When Kodak decided to outsource operation of two major distribution facilities in Europe, it was not looking for quick performance fixes. Years of corporate continuous improvement programs and a well-seasoned logistics staff already had pushed service to a quite satisfactory level. Rather, Kodak's European logistics team saw outsourcing as an opportunity to reduce fixed costs and free capital tied up in owned facilities, while gaining flexibility to respond both to changing market conditions and anticipated increases in future service demands.
A primary market condition influencing Kodak was the structural change taking place in Europe. As borders between countries came down and economic union moved toward reality, many companies - particularly U.S.-based multinationals - rationalized their European operations, consolidating warehouses and distribution centers that had proliferated when each country had to be treated as a separate market.
"If you go back to the beginning of the '90s, we probably had about 25 facilities throughout Europe, on average more than one warehouse in each country," says Jack Frost, vice president and logistics manager of Kodak's European, African and Middle Eastern region. Today that number is down to 10, with further reductions possible. "We are still looking at opportunities that make sense in this new environment," Frost says.
Kodak was changing internally as well, divesting some businesses and acquiring others, while business units "increasingly were striving to differentiate their service network requirements," notes Frost. The result was pockets of "stranded fixed costs where the volume had gone away, or an inability in some instances to accommodate new business coming in."
Clearly more flexibility was needed. Outsourcing, which Frost says had long been an unpopular word among senior management in Europe, began to look like an attractive solution.
There was much to recommend it, not the least of which was that the logistics outsourcing industry in Europe had itself changed in response to the same macro issues impacting Kodak. As restructuring multinationals demanded more logistics services, providers became bigger, more sophisticated businesses. "There are many strong companies, six with more than $1bn in annual turnover, and the largest comparable to Kodak in Europe," notes Frost. "We used these figures to impress on our management that this is a big industry with big players."
Frost and his team also used the "core competency" argument. "Service to our customers is vitally important to us, but we don't think logistics is a core competency of ours," says Frost. "Managing it, yes. But actually doing it, moving boxes around and driving trucks, no. We believe it makes sense to leave the physical activities to specialists, but to manage it very effectively."
The team's arguments for outsourcing, along with opportunities to significantly change the logistics cost structure, convinced top management to approve the plan. Initially, two distribution centers were designated for third-party operation: Swallowdale in Hemel Hempstead, England, and Scharnhausen near Stuttgart, Germany. The Scharnhausen facility was seen as a prime candidate because it had high overhead costs and significant unused capacity, largely due to efficiencies and a reconfiguration that Kodak already had put in place. Kodak's logistics team believed that a third-party would be able to bring in additional clients to share the overhead burden.
"If you want to make some economies and do them as quickly as possible, the key is to find someone who has access to local business and can guarantee to fill up the spare capacity quickly," says Frost.
That's exactly what happened. After a bid procedure, operation of Scharnhausen was outsourced in December 1998 to Logistics Solutions Group (LSG), a part of the Willi Betz Logistics Co., whose many local customers and contacts offered a pool of shared-use candidates. "LSG had access to significant amounts of other business in the area, good quality business, which it has been able to bring in," says Frost. Kodak's employees were transferred to LSG and "that operation is running very well. It was a seamless transition as far as our customers were concerned, and we realized significant cost savings, plus even better quality than we had before, which already was good."
The situation in the U.K. was not as straightforward. The 25-year-old Swallowdale facility at Hemel Hempstead had not been upgraded because of the significant costs involved, so there was less capacity available for other users. "We knew what to do [to capture that capacity], but every time we looked at the cost, we just couldn't justify it," says Peter Blackwell, logistics director.
Moreover, the facility had been designed and built when land was less dear. Swallowdale's infrastructure, which included two high-bay and several low-bay buildings, sprawled over some 20 acres of prime real estate, making it even more difficult to cost-justify.
Additionally, Kodak's logistics requirements at this site were in many ways more complex than in Germany, since it served as a local warehouse for England, a regional distribution center exporting to Europe, Africa, the Middle East and parts of Asia, and as a specialist fulfillment center for customer segments demanding very fast service. And those requirements were far from static. "Our service levels are good now, but we knew we would have to increasingly be world class in every aspect of these activities," says Blackwell. "Customer demands will become greater, not just in terms of current services we offer, but for new services we will have to develop."
When Kodak first went to the marketplace, however, it sought bids for a traditional outsourcing contract with a shared-use solution. MSAS Global Logistics, a division of the Ocean Group based in Bracknell, England, was one of the companies that Kodak asked to bid.
"I think one of the reasons they talked to us is that there already was a relationship," says Paul R. Brown, MSAS regional development director for Western Europe, the Middle East and Africa. "We provide them with a majority of their freight forwarding services in the 50- to 500-kilo range globally. And secondly, multi-user warehousing is a core skill as far as our business is concerned."
|"We share systems and a whole range of backup services, so it is genuinely sharing overhead between customers on the sites, not creating multiple overheads." - Paul R. Brown of MSAS Global Logistics|
For one segment of business, motion picture film, exceptional speed already is paramount - another factor MSAS had to take into account in its operating plan.
Movie-making is a big business in England and when a set employing high-paid actors runs low on film, replenishment must be immediate. "Probably 20 times a week we have to fill an order in 15 to 20 minutes," says Blackwell. Sometimes the film is picked up by the purchaser at a trade counter, or Kodak uses the fastest means available to speed it to the site, which often is via taxicab.
"We currently have a dedicated facility for these orders and this business unit was the most concerned about outsourcing," says Blackwell. "Now that they have seen the plan, they actually believe it could open up further business opportunities which they couldn't have considered with the existing facility."
|MSAS Global Logistics: One Brand|
In 1998 Ocean Group plc created the MSAS Global Logistics brand, bringing together under that banner a wide range of integrated supply-chain management services. In addition to forwarding and logistics company MSAS Cargo International, the group includes Freight Express International and Airlink; Intexo, a European third-party logistics specialist; McGregor Cory; Mercury, including Higgs International; Skyking Freight Systems; A.W. Fenton; Dutch Air; and Marken Worldwide Express. The newest addition is Mark VII, an U.S. intermodal service provider based in Memphis, Tenn., which was acquired in August 1999.
While the long-term intention is to market all of these companies' services under the MSAS Global Logistics flag, Ocean Group CEO John Allen says he does not wish "to relinquish existing brand names prematurely.
"We want to do this in an orderly, managed transition so that we don't disorient these companies' existing customers," he says. "But our end point is clear: The MSAS Global Logistics brand will be our global brand offering and other names will either be played down or in most cases eliminated."
MSAS Global Logistics is focusing on three strategies that Allen says are essential "if we are going to continue to satisfy the needs of our most demanding customers."
The first is to extend the company's global reach. "We now have directly owned or invested operations in 88 percent of the world's manufacturing economy and agents that cover the remaining 22 percent," he says. "I expect that will increase by two to three countries per year as we gradually and selectively fill the remaining holes in our directly managed network."
The second strategy is to further develop what Allen calls "capability," described as "the ability to provide the full range of services that our customers need and to fashion those together to form solutions appropriate to individual accounts." This further involves being able "to integrate those services so that they work as a whole," says Allen. "A lot of things flow from that. In addition to our base services, we are building our logistics solutions design capabilities and the skills needed to implement complex logistics solutions."
MSAS Global's third area of focus is consistency of process.
"We want to have standards of quality in place across the world so that our global multinational customers are comfortable they are getting essentially the same service, performed in the same way, wherever we handle their business," says Allen.
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