Last update:
February 14, 2012
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InHouse vs. Outsourcing of logistic on a example of project
- A consulting project from practice -
Dipl.-Wi.-Ing. Holger Block, fablog consulting GmbH

Introduction

Many strongly expanding enterprises, especially in the manufacturing industry, define core competence by the final product and often neglect important supporting processes in the value chain. This one-sided growth is than limited by the same «secondary processes» and can lead to blockade, production downtimes and to reduction of delivery reliability. Disturbances in the customer-supplier relationship up to destruction of the customer base may follow. Effected can be booth end customers as well as customers of semi-finished products in the Supply Chain.

The two steps to the problem

To avoid the negative effects of the neglected logistics the first step is the build up of inventory as buffer between critical production steps. This inventory build up usually represents beside the additional capital tie up an expansion of the production chain by non value-adding processes. In a consequence this method is not appropriate to eliminate the „bottle-necks“, because subsequent growth will go along with proportional iinventory increase and by that will lead to reduction of the balanced result.

An additional problem caused by the inventory increase following an increase of production capacity arises in companies with different locations. The „local reacting“ leads to isolated solutions which increases the number of interfaces between company locations and disturbs standardization.

After suitable growth in the second step the company faces the problem of disproportionate inventory costs and at the same time falling delivery reliability to the customer and recurrent production supply bottlenecks. Now it is understood that the logistics is as necessary tool to be able to maintain the defined core competence.

At this point the company management has to make the decision, how to procced with production supply, inventory management and customer supply. A decision can be:

• To accept it as a sub-core competences, to build up or increase own know-how and to keep the processes in the own house
• To go the way of Outsourcing and to enter therefore dependencies which may have direct influence on the product defined as core competence and the customer relations

A customer of fablog consulting GmbH, a supplier of electronic components, was in the described situation.

The solution of this problem

The company

The fablog customer is a leading provider of solutions for electrical connectivity, transmission and conditioning of power, signals and data in industrial environments. The company disposes of production plants, sales companies and representations in 70 countries with employees of about 3.000 and a turnover of 443 million euros in the year 2006.

The company develops, produces and sells products in the field of electrical connectivity, functional electronics and communication electronics.

Initial situation

Because of the strong production increase the company faced the task to basically optimize its logistics system. Vital issue due to the strongly increasing production was an non equivalent development of its logistics and in a consequence a lower delivery reliability to the customer.

Approach

As the first step it has been established that beside the internal optimization of processes the possibility of outsourcing of logistics to a service provider should be also considered. The current processes were gathered on site and visualized from the receipt of goods up to the dispatch.

Then was started to evaluate data material to assign costs, times, amounts, capacities, resources and the respective terms of business to the single processes. The weak points already identified at the data gathering and the technical evaluation of the current-state gave information about the optimization potential inhouse.

In parallel a specification was worked out for the service demands to an Outsourcing-partner and was handed over to potential external logistics service providers to submit an offer. Now both scenarios could be evaluated and compared.

Results

The evaluation of the described scenarios „In-House versus Outsourcing“ fastly revealed that the optimized In-House-solution would be the cheaper and more flexible solution under the given conditions. Factors not easily be quantified like customer satisfaction based on delivery reliability, security of production supply etc. were also considered as a decisive factor for the cost side and had a considerably share in the decision making process.

Crucial for the decision to keep the responsibility for the logistic inhouse were moreover beneficial internal conditions such as:

• agreements regarding working hours and operation times
• the commitment of the employees to keep logistics inhouse
• the intention of the management to further develop the existing location and staff

Especially in the logistics of small and mid size companies with the decision for In-House logistics it is necessary to be up to date with the necessary Know How for logistics management and personnel management and to be fit for the future with suitable adaptable extension scenarios.

For this reason it was decided to use with fablog consulting external specialists to build up its capabilities.

The project

The project was together developed in the end of 2007. In spite of some start up difficulties caused by missing or incomplete data, which were successively determined, the team is furthermore committed to the tight project schedule which intends the complete introduction of the building newly to be established with all necessary equipment till the beginning of 3rd quarter in 2008.

The analysis phase and the rough planning with the development of suitable extension scenarios could be concluded in 2007 together with decision for a preferential variant.

Special attention was laid on logistically innovative or automated solutions in all production supply areas. The solutions variants with different levels of automation were evaluated and compared to each other. An area-wise decisive matrix with „hard and soft-skill“ was so developed. Now beside the current optimum the customer is also prepared for future growth.

