Executive Briefings

Do You Outsource, or Keep It In-House and Upgrade?

By some estimates, 75 percent of companies rely on some kind of automated warehouse management system. The question for them is whether to turn that job over to external providers or keep everything under their own roof but try in this tough economic environment to get a bargain on an upgrade.

You're pretty much preaching to the choir if you try to tell a supply chain professional about the benefits of a warehouse management system. These solutions have been around for decades, so most company officials know the arguments about accuracy, efficiency and productivity. The issue they need to address, probably once a year or so, is not whether they need a WMS but whether they need their own or is it better to leverage a system that a third-party logistics service provider has.

There probably are benefits and drawbacks either way, but it can't hurt to review some of them because many systems out there are getting a bit long in the tooth. Many companies need to make a decision one way or the other fairly soon.

Not surprisingly, most 3PL executives will tell you outsourcing is cheaper. The cost of a system can be spread over a larger base - the many clients that a good 3PL has. In addition, the expense of maintaining and upgrading the system belong to the provider. So keeping current is hassle- and cost-free to the buyer. That's the view of Harry Drajpuch, chief of operations at Kane Is Able. "The 3PL has more volume, with the potential to leverage that volume along with yours," he says.

The in-house vs. outsourcing decision is no small matter for those few companies that as yet have no form of automated warehouse management; it's quite a big deal for those that have systems already. What should they do about aging warehouse management systems, upgrade or go outside?

One argument for upgrades goes like this: the economic downturn has stymied sales, so developers are hungrier and may be amenable to hard bargaining.

Maybe, but as Drajpuch says, "No one's giving it away at this point."

But OK, so you get the system, even at a good discount. You still wind up with permanent infrastructure, and you have to maintain staff and the software upgrades, he says. "So a good bargain is not all that it seems." Moreover, you may even go to the back of the queue because providers are going to take care of their best customers. "So the short-term advantage may not be the best in the long run."

Of course, talk of investing in WMS may be academic for many at this point. Capital is still limited, and getting funding for a supply chain project of any sort is difficult at best, according to Kevin Hume, a principal at Tompkins Associates. "Supply chain has always been treated like a stepchild, and it's always been a challenge to get funding for warehouse management."

But the tough economy fuels the case for WMS, in his view. Because money is short, a back-to-basics mentality means greater focus on tight management, better customer service,  and efficiency in inventory management. All of which, he says, you get with a WMS.

Hume's feeling is that now is the time to try to negotiate a good deal on a system. Constraint on capital means that few systems have been sold across the market in the last 12 months or so. That, coupled with the maturity of the extant systems - "a lot of these systems were put in at the dawn of the millennium" - spells opportunities for both providers and customers.

There's a business risk in relying on systems that no one supports anymore, says Hume. They may not work with your suppliers' systems, at least not optimally. The functionality of the newer systems is much more robust than even those that appeared only three or four years ago.

A number of the newer SaaS models are ideal for companies with small and mid-sized volumes and for quite a few 3PLs as well, he says.

While spending has declined, certainly on big-ticket items, developers expect to see pent-up demand for good warehouse management automation loosened once the economy picks up, says Tom Kozenski, vice president of product strategy at RedPrairie. If nothing else, companies always need to improve their position, and if slow or no growth is inevitable, then companies must look to cut their costs. "And that's where we come in." A good WMS can significantly boost throughput and inventory management. It can shave labor costs and obviate the need for new facilities.

Companies are keenly aware of return on investment, and they are well advised to understand their financial hurdles, Kozenski says. "Thy have to look at those constraints." A warehouse management system has a longer ROI timeline that most other supply chain modules, such as labor management, slotting, yard management or a TMS.

Any company with a very low hurdle rate and a need for quick ROI may want to consider engineered labor, an approach that improves worker productivity. When that's achieved and the economy perks up a bit, perhaps they can then consider an upgrade or new system.

Kozenski estimates that only about 20 to 25 percent of companies, at least in the U.S., are still using paper-based management systems. RedPrairie typically has targeted Tier 1 companies, but it has expanded its footprint into Tier 2 and even to smaller companies.

