As we said last time, if you're an experienced practitioner these "Basics" articles are not necessarily for you. But for those new to the Supply Chain, or entering Logistics from a different business function, these examinations of the nuts and bolts of the logistics world might be helpful. Previously, we described the major Players who move freight within domestic and international Supply Chains - Carriers, Forwarders, and Brokers. This time we'll look at three other service providers who could also be vital links in your supply chain.
THIRD PARTY LOGISTICS COMPANIES (3PLs) are bridges between shippers and logistics services companies, but first we need to define 1PLs and 2PLs. A 1PL is the shipper who owns or leases his own vehicles and controls that private fleet for inbound and/or outbound shipments. Carriers hired in lieu of shippers running their own private carriage operations are one type of 2PL. A 3PL manages and/or provides to shippers the services of multiple 2PLs such as carriers, warehouses, distribution centers, returns operations, and more. Thus the Forwarders and Brokers described in our last column are really 3PLs who specialize in managing the transportation services provided by asset-owning carriers. Over time many carriers, distribution centers, and warehouse companies have established their own 3PL operations, which may or may not use the assets of sister companies, depending on the 3PL's agreement with the shipper. In addition, there is another level of outsourced logistics management - the 4PL, or Lead Logistics Provider (LLP), which manages and coordinates the efforts of multiple 3PLs chosen for their strengths in different regions or supply chain functions when no single 3PL can meet all requirements.
A WAREHOUSE is a storage location, and can share a manufacturing plant's floor or be a stand-alone building located near the plant, near customers, or in between. It holds an inventory buffer between production and consumption, supporting longer production runs for manufacturing efficiency and lower production costs per unit - at the extra expense of carrying larger inventories which includes exposure to loss, damage, and obsolescence. But we'll leave discussion of larger vs. smaller inventories to a later column. Many manufacturers, while choosing to hold high inventories, do not want to own all of the "brick & mortar" required, and instead may partially or totally outsource to a public warehousing company. This arrangement usually includes a minimum monthly commitment for square footage; negotiated charges for labor (unloading, loading, re-labeling, re-palletizing, re-packaging, minor assembly, kitting, salvage, etc.); and other services. It may also allow minimum commitments to vary by season.
A DISTRIBUTION CENTER, or DC, is usually designed as a pass-through facility, with much higher inventory turns than a traditional warehouse. Items may indeed spend some time on shelves, but not nearly as long as in a warehouse. Also, a DC is more likely to employ "cross-docking", where shipments that arrive during a day or evening shift are immediately broken down and reconfigured into outbound shipments which soon depart – almost physically identical to the operations of an LTL carrier, but with multiple carriers used for inbound and outbound shipments.
When does a Warehouse become a DC? You can't tell by just looking at facilities. Both have docks, labor, shelving, staging areas, material handling equipment, and information systems. You must look at operations, not just labels, as the real differences are found in: (1) inventory turns (how much is stored vs. how fast it ships out); (2) the customers served (small package shipments to individual consumers vs. bulk shipments to DCs or stores); or (3) other elements determined by the shipper. In general, a DC is more likely to make smaller, more frequent shipments to customers and consumers, while a warehouse is more likely to make larger shipments to DCs and/or customers. And there may be other differences within your supply chain. Do you know what they are?
In the first two articles of this series we defined the major supply chain partners who actually touch your freight or manage its movement and storage. In our final "Players" segment, we'll look at other critical service suppliers who make smooth shipping possible - or come to your aid when things go wrong.
George Yarusavage, CTL, C.P.M., CICSM, is a principal in Fortress Consulting, LLC, specializing in Transportation, Logistics, and Sourcing issues and training. He is also the Treasurer of ISM's Logistics & Transportation Group and can be reached at gyarusavage@yahoo.com, or (203) 984-4957. Membership in the L&T Group is open to all ISM members who are responsible for or have an interest in the Logistics & Transportation fields.