The functional areas

Small-part warehous-unit:
The production program requires a high number of small parts with a volatil demand to be on stock. With an ABC-analysis these parts were:

• according to the demand,
• according to stock range,
• according to number of storage places and
• considering the planned production growth

assigned to a double deep automatic bin storage (AKL) with 12,700 storage places. By reason of the standardization, also regarding the daily flows to an extern logistics centre, the previously used packing unit types were reduced to a standard box with defined measuring.

B-articles are stored directly in the standard box, while for C-articles the box can be further divided up to 8-fold into sub compartments according to the defined article range. Approx. 4,200 storage places can be saved in 2010 by the achieved packing factor of 1:4.

A-articles are stored in the pallet / mesh pallet (GLT) storage area. A weekly demand is stored in the automatic bin storage for picking. To reduce the workload of the picking area, which is linked to the automatic bin storage by an automated conveyer, AA articles (with demand > 4 standard boxes) are provided for picking in a separate live storage and refilled according to consumption.

By the reduction of the C- & A- article capacity in the AKL and the trougput reduction of A–article it was possible to save a complete aisle and storage/retrieval machine as well as to reduce the needed boxes. This reduced the investment need by 180.000 € .

Moreover, the reduction of the needed space for the automatic bin storage by the double deep storage and the reduction of one aisle allows extension scenarios for the box and pallet storage areas untill 2017.

Pallet storage
On account of the low throughput as well as the limited building height of inside approx. 8 m due to local regulations, an automatied solution for the pallet storage could not be justified. Here, the currently available equipment can be used (with capacity extension). For the time after 2010 when the volumes have reached a suitable level there are automatic solutions available which allow the reduction of the aisle widths to increase storage capacity as well as a reduction of fixed personnel costs.

Other storage areas
Beside the already described areas, additional storage and buffer areas have been designed based on the plant wide flow, e.g. quality control, bulky or long goods, coils, outbound parts to cooperation partners. Because of repeaded problems with the complience of the FiFo-principle for parts to be send to cooperation partners, dynamically administered gravitation roller conveyors will be used in future.

Interface production, supplier, customer
The production supply currently takes place manually on account of the demand data at short notice. Suitable hand over and receive stations are used. A steadily increasing number of articles is controlled with a Kanban system. To handle further increase of volumes, automated variants such as laser-steered automated guided vehicles (AGV) have already been considered.

Because the articles produced are partly susceptible towards condensation water caused by temperature variations, the complete inbound/outbound area has been equipped with temperature gates, which also substantially improve working conditions in this area.

Inbound
Beside the raw materials semi finnished products as well as finnished products are received

• from regional cooperation partners,
• other production sites and
• from the external logistic centre.

The goods must be delivered and controlled separately according to the quality assurance regulations. A quality inspection area with conveyors for boxes has been designed directly in the reception area with connection to the outbound area for passing articles.

Outbound
There is a continuous material flow in both directions between the production plant and the logistic distribute centre. That is why a shuttle truck service has been established and the inbound and outbound areas are combined. A separation from the other inbound/ outbound areas made sense there because the flows have matching volumes, the area is used for the consolidation of the own and foreign production and the QS-regulations differ from the other areas. Furthermore loading and unloading could be separated by the use of swap bodies with air-conditioned joining station.

Other outbound areas with the need of separation from inbound have also been located according to the material flow.

The necessary administrative areas are located on a mezzanine floor above the inbound/ outbound area to save place for logistic processes and to provide a good overview about the functional areas.

Future development

Now the "Best-Practice" variant adopted at the end of 2007 for an optimized Inhouse-logistics will be planned in detail at the beginning of 2008 together with fablog consulting. Necessary equipment will be tendered, purchased and is put into operation. With this solution the costumer will be able to unleash production area and improve supply performance to fulfill the planned 10% annually groth. "Soft-Skills" like delivery realibility are the best way to a contented customer. After finished certification by German Institute for Standardization ISO 9001, 14001 and several won awards of the country of „Thüringen“ the customer has come forward to the next goal with support of fablog consulting. The inhouse logistics will be prepared for the future needs very well.

In general

A survey done by SLV among 596 companies with an average size of 450 employees shows the decision of our customer to do logistics inhouse with own staff is up to date: „A change in thinking, with inclusion of the logistics as a core competence, also as a direct interface to the customer, has arisen interestingly also with small and mid size companies. That opinion, however, is contrary to the question after the personnel expenditure structure in the logistics of the companies. While 37% of the companies in 1997 held a lowering of labour costs for absolutely necessary, there were in 2006 only 17%.

Source: Cogent Economics