They're all feeling the pain of the economy and have basically the same needs: they have to lower costs through better inventory and labor management in their facilities, regardless of size. 

A top-notch WMS is "one of the keys to the kingdom when turning inventory into cash," says George Post, global marketing director at UPS Supply Chain Solutions. "In fact, that's what we call inventory, cash on pallets."

But you need to have a better business case than the age of your existing system when approaching management. The times are just too challenging, he says, for many IT projects of any kind to get the needed money.

If you do decide to put WMS functionality in the hands of a 3PL, you must have connectivity in a very robust warehouse management and distribution structure. Wrapped around that has to be very good visibility. "If you can't see your supply chain, you may as well not outsource, right? You need to be able to say, we outsource because other firms do that better than us."

Cracking a new market is an excellent reason for turning control over to a 3PL, in Post's mind. By way of illustration, he says a Los Angeles-based apparel company that senses great potential for its line of clothes in Europe may consider the U.K. as a good site for a distribution center. "But the rates for warehousing  in the U.K. are higher than anywhere on the coasts of the U.S." Post says. "You don't want to go in there and test a new market without at least leveraging the capabilities of a 3PL. The customer is great at sales and positioning, but not in warehousing and distribution. They just don't have large sums of money to put into those countries, and it's about mitigation of risk."

Even a company with an established presence in a market may want to use a provider when considering expanding into new products lines. Again, warehousing and distribution, not to mention the staffing they require, may not be functions a company needs to take on.

Post says rising labor costs in Asia are giving some companies pause about having a physical presence in Asia. He points particularly to China,which has recently enacted insurance and healthcare legislation that may be a "game changer" for some. His argument is that 3PLs are better able to handle those costs than individual companies that may feel they need an overseas DC.

In fact, Post urges manufacturing companies to dispense with warehouses altogether where possible and go to a direct-to-store distribution model. Obviously, it eliminates one very costly step and reduces touches. A drawback, of course, is that there is little or no safety stock. At the very least, manufacturers should consider so-called nearsourcing, say, in Mexico. And, in fact, UPS is seeing more of that, according to Post.

Safelite AutoGlass is one company that decided to stay in-house. The giant windshield replacement company wanted to grow its operations and improve inventory management, but its paper-based system didn't allow for that.

Safelite has operations in all 50 states, and it wanted a fully-integrated WMS that would give it a view into its DC. But like everyone else, it has been stung by the economic downturn and didn't want to invest any more than necessary. The company was also in the process of a takeover, and top management's eye was not always on warehousing and distribution, says Mike Bradsher, director of accounting, manufacturing and distribution control at Safelite.

Despite the economy, sales were still growing and outstripping the pen-and-paper picking operation at Safelite. The company needed to have grater inventory and picking accuracy.

A number of vendors, big and small were considered before Safelite eventually settled on Cambar Solutions of Charleston, S.C. In early 2009, it installed the developer's WMS at its DC in Enfield, N.C. Later that year, Safelite's distribution center in Ontario, Calif., went live with the system as well.

Bradsher says the benefits were immediate. Safelite was shipping within a day of implementation. It's first physical inventory was 99.98 percent accuracy, and there have  been many 100-percent weeks since then. He also says the new system has cut a day out of the distribution process.

Th implementation was more of a challenge at the existing facility in North Carolina, Bradsher says. That was due in large part to old processes and old ways of thinking on the part of some personnel. Things were considerably smoother at the greenfield operation in California.

On the down side, Bradsher says savings generated by the system are not in the workforce. "I would caution people to be careful about that," he says. "It seems that jobs shift rather than go away."

That said, Safelite has not experienced any of the "horror stories you read about. It's a big change, however. You have to let sacred cows go and be open to changing processes or open to paying lot of money for customizations."

Bradsher says he knows of companies that couldn't ship for a week after an implementation and had to have vendor representatives on-site for six months. Safelite shipped the first day and reps were gone in a week.

In point of fact, the implementation took longer than it should have, according to Bradsher, but the fault lies with Safelite, not Cambar.

He said he looked at all the major players in the business, but decided paying a $1m or more wasn't worth it. "It's nice to have all the bells and whistles, but we can do without them," Bradsher says. "This system does everything we need it to."

