U.S. manufacturers are increasingly outsourcing their international logistics functions. One important reason is that third party logistics providers, whose primary function is to move freight by the most efficient means possible, are offering advanced information technology and broader global coverage. This enables more companies to concentrate on their core competencies such as manufacturing or marketing and leave the logistics to 3PLs. In the high-tech electronics industry, whose global nature and customer service demands dictate the need for critical skills in supply chain management, outsourced logistics is particularly valuable.

National Semiconductor Corporation, a manufacturer of state-of-the-art digital technology based in Santa Clara, Calif., realizes substantial savings on its global supply chain costs by outsourcing its logistics activities. The company, which reported $2.1 billion in sales last year, distributes semiconductor chips and related products to more than 3,800 customers worldwide. Prior to 1992, the company distributed directly from its manufacturing plants located primarily in Southeast Asia. As volumes grew and demands for faster delivery increased, NSC decided it needed the expertise of a 3PL provider to handle distribution and value-added inventory functions most effectively. It turned to FedEx Corporation of Memphis for outsourcing, and used FedEx to distribute from a base in Singapore for eight years.

"FedEx relied on its own air transportation equipment, which restricted our shipments to FedEx's flights and routes," says Larry Stroud, manager of global logistics at NSC. "The benefits of outsourcing to a single logistics provider became outweighed by lost revenue from sub-standard customer service. So, in the late 1990s we began searching for a single 3PL which could provide flexible and efficient transportation."

Time for a Change

Stroud says since NSC's core competency is designing and manufacturing chips and not in logistics, his company knew that it wanted to continue to outsource logistics. After carefully reviewing its options, NSC chose UPS Logistics Group, based in Atlanta, as its 3PL provider, which opened a dedicated state-of-the art distribution facility in Singapore in August 2000.

The centralized distribution center receives shipments from NSC's manufacturing plants in Singapore, Malaysia, and the Philippines. UPS Logistics performs the basic functions of receiving and storing inventory; picking, packing, and shipping to customer specifications; outbound transportation; and a small amount of kitting, according to Stroud.

Information Technology Handshake

"With UPS Logistics, we can gain access to tools without diverting from our core competencies. National's information technology systems were developed in-house and are coordinated with those of UPS Logistics, which include customs clearance, labeling, and trade compliance," Stroud says. Samoline adds that their level of service wouldn't be possible without the parent company UPS which provides the telecommunications network. UPS, UPS Logistics, and NSC have invested more than $1 billion in IT over the past eighteen months.

The outsourced WMS system that NSC uses is PKMS from Manhattan Associates. But just as important is the interface between NSC and UPS Logistics which exchanges files, balances inventory and handles other supply chain functions. With its highly automated IT system, UPS Logistics can go for days without talking to NSC unless there's an expedited shipment or problem shipment. "Our WMS is the key to efficient execution, order management, allocation, and shipping," Stroud says.

Samoline says order fulfillment is based on cut-off times for particular regions. "Every 30 minutes UPS and NSC do a handshake which allows them to recognize revenue and bill customers," he says. "The Web-based track-and-trace system is geared toward exception notification, so our staff uses it less frequently."

NSC has realized a savings of 50 percent in its global logistics costs since it began outsourcing it logistics in 1992. With UPS Logistics, it's saving 10 percent over the FedEx system, with potential savings of between 15- and 20 percent, according to Stroud. Other productivity improvements came in the area of labor. At the Singapore facility, UPS Logistics started with close to 270 employees in 2000 and now has only 180 staff members working on similar volumes. Samoline says management and staff is one of his company's greatest strengths.

Although the two companies works well together, as with any outsourcing relationship, there are also some problems. Stroud notes the two companies' objectives aren't always aligned, and there's also a tendency to sub-optimize rather than focus on the whole picture. Samoline says in the future they are looking at the possibility of collapsing NSC's infrastructure and bringing other manufacturers inside.

"It is not by choice that this is a dedicated facility, but it was necessary due to the size of our operations at the time," Stroud says. "If UPS Logistics can maintain the level of safety and security that we need, we welcome the opportunity to share the facility."

For National Semiconductor, outsourcing its international logistics needs has proven to be a cost effective solution for supply chain management. The benefit of advanced information technology, carrier flexibility, and logistics expertise has made its relationship with UPS Logistics one that will continue to grow and flourish.

Sidebar: Carrier Flexibility

UPS Logistics uses a network of air carriers, freight forwarders, and the UPS package system to deliver each shipment within 48 hours on average. One of the chief benefits NSC realizes by using UPS Logistics for outbound finished goods is carrier flexibility. Says Mark Samoline, director of operations and technology at UPS Logistics Group in Singapore, "We are carrier-neutral; our job is to find the best mode of transportation at the best price."

UPS Logistics divides the world into the Asian, European, and North American regions and consolidates individual shipments destined for each region into bulk shipments. This allows NSC to pay for one customs clearance charge instead of numerous ones. For example, upon landing at its first stop in the U.S., UPS does an east-west split, which divides shipments into two sections, based on the region of the country. This system takes advantage of bulk shipments rates which reduce transportation costs. NSC's choice of UPS Logistics also provided it with time savings of two days over FedEx for their shipments from Asia to Europe.

Another benefit is the crossdocking capabilities of the Singapore facility, which provides significant time savings. It saves processing time by offering greater cut-off flexibility and customer service. "Basically, by not putting the product away after it arrives, we can save as much as one day, and we are able to make an earlier flight cut-off time," Samoline says.