Third-party logistics service providers, like everyone else, navigated through the pandemic’s dark, unfamiliar recesses without a good road map to guide them. It was a time when, as a nation and an economy, we were dealing with unprecedented circumstances driven by a once-in-a-century health emergency of a scope, depth, and scale never before encountered.
Thankfully, the pandemic has subsided—mostly. Businesses—and their logistics service providers—are slowly recovering their footing and figuring out the lay of the land in today’s new normal.
Yet it is anything but normal. Inflation, while moderating somewhat, continues to raise the costs of just about everything. Consumers are still experiencing persistent supply chain delays and shortages of goods. Shipping volumes have declined, and trucking capacity remains loose. Some inventories are still out of position and need to be redeployed. Warehouse vacancy rates are the lowest in a decade.
What did third-party logistics service providers (3PLs) learn? How do those learnings affect the 3PL business model? And what do shippers want now?
RIPE FOR DISRUPTION
To answer those questions, it helps to know a bit about the sector’s recent history.
A huge sea change already was underway in logistics when Covid hit, recalls Matthew Beckett, senior director–analyst at research firm Gartner Inc. “First was the onset of digital transformation in an industry ripe for change,” he notes. “Second was how e-commerce exploded onto the scene.” Combined, “those two elements had a massive transformational effect on 3PLs” and how they engaged with and serviced clients. “It [Covid] accelerated what was going to take a few years to happen to literally … a matter of months.”
He believes 3PLs as a result have had to take a hard look in the mirror—and reimagine themselves. “I think they failed to innovate. They didn’t respond effectively or fast enough to the need for end-to-end visibility. They were slow to adopt and implement digital solutions,” he’s observed. “They did not scale quickly enough.”
Nevertheless, 3PLs now are racing to catch up, adapt, and develop the technology tools and capabilities necessary for today’s post-pandemic supply chains. They are doubling down on end-to-end visibility and converting manual processes to digital. They are betting big on integration and data hub capabilities. They’re extending further upstream into a client’s forecasting, sourcing, and manufacturing activities, and downstream to support multiple fulfillment channels—both e-commerce and resurgent brick-and-mortar sales. And they’re dealing with an explosion of last-mile home deliveries, from parcels and packages to big-and-bulky items.
Beckett says there have been big changes in 3PLs’ mindset as well: They’re putting a much more solid stake in the ground and investing in innovation across all aspects of supply chain operations and control; being truly committed to partnerships, including taking real skin in the game with the client; making an honest, credible commitment to meaningful collaboration, not just lip service; and weaning themselves from a historical reliance on transactional relationships.
All of this is leading to the emergence of next-generation “4PL” models, which Beckett describes as “a logistics integrator [using a common platform to] manage physical execution through external networks.” He adds that “the 4PL typically assumes total responsibility for the design, build, run, and measurement of an integrated and comprehensive ... end-to-end supply chain.
“Shippers want more innovation and less transactional focus,” Beckett believes. “The biggest hurdle to overcome is trust. The industry has had a transactional mindset for so long it’s hard to shed that and develop the type of trust needed for a true, collaborative partnership.”
A LIFETIME OF LESSONS
No industry was more impacted or thrown into disarray by the pandemic than health care. As Covid-19 spread throughout the country, it placed incredible burdens on health-care systems. It exposed serious fissures in the traditional supply chain operating model—a model that focused on lowest cost, reliance on indirect suppliers, and just-in-time (JIT) inventory practices, which in some cases failed under the unprecedented stressors on the industry.
Demand for goods, particularly personal protective equipment (PPE), went through the roof. Inventories were there one day and gone the next. Traditional methods and practices of acquiring medical goods and securing inventory went awry.
“It was a lifetime of lessons,” recalls Tom Harvieux, vice president and chief supply chain officer for St. Louis, Missouri-based BJC HealthCare, one of the nation’s largest not-for-profit health-care systems. BJC operates 14 hospitals, multiple outpatient centers, and 300 clinics, collectively with some 3,200 beds.
