Most Strategic
2001 Editor’s Choice Award
Getronics, Arco, and UPS Logistics Group (formerly Sonic Air)
Imagine that you own a retail gas store and the cash register goes down. You can’t sell gas or Twinkies. Now imagine, just for a moment, that you own over 1700 retail gas stores where this could happen. ARCO, a West Coast gasoline refiner and retailer, actually owns that many gas stores and a large convenience store network. Downtime can be disastrous, so ARCO outsourced its point-of-sale terminals to outsourcer, Getronics.
When the Getronics help desk receives a call from one of the retail outlets, the staff diagnoses whether the fix will require a technician. If so, they must obtain the needed part from a depot, dispatch a technician to the site to install the part, and have it up and running within four hours from the time the call was placed — no matter how remote the location might be. It’s truly an extraordinary feat in logistics.
Going Beyond Limitations
But Getronics is not a logistics provider. Getronics provides its customers with world-class information and communication technology solutions including system integration, network technology, eBusiness and strategy consulting. In the very tight, competitive market where Getronics plays, customers demand end-to-end solutions and speedy delivery of computer parts and repair services. Getronics wanted to offer expanded services, reduce overall costs and move to a variable costs structure all at the same time. Since Getronics’ core competence is IT, it recognized its limitations and practiced what it preaches it outsourced its very important logistics process.
Executing the Plan
Richard Fogarty, vice president of service delivery for Getronics, says that selecting a supplier “was a large undertaking in complexity and scope, but we executed it flawlessly. We put a very experienced team together and compared all the strengths, weaknesses and capabilities of the primary logistics carriers for both air and ground freight and logistics services.”
UPS Logistics Group (formerly Sonic Air), was selected for its quality reputation, competitive pricing, commitment to continue investing in logistics and more than anything else for its team approach. They acknowledged they didn’t have all the answers and would be looking to Getronics to help solve the business questions.
The Getronics and UPS Logistics Group September 1999 agreement expanded an existing UPS relationship for parts delivery. Scope now includes same-day delivery, next-day freight, two-day airfreight, centralized warehousing, distribution and repair services.
Fogarty says that UPS Logistics Group made an “unlimited financial and human resources commitment” to get over the massive hurdles in establishing the full range of services that Getronics wanted for its customers. UPS Logistics Group built warehouses and expanded its repair operations at its facility in Louisville, Kentucky. Being adjacent to the UPS international air hub, the Louisville location makes it possible to take orders up to 1:00 a.m. for same-day delivery.
UPS Logistics Group worked with Getronics to determine where its customers’ locations were and then matched the customer zip codes with the UPS Logistics Group network in order to know where to establish the forward-stocking locations for parts. Getronics’s customers like ARCO can depend on repaired equipment within four hours of placing the help desk call, and Getronics saves money on transportation costs. “The logistics of this thing is pretty impressive. They are hitting within a 3&1/2 hour timeframe,” says Joseph Bookout, Jr., Manager of Retail Facilities for ARCO.
Fogarty says Getronics’ competitors have now followed in the company’s footsteps. “But we pioneered this entire project,” he comments. “We were on the cutting edge with this kind of service.” Fogarty says buyers should always select a vendor like UPS Logistics Group one that is willing to work in customer solutions, be responsive to problems and committed to the process being outsourced.
Getronics and ARCO’s Incentive Arrangement
ARCO, pleased with its outsourcer’s swift, efficient repair service, re-signed its agreement with Getronics in July 2000. Like the song, it was better the second time around. Total value of their contract is a little over $5 million a year. The original 1997 contract was services for a lump sum, but the new contract breaks out the help desk process into a separate agreement, which is structured on a monthly call volume basis. Len Austin, maintenance and facility services manager at ARCO, says the company chose this strategy because of the large fluctuation of calls each month.
As he explains, they “keep the field side as a lump sum because that is the most expensive component. So we get the leverage on the expensive sum, and it forces the help desk to be better at resolving calls. At the help desk level, the idea is to resolve 100% of the calls so that they don’t have to dispatch a technician. As a result, they would make a bigger profit. But if they continue to send people out into the field, it will eat away at that lump sum that we pay them every month. It’s an incentive so that they stay focused on doing an extremely good job to resolve calls at the help desk.” The contract’s conditions allow ARCO to determine annually if its lump sum number on the dispatch is too high or too low and modify it at that time.
ARCO is extremely pleased with its supplier’s efforts to bring even more value to the deal. Bookout says that Getronics has been helping them with reliability analysis a project to understand why the system breaks down at the frequency it does, as well as some potential solutions. The supplier has given ARCO some feedback about training issues with its site operators as to how to use the equipment in such a way as to avoid downtime in the first place. “Essentially they are just helping us find better solutions,” he adds.
That’s really what outsourcing enables all three of these companies to do. ARCO outsourced to world-class supplier, Getronics, for better point of sale terminal repair solutions. Getronics found an excellent logistics solution by outsourcing to UPS Logistics Group. Both ARCO and Getronics realize the value of an incentive-based agreement and have found a beneficial solution by restructuring their deal so that both parties reap even more benefits.
Lessons from the Outsourcing Primer:
- Buyers should select a supplier that is willing to work in customer solutions as well as transactional solutions.
- Pricing for two related but separate functions, such as help desk and maintenance/repair, should be separate and not structured as a lump sum. This is a further aid to building incentives into the contract in order to increase the supplier’s performance level.
- One added value service in a help desk function is for the supplier to study the source of problems and look for solutions to eliminate those problems.