Outsiders tighten supply chain

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A visitor to BMW's North American factory near Spartanburg, South Carolina, might assume the fork-lift truck drivers shuttling components around the assembly line were employees of the German carmaker. In fact, they work for TNT Logistics, part of TPG, the Dutch post and package group.

TNT manages BMW's North American supply chain from the moment a part is dispatched by a supplier until its installation in one of the Z4 sports cars or X5 sports utility vehicles made in Spartanburg.

The arrangement is not unique to BMW: nearly 80 per cent of big European and North American companies outsource parts of their logistics operation to outside contractors, up from 71 per cent three years ago, according to research by the Georgia Institute of Technology.

Companies have long outsourced functions such as freight transport and warehouse management. With the increasing complexity of supply chains, however, many are now handing over bigger portions of their logistics operations to companies such as TNT. US companies surveyed by Georgia Tech predicted the proportion of their supply chain expenditure paid to outside contractors - known as third-party logistics providers (3PLs) - would increase from 44 per cent this year to 49 per cent by 2009.

"Our customers do not want to spend time and money worrying about logistics, they want to get on with building products or providing services. We allow them to do that," says Jeffrey Hurley, managing director of TNT Logistics in North America.

TNT is the world's second largest logistics contractor, after UK-listed Exel but ahead of Nippon Express of Japan, UK-based Wincanton, and Germany's DHL Solutions. These companies promise to use their expertise and access to global freight networks to reduce their customers' costs and bring greater efficiency to their supply chains, which often stretch thousands of miles from suppliers in China and other low-cost countries to the big consumer markets of Europe and North America.

Logistics costs, which already amount to an average 7 per cent of sales at large US companies, are being pushed up by rising fuel prices, transport capacity shortages and increased security checks on international cargo because of the threat of terrorism.

"The majority of companies still do most of their logistics in-house, so there is huge potential to grow," Mr Hurley says. "We can usually take 10-15 per cent off a customer's logistics costs and increase efficiency by a large percentage."

In an office inside BMW's facility in Spartanburg, TNT managers monitor computer screens showing the flow of parts from suppliers all over the world. "We micro-manage the supply chain in a way our customers have not had time to do before," says Mr Hurley. "We know where every part is, right down to a gear. If something hasn't left a supplier in Mexico, we're on the phone to them."

Greater reliability in the supply chain has allowed BMW to reduce the inventory in its Spartanburg warehouse from a fortnight's supplies to just three days' worth. The usage rate of in-bound delivery trucks has increased from 61 per cent to 79 per cent and the on-time delivery rate has exceeded TNT's target of 99.2 per cent.

"Before, BMW would not know what was arriving until they opened the back of the truck. Sometimes there would be the wrong part or wrong quantity but by then it was too late to correct, so you get hold-ups on the assembly line," says Allen Melton, TNT's project manager at the BMW plant.

Once parts have arrived at the warehouse, TNT feeds them to the nearby assembly line along a conveyor belt connecting the buildings. Parts are delivered in the precise order needed by assembly line workers.

Such a lean operation brings risks: when the wrong-sized sunroof arrived at the assembly line recently production was halted for 33 minutes while the correct model was rushed from a supplier 16 miles away. TNT paid BMW a $19,000 penalty for the mistake. "The aim is to make sure those sort of discrepancies do not reach the assembly line by checking for defects at every stage of the supply chain," Mr Melton says.

John Langley, professor of supply chain management at Georgia Tech, says TNT's relationship with BMW shows how companies are starting to view third-party logistics providers as strategic partners rather than contractors. "Companies have tended to see 3PLs primarily as a way to reduce costs but a more efficient supply chain can create value throughout the business," he says.

As the relationships become deeper, companies are entrusting logistics partners with more responsibility. At a warehouse in Indianapolis, Indiana, TNT conducts basic sub-assembly work for Eaton, a truck components maker. "When we started this contract two years ago, Eaton did not trust us to talk to their suppliers and customers," recalls Ted Wade, TNT's quality manager at the Indianapolis facility. "But as you develop more trust they are prepared to outsource more functions and allow you further up the value chain."

As well as reducing costs and improving efficiency, companies can offload some risks on to 3PLs. When TNT took control of Michelin's North American distribution network two years ago, it also bought the French tyremaker's 18 warehouses in the US and Canada and hired most of the company's 600 logistics staff "The warehouses were getting old and needed upgrading," says Bob Brescia, Michelin's head of logistics in North America. "By handing them to TNT we got them off our balance sheet and avoided the investment."

However, not all companies have embraced 3PLs as fully as BMW, Eaton and Michelin. Many, such as Wal-Mart, the world's biggest retailer, believe logistics is too important to outsource. "It is one of our core competencies," says Gus Whitcomb, spokesman for Wal-Mart. "It is certainly something we prefer to control internally."

In Europe, logistics outsourcing is well developed but powerful labour unions limit its scope. For example, it would be difficult for TNT to work as closely with BMW in Europe as it does in Spartanburg because the carmaker has an agreement with German unions that 3PLs cannot be involved in assembly line work.

The greatest potential for 3PL growth lies in China, where logistics services are urgently needed to support manufacturing growth. Chinese TNT managers from Shanghai recently visited Spartanburg to learn about BMW's supply chain. And at TNT's North American headquarters in Jacksonville, Florida, Mandarin-speaking staff are testing Chinese language software to communicate with Chinese customers and suppliers.

Analysts and executives forecast annual growth of about 8-10 per cent in the 3PL sector but competition is intensifying. David Kulik, managing director of TNT Logistics, says: "When you compete on price there is always someone willing to do a job cheaper. So, we have to differentiate ourselves by adding more value."


• THE PROBLEM: Global companies today require their logistics providers to offer a range of transport services - from ocean and air freight to road transport and warehousing services.

For TNT Logistics, the trend exposed a gap in its expertise. “Customers are increasingly demanding globally integrated supply chains so we needed more capability in freight management,” says David Kulik, managing director of TNT Logistics.

• THE SOLUTION: Mr Kulik proposed the $300m acquisition of Wilson, a Swedish-based freight management company, earlier this year.

The idea initially got a frosty reception from the directors of TPG, his company’s parent group, after a series of botched European takeovers. “They said: ‘You’ve screwed up a lot of acquisitions, TNT. Tell us why this one is going to be any better’,” he recalls.

Mr Kulik eventually persuaded the board and the deal was completed in August, adding Wilson’s strength in international ocean and air freight to TNT’s expertise in road transport and warehouse management.

The takeover signals TNT’s confidence that the business is back on track. Mr Kulik, previously head of TNT’s North American operation, was drafted into the company’s Amsterdam headquarters last year to lead the turnround.

One of his first acts was to write off €173m of assets, putting a big dent in TPG’s 2003 earnings. TNT Logistics accounted for nearly a third of the Dutch group’s €11.9bn revenues last year.

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