In pre-Covid times, “our supply chain was built around maximizing low cost. We were highly reliant on intermediaries, third parties, indirect sourcing, and buying product through distributors,” he notes. “There was very little focus on end-to-end visibility.”
Relationships were transactional. “Silos” of procurement and logistics services between trading partners did not communicate well or at all. “It didn’t lend itself well to collaboration,” he says. “There was little coordination between sellers, buyers, and the people responsible for running the logistics organization”—in other words, those whose job it was to get supplies to hospitals and on the floors where and when they were needed.
That was his view of BJC’s supply chain before the pandemic. In 2018, he and his team embarked on a fundamental redesign and restructuring of their supplier sourcing and supply chain model. They wrote an RFP (request for proposal) seeking a service provider that could centralize logistics and stand up a dedicated BJC warehouse to serve the entire BJC system, automate “the heck out of it,” staff it, and institute not just tools and processes, but also an effective, proven continuous improvement mindset and culture throughout the operation. Oh, and reduce product cost and improve inventory availability by an order of magnitude.
Funding was secured in 2019. Seven bids were solicited, received, and reviewed. BJC settled on Ryder as its 3PL vendor for the warehouse setup, including a WMS (warehouse management system); automated storage and handling equipment; systems integration; a dedicated, closed-loop transportation network; and a visibility platform. BJC would handle front-end inventory planning, forecasting, and buying. What tipped the contract in Ryder’s favor was its attentiveness to BJC’s requirements and requests. “They listened when it came to our automation needs,” Harvieux says.
Work started in early 2020. And then Covid hit, searing its way through the populace and putting health-care systems under unheard-of pressures. Given the lean nature of JIT practices, “there was not a lot of buffer. So, when demand spiked with Covid, it just broke the entire supply chain,” mostly around acquiring PPE, he recalls.
Harvieux’s team members found themselves running on parallel tracks: still operating the old model and struggling, like every other health-care system in the country, to keep their hospitals stocked with supplies in a raging pandemic, while simultaneously helming a fundamental reinvention and buildout of the new model. It was like trying to build a new car while still driving the old one.
SIMPLIFY AND TAKE CONTROL
BJC’s objective was to move from a “distributor-managed” model to a “self-managed” one. The distributor-managed model starts at the hospital dock door, meaning the health-services provider is receiving goods but not managing inventory or distribution. By contrast, the self-managed model leverages a 3PL group to complement the health-care system’s in-house resources to provide full control over an end-to-end supply chain, including supplier sourcing, inventory management, and distribution.
Harvieux cites several critical goals for the reinvention, with the overall mission being to “simplify and take control.” Among the keys: Ditch [mostly] buying from intermediaries such as distributors and develop strong, enduring relationships directly with manufacturers. Stand up a dedicated warehouse where BJC owned and controlled the inventory. Hire a specialist (Ryder) to design the warehouse layout, spec tech and equipment, project manage the buildout, hire and train staff, and start up and run the warehouse (“Running warehouses isn’t our core competency, nor should it be,” Harvieux recalls telling his team).
Other primary objectives: Install the best automated systems on the market. Integrate BJC’s existing ERP (enterprise resource planning) system with an advanced WMS platform for real-time inventory and order management, analytics, and fulfillment. And, last but not least, layer over the top a “single source of truth” visibility platform connecting all the nodes and flows in BJC’s supply chain.
Harvieux emphasizes that it was paramount that BJC have the full picture of its supply chain, constantly updated, on demand, 24/7. That meant an all-encompassing solution providing accurate, real-time end-to-end visibility—from orders placed at manufacturing, to product leaving the plant, through transport, to cross-docked at the warehouse, in inventory, picked from inventory, individual order shipped, in-transit, and received on a specific floor of a hospital. The answer for BJC: RyderShare, the 3PL’s dedicated visibility offering.
Work on the distribution center began in August 2020 and was largely completed in November 2021, when BJC started to receive and build inventory. Outbound operations (shipments to hospitals and other BJC facilities) commenced in January 2022.
