Nestle Outsources Logistics Functions
By George Anderson
Nestle Chile S.A. has given Ryder the task of managing its distribution network in that South American country.
“We selected Ryder to consolidate our distribution network into a more centralized operation with improved technology and visibility,” said William Beltran, Supply Chain Manager of Nestle Chile S.A in a released statement. “Ryder’s proven track record in transportation and warehouse management will help us bring new products to market faster and improve customer service.”
Under the deal, Ryder will manage two distribution centers responsible for serving more than 600 customers in that country. The company expects to handle between 60 to 80 outbound vehicle loads a day using handheld radio frequency identification (RFID) devices in connection with its warehouse management system.
Ruben Elias, managing director of Ryder Argentina said the company has provided a similar service to Nestle in that country since 2003. “We are proud to have earned their confidence in Argentina, which in turn has given us the opportunity to serve them in Chile. We are honored that Nestle Chile has selected Ryder to manage their distribution and transportation operations.”
Moderator’s Comment: Do you see outsourcing of logistical functions increasing in the CPG and retailing arenas? What are the pros and cons to outsourcing?
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George Anderson – Moderator
Logistics outsourcers publicize their new clients, not the ones they lose. Sometimes I hear about companies that switch logistics outsourcing partners. I’m curious to hear about companies that outsourced their logistics and then decided to take the logistics back in-house. Have you heard of any?
Absolutely! We will see this continue to grow across CPG companies in all categories and industries. CPG companies are (and have been) figuring out what they do best and then looking for ways to get the other work done more efficiently and effectively. CPG companies are out sourcing on both the front end and the back end. An easy example is P&G who looks to outsource innovation on the front end (yes there is more knowledge and creativity outside the 4 walls) and they use Third Party Logistics (3PL’s) for distribution and logistics. Gillette uses their packaging suppliers to manage and pack all their razors and supplies. So this will continue to build. There is little bad news except that you need to be careful and have clear processes and expectations for those who do your work on the front and back end, as it is your Brand Equity on the line. And the new news is we will see more manufacturing done on the outside by Contract Manufacturers – it just makes sense. They are growing somewhere between 10 -25%. With 85% of new products failing in the marketplace, why would you do it in-house during the first 2 years? So, the whole demand and supply chain is changing before our eyes. Stay tuned as the changes are only beginning!
Although I have no formal expertise in transportation or logistics, I think there are two or three major factors affecting transportation and both have implications for the near term and the future:
1) As we become more and more consolidated as manufacturers and retailers, our DCs must effectively and efficiently serve larger geographies and a number of different channels. I believe this requires a transportation network that can operate at costs that are often well below the cost structures that most manufacturers and retailers currently have. I also think the growing number of imports found at retail today will also play an important role in the overall logistics network we now have in the U.S.
2) The competition to find and employ truck drivers continues to be an area of concern for most large firms and the ability to get your goods moved during peak transportation periods will most probably come into play as we look to outsource our transportation in the coming years. The forecasted shortage of workers in the next ten years will also complicate this dilemma.
3) The larger transportation companies will have the clout to negotiate better contracts for equipment, services and fuel as time goes on. This will probably result in more outsourcing.
Outsourcing in general has become more and more the norm. Logistics is a natural for outsourcing. When you outsource, you are turning to an expert. You are, for the most part, dealing with a company who has a specific focus on that which is important to you. In this case, Ryder is the expert on distribution. This outsourcing should be a cost savings to Nestle and at the same time cause an improvement in the movement of their products to their customers. Sounds like a good move to me.
I do not see this building in retail, at least on a major regional or national player scale. Distribution logistics is too inextricably intertwined with core competencies which enable differentiation. For a retailer to outsource distribution logistics would be to put its ability to get the right product to the right shelf at the right time in someone else’s hands. Very much not in favor of that. Supply chain logistics (from point of manufacture to distribution center)…that’s a different story.
As to CPG outsourcing: absolutely. Product development, efficient sourcing, marketing and customer service are core competencies for the next 5 years. Customer service is one that can and should be outsourced, unless it represents one of the top two methods of differentiation in a commodity niche. In general, a CPG player simply wants to be efficient, meet the customer needs, and be competent. By focusing scarce resources on product development, efficient sourcing and marketing, the CPG player has the opportunity to produce a much higher ROI than by focusing on customer service through distribution logistics.
Although I agree that outsourcing will definitely continue to grow, there are some disadvantages. The obvious advantage, as has been mentioned, is using an organisation with expertise outside the manufacturer’s own, letting them concentrate on what they do best. This is also very relevant to retailers moving into new markets. The equally obvious disadvantage, however, is that outsourced businesses have more than one client and cannot give any of them the care and attention that a manufacturer or retailer would give to its own business. Sharing resources may help reduce costs but it could also reduce service. Caveat emptor.
Outsourcing of logistics and every area which they contact is a natural in the manufacturing and retail industries. This is a core competency which often determines the failure or success of these organizations, as well as the future of their relationships with their customers. We only need to look to the extremely successful organizations like Wal-Mart and Dell to realize how important logistics have become. Many companies do not have the core competencies in logistics, and it only makes sense that they outsource this. This will enable them to more aggressively position themselves with their customers as they better compete with customers who have strengths in their logistical competencies. Outsourcing is a great solution to many things, and logistics is certainly one opportunity that all companies should be looking at.
Will Nestle use this as a model for outsourcing in larger markets like Brazil’s Pet Care?