Fulfillment Stream Management +: The New Era of the 3PL

Fulfillment stream management can help deliver the highest possible value at the lowest possible total cost

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It has been over four years now since the Lean Enterprise Institute published our workbook titled Building the Lean Fulfillment Stream. As a co-author of the book, I was honored when the book received a Shingo Prize, which recognizes “research and writing regarding new knowledge and understanding of lean and operational excellence.”

Now—four years later—we have more experience and lessons behind us. Successes and failures in implementing lean in the supply chain—or fulfillment stream—now make us wonder what is next. In the spirit of incremental improvement, how can we use the knowledge and experience of the last several years to build upon the work already completed?   

Further, how does lean fulfillment stream management impact the world of third-party logistics (3PL)?

The Lean Fulfillment Stream

While we are looking for the next level of performance in our fulfillment streams and the role of the 3PL, one thing did not change: that is the definition the lean fulfillment stream.

The lean fulfillment stream is planned, stable, visible and collaborative. The lean fulfillment stream relentlessly focuses on lead-time reduction by eliminating all non-value-creating activities (waste). This is accomplished through rigorous process discipline, inventory reduction, first-time quality and eliminating all unnecessary variation. The lean fulfillment stream flows to the beat of the customer, in which all supply chain activities are triggered by the pull of a pace-setting process. The goal of the lean fulfillment stream is to deliver the highest value to the customer at the lowest total cost of fulfillment.

Business Is Changing

All business environments are changing. Strong organizations eliminated the easy-to-see waste at the functional level and now require new thinking to reach the next level of operational excellence. What is required is a framework for the implementation plan in order to develop a comprehensive supply chain strategy that designs, builds and successfully implements a lean fulfillment stream.

Some of the challenges we need to overcome include:

  • Customers expecting continued improvements on cost, quality, speed, service and innovation.
  • The continuation of the business environment to evolve to more customized products or high-volume commodity products with lower margins.
  • Globalization making the supply chain more complex and disconnected from a flow and process point of view.
  • Increasing product variations that lead to supply chain complexity resulting in increased waste.
  • Lead time reduction required to be more flexible to high variation in market demand patterns—seasonality and customer spikes.
  • Maintaining profit margins, which requires a focus on reducing operating costs and improving working capital to generate sufficient cash to ensure self-funded growth.

VisionFulfillment Stream Management

The vision of fulfillment stream management (FSM) is to drive a strategy that successfully implements and sustains an integrated supply chain that delivers the highest possible value to the customer at the lowest possible total cost of fulfillment.

FSM is different than traditional supply chain strategies. FSM is focused on an integrated approach to managing the supply chain. This approach is to identify, understand and improve upon the fundamental influencing factors of supply chain excellence in four key business processes. These key business processes include:

  1. Organizational business strategy.
  2. Product creation and development.
  3. Sales and marketing.
  4. Customer order fulfillment.

FSM recognizes that supply chain excellence only results from focusing horizontally on supply chain functions.  Therefore, the work of FSM is to connect all supply chain activities to reduce and eliminate points of instability (unnecessary variation) at the interfaces, or connection points, of supply chain processes and channel partners. In addition, we need to focus internally on key processes to identify and eliminate points of instability within the core process itself.  Stability is at the heart of lean thinking, thus FSM focuses on eliminating all drivers of instability. This is the essence of flow.

Implemented as an overall business strategy, FSM results in implementing flow to increase supply chain velocity and eliminate organizational waste. This results in reduced lead times, improved working capital position, reduced operating costs and increased sales.

With all of this in mind, we should ask ourselves: How does FSM impact the 3PL industry?

The Paradox of Lean and the 3PL

One of the major tenants of lean is the elimination of waste. The king of waste is overproduction, defined as building more than customers are demanding or buying more than we need at that exact time. Overproduction is the king of wastes because it creates the waste of inventory, transportation and storage. Herein rests a paradox for the 3PL. Is our job not to manage and execute inventory processes, transportation and distribution? Does this mean our job is to manage waste? If so, do we really want our customers to get their proverbial act together, and become models of operational excellence focused on stability, standardization, quality at the source and inventory reduction? What if they get so good they don’t have excess inventories that need transporting or storing?

What exactly is the role of the 3PL in the new age of lean?

