Contract Logistics - Key block in Supply Chain Management

Supply Chain Activities constitute multi-modal transportation, customs clearance, and warehousing activities in one or more locations in the entire network. Supply chain activities may be local referring to within the country or regional meaning within a continent or region and global which is essentially intercontinental. Global operations are the order of the day as businesses follow markets and also look for cheaper conversion costs that are achieved by setting up manufacturing facilities in countries where costs are cheaper.

Take the case of Pharmaceutical industry. High cost of manufacturing led the companies to shift manufacturing out of Europe and US to South Africa, India, and other cheaper nations.

While inbound supplies from these countries may be consolidated in each country by the freight forwarder and shipped out, they may also be shipped out by the supplier to a third party warehouse in the destination country for VMI inventory replenishments. Inbound supplies may be running into thousands of part numbers and hundreds of shipments from a few hundred suppliers.

Finished goods, on the other hand, would be dispatched from the plant directly to a distribution center in the country or exported to another distribution center abroad. Similarly, each country distribution center would receive finished goods from the local plant, imported finished goods from other distribution centers. They would also receive the bought out items that are procured for integration with finished goods at the distribution center. The distribution center manages the inventory, completes any in-house process, etc. Further movement of cargo goes happens from the mother distribution center to subsidiary or secondary warehouses from where they finally reach the distributor.

If you plot the above two supply chains, you will see that at any time, the highest amount of inventory is help at the warehouse that holds supplier parts and the distribution center and subsidiary warehouse. The amount of shipments in the pipeline would be very small compared to the inventory at the warehouses. Plants do not hold inventories at all. Therefore, warehouses are critical to supply chain networks. Warehouses are the main links in the supply chain and their location and functioning in terms of operations affect the rest of the supply chain efficiency.

Distribution Centers, VMI Centers, Parts Centers and various business models of warehousing activities are now outsourced to 3PL Service Providers. Many companies do manage these as critical functions in-house, but the increasing trend is to outsource these activities.

A warehousing operation encompasses many value added processes and critical operations. In the case of plant logistics, these activities involve the complete responsibility of managing inbound traffic management, yard management, and inbound shipment receiving, warehousing and inventory management. In-house processes can include kitting; sub-assembly and any other value-add processes to be managed before parts are supplied to the plant. Any wrong transaction or mistake in the transaction will affect the production line and result in an increase in downtime. Other responsibilities managed include scrap management, packing material management, etc. In the case of automotive plants, these warehousing activities are very big and complex in size and word as independent companies on 24 x 7 basis with senior management being present at the site to manage the small company. Hypothetically In typical small size operations, a logistics facility could be receiving over a hundred shipments a day, unloading around 50-60 containers a day, maintaining inventory anywhere between 20000 to 35000 SKU part numbers, held in various modes in 8000 to 10000 rack locations and many more block stock locations. Outgoing supplies to plant may happen on call basis - every two hours and supplies can consist of a few hundred parts kitted as per the Bill of Material. All this activities needs to happen continuously on a shift basis. Contract Logistics companies have further extended their services into managing semi manufacturing processes within the plant.

Many multi-national companies have invested into building Contract Logistics capabilities. The management structure consists of supply chain managers, engineers and other technical staff required managing specific segments. Development of core competence in managing warehousing operations and supply chain network was perfected in Europe in automotive, retail and many other industries.

In cases where the operations size and processes involved are more than just a warehouse; normally it is referred to as Contract Logistics. The business is driven by a Contract Manager at the site with administration support staff and operations teams. Such sites normally call for a lot of investments in infrastructure including material handling equipment, racking, building, etc. The size of operations and investments being large, the contracts usually run for some years. The projects involve integration and building interface with IT applications of both companies to facilitate day to day transactions.


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