Part of what the system need to do is ensure that the windshields are pulled in an optimal way for distribution, says Rick Register, president and chief of operations for Cambar Solutions. The glass comes in quite a number of shapes, sizes and curvatures, so it has to be picked and packed on pallets very carefully. "They have to put a packing material in between the glass, so we have a routing sequence to make it efficient and keep it to one touch."

The goal for any customer, not just Safelite, is to eliminate physical inventory within the definitions of their accounting practices, Register says. They need visibility to see activity, what works, what needs to be done and the space that's available.

"If you think about the economic situation we're still in, everybody has cut just about all they can," Register says. "Companies are limited as to what else they can do if they don't have a WMS."

Register's argument: Labor becomes more efficient. The system provides rules on inventory management, then directs that activity. Orders are pulled timely and accurately. Money-wasting, inaccurate shipments don't have to come back. Space in the DC is reclaimed as in general but certainly between fast-movers and slow-movers.

Ultimately, an operation without a good WMS will have to add people and possibly space when demand returns. Those with systems, Register believes, can leverage what they have without spending that extra money.

"Your customers are more demanding," he says. "They want special handling, so you need systems in place to automate that as much as possible."

Maintaining control is one of the most frequently heard justifications for keeping warehouse management in-house. Drajpuch, at Kane Is Able, says he's heard the argument for 30 years. It wasn't true then, it's not true now. "I would say anyone who says that is not living in reality."

A provider simply has to ensure that the customer gets what it wants, 24/7, or the business will be lost, he says. Any time you pay for service, you have control, according to Drajpuch, who analogizes the transaction to eating out. "If I  eat at a restaurant, I have total control. If I don't like it, it's going back."

Contrast that with eating at home, he says. "If my wife puts a meal in front of me, and I don't like it, it ain't going back."

Resource Links:
Kane Is Able, www.KaneIsAble.com
RedPrairie, www.RedPrairie.com
Tompkins Associates, www.TompkinsInc.com
UPS Supply Chain Solutions, www.UPS-SCS.com
Safelite AutoGlass, www.Safelite.com
Cambar Solutions, www.CambarSolutions.com

You're pretty much preaching to the choir if you try to tell a supply chain professional about the benefits of a warehouse management system. These solutions have been around for decades, so most company officials know the arguments about accuracy, efficiency and productivity. The issue they need to address, probably once a year or so, is not whether they need a WMS but whether they need their own or is it better to leverage a system that a third-party logistics service provider has.

There probably are benefits and drawbacks either way, but it can't hurt to review some of them because many systems out there are getting a bit long in the tooth. Many companies need to make a decision one way or the other fairly soon.

Not surprisingly, most 3PL executives will tell you outsourcing is cheaper. The cost of a system can be spread over a larger base - the many clients that a good 3PL has. In addition, the expense of maintaining and upgrading the system belong to the provider. So keeping current is hassle- and cost-free to the buyer. That's the view of Harry Drajpuch, chief of operations at Kane Is Able. "The 3PL has more volume, with the potential to leverage that volume along with yours," he says.

The in-house vs. outsourcing decision is no small matter for those few companies that as yet have no form of automated warehouse management; it's quite a big deal for those that have systems already. What should they do about aging warehouse management systems, upgrade or go outside?

One argument for upgrades goes like this: the economic downturn has stymied sales, so developers are hungrier and may be amenable to hard bargaining.

Maybe, but as Drajpuch says, "No one's giving it away at this point."

But OK, so you get the system, even at a good discount. You still wind up with permanent infrastructure, and you have to maintain staff and the software upgrades, he says. "So a good bargain is not all that it seems." Moreover, you may even go to the back of the queue because providers are going to take care of their best customers. "So the short-term advantage may not be the best in the long run."

Of course, talk of investing in WMS may be academic for many at this point. Capital is still limited, and getting funding for a supply chain project of any sort is difficult at best, according to Kevin Hume, a principal at Tompkins Associates. "Supply chain has always been treated like a stepchild, and it's always been a challenge to get funding for warehouse management."

