Out Of The Box - Volume 1, Issue 2, September 2013

FROM FLYING ROBOTS TO LOGISTICS BLISS: A CASE STUDY

By Thomas J. Knox

The motors whirred as a robotic trolley sped down the long warehouse alleyway. As it went it rose ever higher in the ten-story tower, lifted by cables and pulleys. The trolley's mechanical arm picked a box from the rack suspended fifty feet above the warehouse floor and deposited it in a bin on its back. Within a minute the trolley returned to its starting point with its precious cargo.

This automated, robot-driven warehouse facility was a technological wonder 25 years ago when it was built by a multinational pharmaceuticals company. It stood on the company's main U.S. campus as a showcase and was a favorite stop for visitors on campus tours. Tour guides explained that almost all of the company's U.S. inventory spent time on these shelves before being shipped to destinations throughout the country.

That was then. Today, the robotic vertical warehouse is gone. In its place are green fields, a gleaming new research building, and a new logistics model that relies on a third-party logistics provider (or "3PL" in the language of the industry) for managing the flow of goods from the factory to the market. How and why did this happen? Four factors tell the story.

Expense. During the many years that the company ran its own logistics operation using company employees, the quality of the operation was high. The numbers of inaccurate picks, spoiled products and out-of-stock events were small. But this good performance came at a steep price. The company had overinvested in capital equipment and real property, having built facilities that were expensive to maintain on prime real estate on a campus that lacked good access to interstate highways and other transportation corridors. Despite the automation of key elements of the operation, the department had substantial personnel expenses that were hard to manage.

The company asked us to assist it in assessing alternatives, including engaging a 3PL to take over the warehousing and transportation of its inventory. A vigorous proposal process followed. It revealed that substantial savings could be found by moving the inventory to the 3PL's warehouses and allowing its personnel to manage the inventory.

Expertise. Actually, cost savings weren't the primary driver in the company's drive to restructure its logistics and fulfillment operations. The company knew that it had not kept up with the state of the art over the previous 25 years and wanted to be sure it was using best practices in an effort to fulfill its mission of continuous quality improvement in all elements of its business. But the company's core competence was drug development, not warehousing. So it sought business partners with core competence in that arena who could commit to applying current and future best practices to drive more quality, accuracy and speed into the process. Of particular concern to the company was the 3PL's ability to handle the many regulatory requirements applicable to the handling of pharmaceuticals.

As part of the vendor downselect and contract negotiation process, we helped the company assess the experience and capabilities of the bidders in the pharmaceutical field. It was key to work with experts inside the company and with industry consultants to draft statements of work that describe in detail the current best practices to be used in the logistics operation while also incentivizing the implementation of newer, more efficient processes as they became available over time.

Efficiency. Despite the company's expertise, developed over many decades, in managing pharmaceutical product inventory, the company acknowledged that it did not possess the domain expertise and breadth of facilities, systems and personnel that dedicated logistics providers could offer. In making their pitches to the company, the providers emphasized the efficiencies that they could bring to bear. The key in negotiating the deal was to make sure these discussions would not be forgotten as sales talk, but would be woven into the fabric of the agreement.

We advised the company on ways to enforce and encourage efficiency, using outcomes-based language in the contract and in statements of work, and measuring success using service level agreements (SLAs) and key performance indicators...