The project saw BJC and Ryder stand up a new 412,000-square-foot ambient-temperature facility with 44 dock doors. It has 20,000 pallet locations and 1.3 miles of conveyors. Its AutoStore automated storage and retrieval system has 27,000 bin locations. All told, the DC houses 6,500 active SKUs (stock-keeping units) from more than 100 suppliers that encompass numerous health-care commodities, including tape and bandages, surgical supplies, and medical devices. In the facility, Ryder manages a workforce of some 160 employees who perform various warehouse planning and operations, material handling, administration, and fulfillment roles. All employees participate in Lean continuous improvement activities.
Harvieux recalls that under the old model, BJC facilities were dealing with “hundreds” of parcel shipments daily from distributors and manufacturers—at a significant cost. Since transportation and logistics expense was built into the product price charged by the distributor, it was difficult, if not impossible, to know the true costs of goods purchased.
Under the new self-managed model, those parcel shipments have essentially disappeared, replaced by consolidated, sequenced loads delivered daily (and sometimes two or three times a day) to hospitals by dedicated truck. Harvieux and his team now have clear visibility into—and control over—actual logistics and supply chain costs. And, because goods are sourced directly with manufacturers and suppliers, shipping costs once embedded in product pricing are stripped out—providing significant savings in cost of goods purchased. The savings also have been significant on the annual operating cost of the DC.
HOW IT WORKS
BJC and Ryder collaborated to build a fully engineered warehousing, inventory management, fulfillment, and transportation solution. Multiple highly reliable systems and re-engineered processes were designed and implemented around reorder points and how hospitals send signals back to the DC.
Typically, hospital departments drop orders into the ERP/WMS every afternoon. By 6 p.m., orders are picked from the AutoStore system and the totes are loaded, stacked in designated order on pallets, sequenced in trailers, and rolling out of the building on dedicated Ryder trucks (typically a tractor pulling a 48-foot trailer) for delivery.
Trailers are loaded in a specific sequence dictated by the WMS. For example, supplies needed for surgeries are on top of a pallet at the tail of a trailer. This allows hospital staff who are unloading pallets to get those more time-critical items onto carts for delivery first. Hospital staff don’t have to guess where supplies go; every tote in the trailer has a label specifying the destination floor, storeroom, and/or locker. At any time, Harvieux and his team can go into RyderShare and check the in-process status of any supplier order in transit, item in the warehouse, or order being filled as well as the status of a particular product, such as a surgical kit, that’s en route to a hospital.
“We implemented a Kanban system for triggering orders from hospitals into the DC,” Harvieux explains. BJC’s ERP system has near-real time inventory data and communicates constantly with the WMS. Hospital staff place orders in the ERP. If inventory is available, the order is passed to the WMS. Once an order is picked at the DC, confirmation is passed back to the ERP, which updates inventory records. In some cases, orders are triggered automatically based on minimum/maximum quantity levels written into the ERP’s instructions. Harvieux’s team manages and oversees the entire process.
During the pandemic, BJC’s fill rates (percentage of orders completely filled and delivered on time) struggled to reach the low 90% range, and for some products, even lower.
With the new DC, fill rates are consistently hitting 98.5% for orders going to the nursing and surgical procedure areas.
Building direct relationships with suppliers has provided an added benefit on the inbound side, Harvieux says. Before, shipments arrived in all shapes, sizes, and packing configurations. There were no consistent guidelines for how suppliers packaged, segregated, and shipped orders. Now BJC has collaborated with its direct suppliers to create a common set of instructions for how goods are to be packed, loaded on pallets, and sent to BJC. That’s enabled other efficiencies in the receipt and putaway of inbound goods when they arrive at the warehouse.
WORKING OUT THE BUGS
While there are still hiccups here and there, and some bugs to work out, Harvieux is pleased with how the overall project developed, was executed, and is operating today, including the technology, integration, and warehouse management. “We would have struggled with the technology and the integration because that’s not a core competency of ours,” he notes.
And for the rest of the 3PL industry, the story of BJC and Ryder provides a real-world example of the success that can be achieved when the old transactional ways of doing business are set aside and replaced with relationships built on trust and meaningful collaboration.
