Smith & Nephew is in the trauma business, but it doesn't want any emergencies in its distribution system. Like a lot of companies, the $5.7 billion manufacturer of medical supplies prefers to concentrate on its core competency, not on transportation or warehousing for its products, which include bio-engineered skin, surgical supplies, and burn and wound dressings.

That's why Smith & Nephew turned over U.S. distribution for its wound-care division in 1999 to APL Logistics, a third-party logistics company (3PL). APL operates a dedicated, 59,000 square-foot warehouse for wound-care products outside Atlanta. It handles approximately 450 SKUs, all of them lot-controlled and shipped on a first-in/first-out basis. Inventory turns 10 times a year, and while they're in the facility, products are stored at temperatures below 77 degrees to prevent degradation of many of the adhesives.

Logistics Manager David Blythe praises APL Logistics for its work in a number of areas, from labor utilization to facility layout to equipment selection. As pleased as he is with APL's service, though, it still took some time to establish boundaries for that relationship.

At first that wasn't an issue because the 3PL was learning about Smith & Nephew's business, Blythe says. But later, APL asked for control over more functions in order to better manage information and work flow. Rather than automatically agree, the shipper carefully considered which activities to outsource and which to retain in-house. Today the company continues to handle some transportation and logistics functions on its own and gives APL responsibility for others when it makes sense economically and increases efficiency.

Even when shippers like Smith & Nephew are pleased with their 3PLs' performance, they still must manage those relationships to ensure that they're getting their money's worth.

The first step toward successfully managing a 3PL relationship is to establish objectives for the contract distribution provider and metrics for rating its performance. The shipper's expectations should be clearly stated in the terms and conditions of the contract.

Those expectations should include specifics on who will be responsible for what, and the chain of command should be clear to both sides. That requires shippers to give some serious thought to how they want to restructure their logistics organization.

That decision often depends on how the company's upper management perceives the role and importance of its supply chain management function, says Albert J. Giunchi, until recently director of distribution and logistics for Hartz Mountain Corp. Some companies give the 3PL total control and virtually eliminate their in-house organizations, although experts advise against that approach. Others outsource day-to-day operations and get involved when there are problems. "Some shippers hire a 3PL and say, 'Don't bother me,' " Giunchi observes. "Others only want to know when something is about to blow up."

At the other extreme, shippers may appoint an in-house "traffic cop," a detail-oriented person who keeps tabs on the 3PL and measures every move. The most effective approach for many companies is a blend of the two extremes, with personnel from both sides working together. That strategy offers the best of both worlds: 3PLs' expertise in specific areas married with shippers' in-depth knowledge of their products, customers, and markets.

Once an outsourcing firm has proved its worth, the shipper can let up on the reins a bit. Consultant Richard Armstrong, who publishes an annual guide to the 3PL marketplace, says he's seen very few shippers turn over their entire supply chains to third parties. Instead, he says, they are giving related or integrated functions to 3PLs that have a proven record of success in those specific areas.

Smith & Nephew, for example, has allocated additional responsibilities to APL since signing its first contract with the 3PL in 1999. In the beginning the relationship was fairly cut-and-dried, recalls Blythe. After a while, though, APL asked for control of inbound scheduling to better manage workflow. "Since we had on-site representation, we were more willing to give them this control as we could still communicate priorities," he notes. In some areas, shipper and 3PL split responsibilities. "We later gave them export control of documentation, tracking, and communications, but we still choose the carriers," Blythe explains.

The details of 3PL arrangements are also likely to change after the shipper's information system has been integrated, either totally or in part, with that of the 3PL. In-house staffing levels will depend to some degree on the extent of that integration and which activities have been automated or shifted elsewhere, shippers say. Continued...

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