Embracing Lean Manufacturing by Outsourcing Third-Party Logistics | Article

outsourcing agreementOne of the competitive advantage strategies General Motors North America (GMNA) regularly deploys is outsourcing, and it has plenty of experience analyzing which outsourcing supplier’s capabilities and solutions best fit its needs.

Even so, when GMNA signed a contract in May 1995 to outsource the management of its inbound transportation functions to FedEx Supply Chain Services (FSCS), it was the start of something big.

“They have gone beyond our wildest expectations in service,” exclaims Ellen Fecher, manager, Powertrain GMNA Logistics. Indeed, FSCS has earned the prestigious GM Supplier of the Year Award for three consecutive years.

Choosing the Supplier

GM Powertrain is responsible for manufacturing the engines and transmissions for GM vehicles made in North America. When the Powertrain Warren plant was identified as a plant where GM would embrace lean manufacturing principles, executives from Powertrain and Powertrain Warren visited GM’s Service Parts Operations (SPO) to find out the results SPO had achieved by using a third-party logistics supplier to expedite transportation issues.

Fecher recognized the greater benefits GM could receive from economies of scale, so she determined the best strategy was for all of Powertrain to work together and use one third-party logistics supplier for the entire group.

GM evaluates potential suppliers on weighted factors in four primary criteria: overall quality, service, technology or innovation and price. FSCS won in that scoring, but Fecher says two other FSCS operational characteristics “really put them over the top.”

Whereas most suppliers wanted to run the freight on their own equipment, FSCS would bid out every piece of the route to second-tier carriers. This was attractive to the auto giant because it had existing relationships with niche carriers. Best of all, FSCS was the only supplier that would use origin-based route design (instead of destination based).

The Services

FedEx Supply Chain Services now plans and manages the inbound transportation for more than 1500 product suppliers into 26 GM Powertrain engine, transmission component and foundry plants, as well as moving the freight between the Powertrain facilities. Services encompass all product freight (anything that goes on an engine, transmission or casting) and returnable container pickups and deliveries, as well as all second-tier carrier activities (including selection, procurement, certified loading, freight payment and performance reporting). Some of the freight is moved by air, but most is moved by truckloads and milk runs.

FSCS employs a transportation manager in each of the 26 GM Powertrain plants. Fecher says the relationship between the two companies is so integrated that it’s difficult to tell whether someone is a FedEx or a GM employee.

The transition phase lasted almost a year. Operational teams, with representatives from both companies, met weekly to go through the issues, work together to solve problems and jointly bring new ideas to the table. FSCS implemented the outsourced process in phases, based on its origin-based route. Responsible for moving material in the Midwest (the lean vision territory), FSCS tackled the project in a clockwise manner along the route – first eastern Michigan, then western Michigan, Ohio, Indiana and on around to Ontario. “Each time they implemented a new piece or area, we had a review,” recalls Fecher. “Did it go well? What didn’t go well? We did the review each time before we’d give them the green light to go on to the next area.”

The Benefits

In support of lean manufacturing principles, FSCS must do it all in the least costly and most expeditious manner. GM’s strategy of outsourcing this transportation function is definitely working well. FSCS holds a 99 percent on-time performance record and has achieved significant savings for GM.

Fecher comments that the complete visibility of products and information through GM’s supply chain pipeline has been an unexpected value. The supplier also recently has assumed added responsibility for scanning all the freight and updating GM’s advance shipping notifications.

To ensure the parties will collaborate to continue to meet GM’s lean manufacturing goals, their outsourcing arrangement includes a gain sharing component. “It’s an incentive to continue to reduce overall costs,” explains Fecher. “We’re always changing what we want. We wanted on-time performance, for instance. Now we’re looking at reducing the number of route miles they are running.” Both parties meet twice a month for an operational meeting, followed by a cost savings meeting.

Both parties believe it’s an outstanding outsourcing relationship. “They brought the IT that we don’t have and are not willing to invest in. And they have helped us do things that we couldn’t have done as quickly,” says Fecher. “We wouldn’t want to get out of this relationship!”

Lessons from the Outsourcing Journal:

  • Outsourcing transportation functions allows a buyer to leverage the supplier’s strengths in economies of scale in order to achieve objectives such as on-time performance and cost reduction.
  • A third-party logistics supplier manages the transportation function. It may choose to use subcontract arrangements for portions of the route, or perform the transportation services along with the management component.
  • A gain sharing mechanism in the outsourcing contract is a highly effective incentive for continual cost reduction and improvement of services.


1 Comment on "Embracing Lean Manufacturing by Outsourcing Third-Party Logistics | Article"

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  1. This article shows how one can embrace lean manufacturing by outsourcing third-party logistics.It was recognized that receive greater benefits from economies of scale, so the best strategy was for all of Powertrain was to work together and use one third-party logistics supplier for the entire group.

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