When Hercules Inc. ran into financial difficulties back in 2001, the Wilmington, Del.-based manufacturer of specialty chemicals decided to take a hard look at all of its operations and reengineer the way it did business. As part of that cost-cutting process, the company handed off the management of its domestic carriers to Odyssey Logistics and Technology, a third-party logistics company (3PL).

Hercules took quite a gamble by going that route. Not only was it the first time the company had outsourced its transportation management, but it also chose a start-up company as its contract services provider. That gamble, though, has paid off handsomely: Since then, the 3PL has saved Hercules some $4.5 million in transportation costs by optimizing shipments and leveraging shipment volumes with fewer carriers.

Three years ago, Hercules had five business units, each making a different type of chemical product. When one of those units, a manufacturer of water-treatment chemicals, failed to earn a profit, the parent company began to examine all of its operations for cost saving opportunities. (Hercules has since sold that business.)

"We set a criteria that said, if something we do within Hercules doesn't represent a core competency, and if the scale with which we do it does not create a competitive advantage for the corporation, then we need to take a look at it and seriously consider outsourcing that function or service," recalls Rick Pekarski, director, global supply chain operations. "Transportation management fell into that category."

At that time, Hercules had a small transportation department, which managed shipments from the company's North American manufacturing plants. Those shipments moved by water, less-than-truckload (LTL), truckload, and tank-truck transportation. Over the years, the department had been downsized to just six people, who managed the largest-volume carriers. Although the staff was doing its best, Pekarski says, they weren't providing the level of service required by the company's different business units. For instance, there was no process for consolidating loads, nor was there a shipment reporting system. There was no formal method for selecting backup carriers. In addition, no single individual was responsible for the entire transportation management process, from pricing to execution and payment.

Hercules looked at a number of ways it might improve its transportation management performance. For instance, managers considered outsourcing some activities to several regional providers. Although that approach would have allowed Hercules to benefit from the expertise of each provider, the company would have had to deal with multiple points of contact when resolving problems. It also would have required the company to develop and maintain several different information-system interfaces.

Another possible course of action was purchasing a transportation management system (TMS) software package. At a million dollars in software, hardware, and implementation costs, though, that would have been too expensive an investment for a company that needed to cut its spending. Implementation, moreover, would have required as long as a year to complete, and Hercules would have been stuck with the cost of maintaining the system. "We would have had to add staff to our fixed costs," Pekarski says. "It wasn't right for us."

Rather than buy a TMS package outright, Hercules examined the possibility of "renting" one online from an applications service provider. That was ruled out, however, in part because the existing staff lacked the necessary skills to run a TMS. Managers also worried that if the existing employees did not change their mindset, they would continue to suboptimize the company's freight movements.

After careful deliberation, Hercules opted to outsource its transportation management to a single contract logistics company. After screening several candidates, it selected a newcomer to the third-party logistics scene, a start-up venture called Odyssey Logistics and Technology, headquartered in Danbury, Conn.

Pekarski concedes that his company's choice of vendors was a bold move that entailed some risks. But Odyssey stood out among the candidates because of its fit with Hercules' own corporate culture. Prior to forming the 3PL, Odyssey's executives had run UniGlobal Logistics, a subsidiary of chemical giant Union Carbide. When Dow Chemical bought Union Carbide, UniGlobal's senior management launched Odyssey.

"These guys had years of history at Union Carbide managing logistics much more complicated than that of Hercules," Pekarski observes. "We felt they were chemical people who talked our language and understood our issues. At the end of the day there's a risk factor, and we took a high-risk, high-reward path, essentially."

Hercules and Odyssey signed a five-year, multimillion dollar contract that included a provision for gain-sharing for both shipper and 3PL. "Our interests were to clean up the work processes and make our costs variable," Pekarski says. "We felt that it was important to provide them with financial motivation to work with us to drive down costs."

In the fall of 2002, shipper and vendor began the transition from the corporate transportation group to the 3PL. During that period, Odyssey's employees "shadowed" Hercules' transportation staff and worked collectively to map out 55 work processes, which served as the basis for electronic interfaces between the shipper's and the third party's information systems. Hercules' transportation staff then reversed roles and shadowed the 3PL's workers to verify that they had mastered all the details.

In December, the in-house group was disbanded and Odyssey Logistics became, as Pekarski puts it, "the face" of Hercules to its carrier community. The 3PL hired a couple of the in-house group's employees, a move that helped promote continuity, he adds.

Today, Pekarski and Hercules' logistics council, which includes logistics managers from each of the company's four business units, oversee the 3PL's activities. "Beyond the implementation, the council will be the management mechanism by which we manage the interface with Odyssey," Pekarski explains. "They speak for each business and collectively they speak for the corporation."

It didn't take long before Odyssey set about changing the way Hercules purchased transportation services. Prior to assuming control over carrier management, the 3PL had extracted data about transportation expenditures from the shipper's SAP computer system and examined every shipping point, including manufacturing plants, warehouses, and the locations of co-producers that make product under contract. Odyssey found that Hercules had engaged some 400 transportation companies to ship its product throughout North America. Because it was using so many carriers, the chemical company didn't always leverage its freight volumes to negotiate lower rates.

Mode by mode, the 3PL winnowed the ranks of Hercules' carriers, consolidated shipments wherever possible, and secured lower rates from the remaining providers in exchange for larger freight volumes. Odyssey applied the carrier-reduction program first to marine transportation, then to LTL, truckload, and tank-truck transportation.

Less than two years later, Hercules has cut the number of carriers it uses in half, a move that saved the chemical manufacturer some $4.5 million on transportation expenditures in 2003. "[Odyssey] did a network optimization and looked at the moves," Pekarski explains. "They looked at the number of carriers we were using, collapsed the carrier base and put more volume on fewer carriers, and leveraged that volume for better price and service."

In addition to reducing the carrier base and consolidating shipments, the 3PL installed sophisticated transportation planning software that automates load tendering and the receipt of carriers' acceptance of shipments. This system has provided Hercules with improved visibility over its shipping patterns and costs—something the shipper hoped to achieve by working with a 3PL. "Our expectation was that we could get a deeper dive into the data," says Pekarski. "Data is critical."

Pekarski expects his company will realize more benefits from working with Odyssey. For example, the partners are looking at ways to extend the cost-savings program to shipments made by co-producers as well as to export shipments.

The supply chain director also expects the 3PL to continue analyzing transportation data to find more opportunities to save freight dollars, such as identifying shipments that could be switched from truck to less-expensive rail transportation. "As we go into this year, we're in a whole different realm," Pekarski says. "We can slice and dice data to get a good analysis to find opportunities to better serve our customers at a lower cost. We will drive further cost reduction through optimizing modes and freight utilization."

Although the hiring of a third party has simplified some aspects of the business, Pekarski concedes that the switch to contract distribution was not an easy change to make. "This is a complex process that affects a lot of groups, from accounting to customer service. There's a lot of change management and a fair amount of automation between the two companies to strip out cost and complexity," he observes. "If a company is going to consider outsourcing, it's like a marriage. You've got to pick the right one."

Pekarski believes that his company chose the right partner. "I've been in the chemical industry for 30 years with Hercules," he says, "and the chemical industry margins are always under pressure." A good 3PL, he adds, allows its client to focus on what it's good at and avoid getting distracted by other things that might interrupt the flow of commerce.

In fact, he expects that the best years lie ahead. "The real benefit," he says, "comes in year two or three years and beyond, when the service provider starts to understand your business and looks for further opportunities."