mid-sized company seeking to expand needs to
ensure qualified providers under consideration offer
a flexible, unified global technology platform that can
easily integrate to its clients systems and processes,
Logistics Services
Community Voice
Mid-Market Companies Compete
on an International Scale
By Paul Malamet, Executive Vice President, Account
Services & Business DevelopmentChoice Logistics
growth. By relying on a 3PL for informa-
tion technology and personnel, a mid-
market company can maintain focus on
its core competencies, which can lead to
efficiencies far beyond the supply chain.
Global expansion is a challenge.
Managing this process internally, means
a significant investment of resources,
taking years to establish. As companies
may refrain from this type of expansion
as a result of todays down economy, am-
bitious organizations have a significant
opportunity to gain ground and increase
market share. A strategic 3PL partner-
ship can be an ideal strategy to accelerate
growth in a cost effective manner.
For the relationship to be
successful with sustained
growth, a top-down orga-
nizational commitment is
essential. Companies must
be willing to fully under-
stand their own operations
to realistically assess the po-
tential results. If the busi-
ness model is inefficient, the
benefits of an outside part-
ner cannot be realized.
Internal alignment will allow a mid-
market company to maximize its own
resources, while leveraging those of an
established 3PL partner. If implemented
correctly, with thoughtful leadership,
new heights of success and growth can
be achieved.
Paul Malamet is executive vice president
of account services and business develop-
ment of Choice Logistics, an outsourced ser-
vice parts logistics provider for mission-crit-
ical, high-tech global service organizations
(www.choicelogistics.com).
rather than vice versa. This level of
connectivity creates another layer of
efficiency that speeds international ex-
pansion and quickly establishes reli-
able operations. An international op-
eration must also be able to scale down
as quickly as it can scale up, to meet
the evolving needs of a companys cus-
tomer base.
3PLs can offer the required scalability
with an established global network in
place. This provides an advantage to
mid-sized companies that cannot afford
to over commit resources if client profit-
ability fluctuates.
Partnering with a competent 3PL can
further differentiate a mid-market com-
pany, allowing it to provide specialized
service offerings. One example is a more
aggressive approach to service level agree-
ments. Depending on the industry served,
offering mission critical logistics (also
known as time-definite), with deliver-
ies within hours on a globally consistent
basis, can support new revenue streams
for global business opportunities with
existing and potential customers. This
level of expedited and specialized service
is not cost effective for most mid-market
companies to perform independently, and
requires outside resources to execute.
Upon selection and implementation
of a 3PL to offer new services, most mid-
market companies have the benefit of a
flat organizational structure. This level
of nimbleness enables expedited 3PL
integration, which can accelerate time
to ROI.
However, the lean operational struc-
ture of mid-sized companies can also
be prohibitive, as the internal structure
may not efficiently support the uptick in
business demand. For these situations,
a well-matched 3PL partner can pro-
vide the necessary resources to support
CAREER OPPORTUNITIES
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5 CRST ........................ crstvanex.com
25 Kane Is Able www.kaneisable.com
29 MATTECH ............ www.mattech.us
32 Munchener Messe
.www.transportlogistic.de/register
17 NASSTRAC ....... www.nasstrac.org
COV4 Old Dominion Freight Line Inc.
................................ www.odfl.com
9 Saddlecreek Corporation
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COV3 SCOPE ........... www.scopeeast.com
14-15 SMC3 ... www.smc3.com/go/heroic
COV2 Spectrum Logistics
............. www.spectrumlogistics.us
33 TMCA ........... www.TMCAtoday.org
3 Verizon Wireless
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Ad Index
Pg. Company/Website
3PL File

Mission Statement: To achieve global supply chain excellence
for its customersmanufacturers, retailers and distributors of all types
and sizes. To exceed customer expectations by delivering lower costs,
better service, greater inventory velocity and higher capital utilization.
Capabilities: Transplace brings together a larger critical mass of
freight and carrier capacity than any single shipper, applying industry-
leading logistics technology to optimize freight while connecting all
parties to the transaction via electronic web-based connectivity. The
companys proprietary Dense Network Efficiency (DNE) platform in-
tegrates three critical elements for lowering logistics and supply chain
costs: The critical mass of virtually unlimited shipper freight and car-
rier capacity combined; web-based systems connectivity linking ship-
pers and carriers, facilitating collaboration and supply chain visibility;
and optimization technology utilizing a systematic and highly auto-
mated methodology to identify transportation synergies that reduce
cost and improve service.
Technology Advantages: Diverse offerings of logistics technol-
ogy and transportation management services include transportation
management systems and solutions; load control center management;
inbound order and supplier management; and logistics optimization
technology.
Additional Services Offered: Transplace provides tactical de-
cision-making services that bridge the gap between strategic planning
and operational execution. Clients taking advantage of the companys
multi-level approach realize benefits such as improved utilization of
private fleet operations, lowest cost mode conversion, assignment of
carriers to dedicated lanes and reduction of detention and accessorial
charges.
How It Differentiates ltself: Among its other unique charac-
teristics are asset neutrality; depth of engineering expertise; breadth
of customer base; flexibility and full scope of services; proprietary
logistics optimization technology and web-native applications; service
excellence; track record of delivering value; product and order data
maintenance and management; dock scheduling application; and yard
management system.
Company Name:
Transplace
Ownership:
Limited Partnership
Privately Owned
Stock Symbol:
N/A
US Headquarters:
3010 Gaylord Parkway
Suite 200
Frisco, TX 75034
888-445-9425 or
479-770-7391
Website URL:
www.transplace.com
Foreign Locations/Markets
Served:
A non-asset based third-party logistics
provider offering manufacturers
and retailers the optimal blend of
logistics technology and transportation
management services. The companys
main operations center is in Lowell,
Ark.; specialized services are in
Stuttgart, Ark.; an additional
operations center for Mexico is in
Laredo, Tex. Transplace provides
direct transportation coverage to all of
North America. In addition, Transplace
International offers import/export
services between North America, Asia
Pacific, Europe and Latin America.
Key Personnel:
Thomas Sanderson,
President & CEO
George Abernathy, Executive
VP & COO
Steven Crowther, CFO
Vincent Biddlecombe, CTO
Year Founded:
July 1, 2000
Number of Employees:
600
903LT40.indd 40 2/13/09 3:52:42 PM
Untitled-2 1 2/17/09 2:36:26 PM
Untitled-1 1 2/18/09 10:16:09 AM

Tight Performance: Holding Up Service Commitments

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Tight Performance: Holding Up Service Commitments

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