But the tough economy fuels the case for WMS, in his view. Because money is short, a back-to-basics mentality means greater focus on tight management, better customer service,  and efficiency in inventory management. All of which, he says, you get with a WMS.

Hume's feeling is that now is the time to try to negotiate a good deal on a system. Constraint on capital means that few systems have been sold across the market in the last 12 months or so. That, coupled with the maturity of the extant systems - "a lot of these systems were put in at the dawn of the millennium" - spells opportunities for both providers and customers.

There's a business risk in relying on systems that no one supports anymore, says Hume. They may not work with your suppliers' systems, at least not optimally. The functionality of the newer systems is much more robust than even those that appeared only three or four years ago.

A number of the newer SaaS models are ideal for companies with small and mid-sized volumes and for quite a few 3PLs as well, he says.

While spending has declined, certainly on big-ticket items, developers expect to see pent-up demand for good warehouse management automation loosened once the economy picks up, says Tom Kozenski, vice president of product strategy at RedPrairie. If nothing else, companies always need to improve their position, and if slow or no growth is inevitable, then companies must look to cut their costs. "And that's where we come in." A good WMS can significantly boost throughput and inventory management. It can shave labor costs and obviate the need for new facilities.

Companies are keenly aware of return on investment, and they are well advised to understand their financial hurdles, Kozenski says. "Thy have to look at those constraints." A warehouse management system has a longer ROI timeline that most other supply chain modules, such as labor management, slotting, yard management or a TMS.

Any company with a very low hurdle rate and a need for quick ROI may want to consider engineered labor, an approach that improves worker productivity. When that's achieved and the economy perks up a bit, perhaps they can then consider an upgrade or new system.

Kozenski estimates that only about 20 to 25 percent of companies, at least in the U.S., are still using paper-based management systems. RedPrairie typically has targeted Tier 1 companies, but it has expanded its footprint into Tier 2 and even to smaller companies.

They're all feeling the pain of the economy and have basically the same needs: they have to lower costs through better inventory and labor management in their facilities, regardless of size. 

A top-notch WMS is "one of the keys to the kingdom when turning inventory into cash," says George Post, global marketing director at UPS Supply Chain Solutions. "In fact, that's what we call inventory, cash on pallets."

But you need to have a better business case than the age of your existing system when approaching management. The times are just too challenging, he says, for many IT projects of any kind to get the needed money.

If you do decide to put WMS functionality in the hands of a 3PL, you must have connectivity in a very robust warehouse management and distribution structure. Wrapped around that has to be very good visibility. "If you can't see your supply chain, you may as well not outsource, right? You need to be able to say, we outsource because other firms do that better than us."

Cracking a new market is an excellent reason for turning control over to a 3PL, in Post's mind. By way of illustration, he says a Los Angeles-based apparel company that senses great potential for its line of clothes in Europe may consider the U.K. as a good site for a distribution center. "But the rates for warehousing  in the U.K. are higher than anywhere on the coasts of the U.S." Post says. "You don't want to go in there and test a new market without at least leveraging the capabilities of a 3PL. The customer is great at sales and positioning, but not in warehousing and distribution. They just don't have large sums of money to put into those countries, and it's about mitigation of risk."

Even a company with an established presence in a market may want to use a provider when considering expanding into new products lines. Again, warehousing and distribution, not to mention the staffing they require, may not be functions a company needs to take on.

Post says rising labor costs in Asia are giving some companies pause about having a physical presence in Asia. He points particularly to China,which has recently enacted insurance and healthcare legislation that may be a "game changer" for some. His argument is that 3PLs are better able to handle those costs than individual companies that may feel they need an overseas DC.

In fact, Post urges manufacturing companies to dispense with warehouses altogether where possible and go to a direct-to-store distribution model. Obviously, it eliminates one very costly step and reduces touches. A drawback, of course, is that there is little or no safety stock. At the very least, manufacturers should consider so-called nearsourcing, say, in Mexico. And, in fact, UPS is seeing more of that, according to Post.

Safelite AutoGlass is one company that decided to stay in-house. The giant windshield replacement company wanted to grow its operations and improve inventory management, but its paper-based system didn't allow for that.

