Known for its cutting-edge innovation, and no-nonsense approach for solving problems through technology, Sun Microsystems Inc. didn’t waste any time in addressing a nettlesome source of added cost: The uneven performance by contracted third-party logistics providers (3PLs) serving its distribution channels.

“We were confronted with two major logistics challenges,” recalls Kuljit Rai, Sun’s supplier manager who’s based in the company’s Fremont, Calif. campus.

“First, was the lack of accurate forecasting of the demand. Second, was the perception that some—if not all—or our logistics activity could be viewed and measured in a different way. “The notion that Sun could “commoditize” logistics was a major hurdle due to cultural resistance, says Rai, but one that had to be approached with confidence. “We considered traditional one-on-one and RFQ negotiations with potential intermediaries, but in the end, we went ahead and started a bidding model.”

The evolution of such thinking is easy to trace: Sun’s logistics had long been outsourced to a network of 3PLs that held its “sub-tier” supplier’s logistics contracts on Sun’s behalf. This network of 3PLs was held totally accountable for logistics performance end-to-end—in other words, another layer of complexity was in place. This included assurance that Sun was paying competitive rates, and guaranteed that its 3PLs were conducting regular “request for quotes” (RFQs).

But two years ago, the company began to examine another part of its model for ideas on how to streamline its logistics process. “We were utilizing a best-in-class 'e-sourcing’ program and methodology for general procurement that had historically been used for raw materials and commodity procurement,” he says.

In essence, Sun was working with its e-sourcing partner Ariba to cast out its line and reel in the best offers. So, why not use these Dynamic Bid Events (DBEs) as an alternative to the old way of hiring logistics and distribution providers? After careful evaluation and planning, Sun launched two bids (one in the United States and one in Europe) targeted at “second tier” carriers in the fall of 2007. “We even worked with our main 3PLs to conduct DBEs for the lanes within the network managed by these carriers,” says Rai.

But the experiment was not without its problems, admits Rai, who remembers how resistant some of the potential bidders were at first. “Many were apprehensive about the DBE process,” he says, “and we had to conduct a series of teleconferences and meetings to resolve their concerns. In the end, they came to trust us, and feel that we were all on an even playing field.”

A two-step process was then introduced: First, Rai and his team produced a request for information (RFI) that identified qualifying elements for bidders. Sun communicated “prerequisites” to all bidders via the system and bidders then had to accept these to qualify for the event. Sun then worked on a logical breakdown of all the lanes it wanted to bid. The second step was a price compression, or RFQ, which was done via the DBE.

“The Logistics DBE process proved itself to be very efficient and drives a very competitive bid environment,” says Rai. “The process is structured such that all bidders can view their rank for the lanes being bid and have opportunity to adjust their rates accordingly to win the business.”

And the results further strengthened Rai’s position, as everyone soon recognized, that cost was being stripped out of several key distribution lanes. The DBE structure soon became part of the company’s culture and won over new admirers as a consequence.

“The approach proved to be so efficient that our main 3PL now uses it instead of the traditional RFQ,” says Rai. “For them, too, it provides a confirmation that they are being given competitive rates—and in some cases—rate reductions.”

The transparency is another added benefit, says Rai, since all documentation is received on-line, the logistics team can see and archive bid results in real time.

However, vigilance is key, says Rai, who adds that the only way to build this success is to continue to benchmark performance and pricing trends at all times.

Sun Microsystems, Inc.