LETTING GO

MINA WILLIAMS

A&P, Montvale, N.J., outsourced trucking and warehouse operations.

Associated Food Stores, Salt Lake City, outsourced its maintenance facility.

Kroger Co., Cincinnati, and Safeway, Pleasanton, Calif., outsourced refrigerated warehousing.

These are just a few examples of an emerging trend: Supermarket operators are cutting the apron strings from some logistical operations in an effort not only to save money and gain efficiency, but to free up precious time to focus on more pressing concerns. "There is a trend to outsourcing trucking, logistics, warehouse management and maintenance," says Ken Johnson, vice president operations, Merchants Terminal Corp., a third-party logistics provider based in Jessup, Md.

"There are not a lot of retailers investing money into logistics these days," said Hal Justice, executive vice president, sales and marketing, Americold Logistics, a cold chain logistics provider based in Atlanta.

"Rather than building bricks and mortar [for logistics] and adding distribution facilities, they are investing in stores," Justice added.

"We outsource some of our logistics functions where it makes sense," said John Metzger, vice president, supply chain and logistics for A&P. The chain currently outsources part of its trucking operations and some warehouse functions.

"We take a look at expertise, resources and core competency when evaluating whether to outsource or not," Metzger said.

Another Eastern Seaboard retailer has steadily moved from maintaining total control to outsourcing.

The tried-and-true business model of the operator was to control as many facets of its business as possible. The chain had operated a bakery, a print shop and a bottler, for example.

Industry observers point out that as the business grew, the retailer started losing the focus of what it did best -- namely, selling food to the public.

"A whole lot of assets were tied up in things that were not their core business," said one observer.

Being in the competitive Eastern market compels supermarkets to compete at a higher level. Thus, the chain honed its strategy and engaged specialists for several links in its logistics chain.

Out West, Associated Food Stores is one operator that has recently examined what it does best and shifted to outsourcing a piece of its logistics puzzle. The company now outsources its maintenance facility, according to Bryan Goins, director, logistics and transportation.

However, officials there said this move was made with the logistics team's eyes wide open.

"If a company looks at outsourcing as a cure, they are in for a big surprise," Goins said.

Previously, the wholesaler had outsourced its security function at the yard's gate.

"We were having trouble finding people for that $8-per-hour job. We were given an opportunity to outsource the security and we thought that a headache would be eliminated," Goins said.

A few months later, Associated reversed its decision because the outsourcing company experienced too much turnover in personnel.

"Many times, operators outsource saying they want to stay within their core competency. So they find a company where a particular function is their specialty," Goins said.

"However, 20% to 25% of the time it doesn't work. Going into a project thinking outsourcing will make all the problems go away is not always the case. Outsourcing is not always the answer. Outsourcing doesn't mean you never have to worry about it anymore.

"We have looked at three or four companies to take over our inbound functions," said Goins. "The companies ask for data and they crunch it to get their estimate. It could cost us money if we did not know how to negotiate a deal. It is expensive to evaluate the ins and outs of businesses."

Associated was able to take advantage of Goins' previous experience as a outsource supplier working for a large truck-leasing and logistics company. "I knew where we would break even and where we could save," he said.

Additionally, the wholesaler negotiated for additional services, including logistics studies.

Leading retailers, including Kroger and Safeway, moved this year to third-party refrigerated warehousing to free up capital.

It has proven to be an invaluable bridge, as the operators have leaped into geographic areas previously not within their marketing areas.

Still, the silver lining for using third-party refrigerated warehouses is in offering retailers flexibility for seasonal items and the opportunity to do forward buying.

Using frozen turkeys as an example, many operators pointed to the fact that prices are lower in February than in September.

"We have to have a place to store them," said an Eastern meat buyer. "We want to take advantage of the price and create innovative marketing programs to get people's attention and change their behavior."

One operator has tapped Americold's expertise because of a chronic shortness of space. The chain has split the distribution functions between itself and the outsourcing company in an effort to maintain a degree of control over the logistics function. The chain uses its own fleet, maintaining a seamless presence to its units, but uses Americold's facility to receive and store temperature-controlled goods.

Technology shifts drove Associated to maintenance outsourcing for its transportation fleet.

"A lot has changed over the past five to eight years," Goins said. "There are a lot of electronics and extended warranties. Maintenance is more complex. Our mechanics could tear down engines and rebuild them, but they did not have the discipline for preventative maintenance. We would have had to change the culture in the shop. We decided to go with someone with a core competency in maintenance."

Instead, Associated partnered with Ryder Trucks to provide maintenance for its trucks.

The partnership has proven to bring additional benefits to the wholesaler. As expansion began into a newly purchased warehouse formerly owned by Rite-Aid, Associated made plans to build a new $1 million maintenance shop.

However, Ryder developed a plan to employ the existing two-bay shop, reposition the fuel island, enclose the facility and add two additional bays. This eliminated the necessity to build a shop and reduced the capital expenditure to $140,000.

The wholesaler has also used unconventional outsourcing companies for maintenance of refrigerated trailers. It has 200 of these trailers to keep road-ready.

"We originally went to Carrier Corp. to buy new units and asked them to take over maintenance. Carrier built a special service truck for us," Goins said.

While the wholesaler gladly outsources maintenance, trucking is where they draw the line.

"Our drivers are our face to our customers," Goins said. "We would never outsource trucking.

According to a Food Marketing Institute Transportation & Fleet Maintenance Report, though, there is a definite movement toward third-party logistics providers, especially when it comes to transportation.

Over the past few years, several operators have outsourced their entire transportation fleet, the report states.

The leading reason for this given in the report was the elimination of labor contracts. Boosted customer service and lower costs were also cited as factors in the decision-making process.

However, there are some who believe outsourcing isn't always what it is cracked up to be.

"There have been negative connotations as well as bad approaches taken to outsourcing," said Thomas Murphy, president, Peak Tech Consulting, Colorado Springs.

"Many times the business is not handled better. Some retailers believe you can hand over and ignore parts of the business, giving segments over so they can ignore them feeling like they don't have to worry about them. This has created a lot of failures," Murphy said.

To combat the failure rate, Murphy suggests right sourcing, or identifying a portion of the business another company can do more efficiently, and then building a business relationship with the outsourcing company that makes sense in the corporate culture of the retailer.

"When you believe somebody can do a function better, not cheaper, but more effectively and efficiently, then giving up part of your business to the right source makes sense," said Murphy. "Particularly when the other company has leverage and knowledge you don't have. That can be used to improve efficiencies."