Safelite has operations in all 50 states, and it wanted a fully-integrated WMS that would give it a view into its DC. But like everyone else, it has been stung by the economic downturn and didn't want to invest any more than necessary. The company was also in the process of a takeover, and top management's eye was not always on warehousing and distribution, says Mike Bradsher, director of accounting, manufacturing and distribution control at Safelite.

Despite the economy, sales were still growing and outstripping the pen-and-paper picking operation at Safelite. The company needed to have grater inventory and picking accuracy.

A number of vendors, big and small were considered before Safelite eventually settled on Cambar Solutions of Charleston, S.C. In early 2009, it installed the developer's WMS at its DC in Enfield, N.C. Later that year, Safelite's distribution center in Ontario, Calif., went live with the system as well.

Bradsher says the benefits were immediate. Safelite was shipping within a day of implementation. It's first physical inventory was 99.98 percent accuracy, and there have  been many 100-percent weeks since then. He also says the new system has cut a day out of the distribution process.

Th implementation was more of a challenge at the existing facility in North Carolina, Bradsher says. That was due in large part to old processes and old ways of thinking on the part of some personnel. Things were considerably smoother at the greenfield operation in California.

On the down side, Bradsher says savings generated by the system are not in the workforce. "I would caution people to be careful about that," he says. "It seems that jobs shift rather than go away."

That said, Safelite has not experienced any of the "horror stories you read about. It's a big change, however. You have to let sacred cows go and be open to changing processes or open to paying lot of money for customizations."

Bradsher says he knows of companies that couldn't ship for a week after an implementation and had to have vendor representatives on-site for six months. Safelite shipped the first day and reps were gone in a week.

In point of fact, the implementation took longer than it should have, according to Bradsher, but the fault lies with Safelite, not Cambar.

He said he looked at all the major players in the business, but decided paying a $1m or more wasn't worth it. "It's nice to have all the bells and whistles, but we can do without them," Bradsher says. "This system does everything we need it to."

Part of what the system need to do is ensure that the windshields are pulled in an optimal way for distribution, says Rick Register, president and chief of operations for Cambar Solutions. The glass comes in quite a number of shapes, sizes and curvatures, so it has to be picked and packed on pallets very carefully. "They have to put a packing material in between the glass, so we have a routing sequence to make it efficient and keep it to one touch."

The goal for any customer, not just Safelite, is to eliminate physical inventory within the definitions of their accounting practices, Register says. They need visibility to see activity, what works, what needs to be done and the space that's available.

"If you think about the economic situation we're still in, everybody has cut just about all they can," Register says. "Companies are limited as to what else they can do if they don't have a WMS."

Register's argument: Labor becomes more efficient. The system provides rules on inventory management, then directs that activity. Orders are pulled timely and accurately. Money-wasting, inaccurate shipments don't have to come back. Space in the DC is reclaimed as in general but certainly between fast-movers and slow-movers.

Ultimately, an operation without a good WMS will have to add people and possibly space when demand returns. Those with systems, Register believes, can leverage what they have without spending that extra money.

"Your customers are more demanding," he says. "They want special handling, so you need systems in place to automate that as much as possible."

Maintaining control is one of the most frequently heard justifications for keeping warehouse management in-house. Drajpuch, at Kane Is Able, says he's heard the argument for 30 years. It wasn't true then, it's not true now. "I would say anyone who says that is not living in reality."

A provider simply has to ensure that the customer gets what it wants, 24/7, or the business will be lost, he says. Any time you pay for service, you have control, according to Drajpuch, who analogizes the transaction to eating out. "If I  eat at a restaurant, I have total control. If I don't like it, it's going back."

Contrast that with eating at home, he says. "If my wife puts a meal in front of me, and I don't like it, it ain't going back."

Resource Links:
Kane Is Able, www.KaneIsAble.com
RedPrairie, www.RedPrairie.com
Tompkins Associates, www.TompkinsInc.com
UPS Supply Chain Solutions, www.UPS-SCS.com
Safelite AutoGlass, www.Safelite.com
Cambar Solutions, www.CambarSolutions.com