You make it, they distribute it - contracting out with logistics companies

Nation's Business, March, 1994 by Julie Candler

When Barry Goodridge of Premier Inc. looked for a way to cut transportation and distribution costs, he turned to GATX Logistics Inc., of Jacksonville, Fla., to provide trucking, packaging, and warehousing services for his company's over-the-counter pharmaceutical, health, and beauty-aid products.

"The current size of our company doesn't warrant establishing our own distribution center," says Goodridge, Premier's director of sales. The Greenwich, Conn., company had $28 million in sales in 1992.

Nearly three years after the contract was signed with GATX in the spring of 1991, Goodridge assesses the arrangement as "very efficient."

Increasingly, firms nationwide are turning to third-party logistics companies to distribute products. At the same time, other companies, such as trucking firms, are getting into the logistics business. When GATX Logistics (originally called the Unit Co.) began in 1974, it was one of a handful of such enterprises. Today, about 125 companies--many of them formed in the past five years--provide contract logistics services.

"It's a concept of one-stop shopping," says Ken Siegel, deputy general counsel for the American Trucking Associations, in Alexandria, Va. "Instead of hiring 100 people to run your own freight department, you turn the work over to a logistics company, and they do everything, maybe even control your inventory."

In transportation, logistics is the process for the efficient and timely flow of goods, services, and information from the point of origin to the point of consumption. "It's taking a manufactured product and getting it to the ultimate consumer," says Maria McIntyre, senior director of operations for the Council of Logistics Management, a professional organization in Oak Brook, I11., with more than 6,800 members worldwide.

"Some of our clients are small and medium-sized companies with limited in-house staffing," says Larry Meek, president of Diversified Transportation, a logistics company in Atlanta. "They don't have the time or the personnel."

In Premier's case, its contract with GATX calls for goods produced at Premier's four plants around the country to be funneled to a GATX warehouse in Dallas and shipped from there to distribution outlets nationwide.

GATX also packages several Premier products. "GATX does all our special packaging and promotions even though we use a variety of packaging configurations and forms and often make short-notice demands," Goodridge says.

For Premier, a wholly owned subsidiary of Advanced Polymer Systems, of Redwood City, Calif., the logistics company provides about 1 million promotional packaging units each year for products that include Sundown sunscreens, TakeOff makeup-remover cloths, Exact acne products, and Orafix denture adhesives.

GATX Logistics, a subsidiary of GATX Corp., a Chicago-based equipment lessor, is one of the largest providers of contract or third-party logistics services in the nation. Its assets include 21 million square feet of warehouse space and 550 tractors and trailers.

The sophisticated logistics skills of companies like GATX are helping make U.S. businesses more productive and competitive by making their goods available more quickly at lower cost.

Robert V. Delaney, executive vice president of Cass Logistics, a management-software firm in St. Louis, credits logistics with cutting the country's physical distribution costs as a percentage of gross domestic product to an all-time low--9.8 percent--in 1992. In 1980, it was 14 percent. Delaney estimates that wise use of logistics and reduction of costly inventories helped U.S. businesses cut $1 billion from their annual physical distribution costs in 1992.

Contract logistics companies know how to find the proper carriers or other transportation services and negotiate with them. Logistics companies may also provide handling, warehousing, distribution, inventory control, electronic data interchange, and dozens of other services.

Hess Shoes, a medium-sized shoe retailer in Baltimore, turned to Ryder Dedicated Logistics, a division of Ryder Systems, of Miami, for help in January 1993. Tom Kane, Hess Shoes' director of operations, had concluded that making deliveries four times a week (three times at a few stores) could be just as efficient as five stops weekly.

Ryder Dedicated Logistics now provides a driver and a single truck that delivers shoes three to four times weekly from the Hess warehouse in Baltimore to 23 of the company's retail stores in the Baltimore-Washington area.

Before the contract with Ryder, Kane says, Hess hired its own driver and rented its truck from Ryder. "With dedicated logistics, we don't have to worry about the truck, its maintenance, or its driver. The same driver handles our work 95 percent of the time."

Kane estimates that the move to Ryder and the less frequent deliveries are saving Hess $18,000 a year.

Some logistics companies provide only management skills. They may provide their services free of charge, gaining their revenue from a commission paid to them by the carriers they hire for their clients.