Lean and the 3PL

Connecting lean and the 3PL has two vantage points. One is internal and the other external. The internal view for the 3PL asks, “What can lean do for my organization to drive increased revenues, reduce costs and improve profitability?” The external perspective asks, “If my customers are implementing lean, what do I need to do to remain part of the value proposition?”

Let’s deal with the internal first.

Third-Party Logistics: Looking Inward

Third-party logistics providers have an incredible opportunity in front of them to drive operational excellence internally. In our education work with 3PLs (yes, we willingly train our competitors), we recognize an opportunity to implement fundamental lean principles. These include strategy deployment, standard work, error-proofing processes, time and motion analysis, visual management and organized workplace (the 5S’s) disciplines. In addition, very few 3PLs succeed in building a problem-solving culture.   This latter point is the largest opportunity that exists. The 3PL environment is one by design largely made up of unskilled and skilled team members, floor supervisors, team leaders and floor managers. In other words, the majority of employees working in the 3PL industry are driving down the road or on the floor engaged in real work. Yet, as leaders, we are not engaging them.

Taichii Ohno, the famed engineer who led the development of the Toyota Production System, called this lack of engagement a “terrible waste of humanity.” These team members live, see and feel the problems (and at times, cause them), yet we continue to ignore the potential the entire organization brings in solving problems at the root cause. This is step number one for any 3PL looking to begin the lean journey.

But beware! When we do begin engaging the workforce to identify and expose problems, it only creates more grief in the short term. Why? Because 3PL University brainwashes us to believe that the root causes of all our problems are created by our customers. If only our customers could level their shipments. If only the customer could label the boxes properly. If only the customer could load our trucks faster. If only we could get accurate data. And so the story goes, if it wasn’t for our customers, we would be the billboard for operational excellence.

This level of arrogance will not survive the new economy. Economic volumes will come back, but not to the levels we knew in the past. We will see growth, but it will be gradual and relatively flat. Rest assured there will be a host of 3PLs competing for fewer opportunities.  This will truly be survival of the fittest. And the fittest will be those who check their ego at the door, take a good look in the mirror, and realize their operations are riddled with waste that has nothing to do with the customer or other external forces. As the great philosopher Pogo once said, “We have seen the enemy and the enemy is us.”

Third-Party Logistics: Looking Outward

Jim Womack and Dan Jones, leading thinkers and authors in lean, describe the Lean Enterprise as:“A continuing agreement among all firms sharing the value stream to correctly specify value from the standpoint of the end customer, remove wasteful actions from the value stream, and make those actions which do create value occur in continuous flow as pulled by the customer.”

Nobody is so naive to think that this is not a very tall order. However, we do know something from the last two years that proves useful. Organizations that continue to create and tolerate process waste will not survive in the new world. Operational excellence is not a nice to have, it is a must have. Let’s examine why.

Prior to the economic collapse, many organizations were riding the wave. Business was great and we couldn’t move product fast enough. We built factories and distributions centers. We hired people en masse and the last thing we needed to worry about was waste reduction. Then the tide changed, and we reversed all the growth decisions by closing, reducing and eliminating.

As volumes come back, organizations will be faced with a very tough question. Do we build, hire and increase again knowing what we now know? The question of all questions is: “How do we grow steadily and not add infrastructure cost?” The way to accomplish this is to focus on lean principles, as described as eliminating all wasteful activities and only doing those things that add value for the customer.

Let’s go back to fundamentals. There are three types of processes:

  1. Value added: those things that are critical to service the customer; the customer is willing to pay for these things (think transforming products or services to meet customer expectations).
  2. Business value added:  Those things the customer does not care about, but we must do anyway (think Homeland Security, Department of Transportation regulations).
  3. Non-value added: Those things the customer is not willing to pay for, and serve only to drain money and resources from the organization (think rework, storage, obsolescence).

When organizations do not focus on operational excellence, growth only serves to grow all three types of processes—inefficiently adding more people, space and overhead.

What an amazing opportunity for the 3PL industry to participate in this new awakening that our customers are heading toward. Our roles will not be to transport and store, but rather to identify problems, implement solutions and add value in a myriad of service offerings. Who better to brainstorm about waste in the supply chain than your friendly neighborhood 3PL? We feel, know and live the effects of much of the undisciplined processes that create the waste. The goal is to become a leader in the solutions to eliminate this waste from the supply chain from a lean enterprise point of view.

The 3PL has a very important role to play in this new era of lean fulfillment stream management.