RK Logistics Group has found success by targeting high-tech companies in the San Francisco Bay area, growing revenues from about $16 million five years ago to $65 million.
RK Logistics Group, based in Fremont, Calif., is a third-party logistic provider that has found success by targeting high-tech companies in the San Francisco Bay area.
With 14 facilities in the East Bay, RK has grown revenues from about $16 million five years ago to $65 million and hopes to increase that to $100 million within the next five to 10 years. It employs about 500 full-time and 200 temporary employees.
Rod Kalune, chairman and CEO, and Rock Magnan, president, described RK’s plans to American Shipper during a recent visit to a 300,000-square-foot warehouse in Livermore, Calif., dedicated to the work they do for Lam Research, a company that manufactures equipment for the semiconductor industry.
Other RK customers include the floor care division of German appliance manufacturer Miele; automaker Tesla; Zero Motorcyles, a manufacturer of electric motorcycles; ViewRay, which makes radiation therapy systems for treating cancer; KLA-Tencor and Applied Materials, both of which also make equipment for semiconductor manufacturers; Cepheid, which makes medical diagnostic equipment; and Stryker Corp., a medical technology provider.
Kalune is the company’s founder and owner. He began his career working in both operations and sales for several different trucking companies.
When one of those companies folded in 1983, he set out to start his own logistics company with the support of several former customers in Silicon Valley, including Fujitsu, IBM and Johnson & Johnson. Another client was office furniture manufacturer Haworth.
When a joint venture with another company didn’t work out, Kalune, undeterred, created RK Logistics in 1987, then doubled its size through an acquisition.
Since then the company has grown by adding new clients and transforming itself so that the vast majority of its revenue—about 80 percent—now comes from warehousing and 20 percent from trucking. Five years ago, the shares were nearly the reverse, with 70 percent of revenue coming from trucking and 30 percent from warehousing.
With the trucking industry increasingly impacted by driver and equipment shortages, Magnan said it made sense for RK to limit its exposure to the trucking side of the logistics business and invest in equipment where it would have the most impact.
The Lam Research facility is RK’s largest facility, employing about 500 workers. Unlike RK’s other warehouses, which have multiple customers, it is devoted solely to storing Lam’s products and fulfilling orders from its customers.
Because of the pristine conditions in which integrated circuits are made, the Lam warehouse includes an 8,000-square-foot clean room.
Fetching Robots. Several autonomous robots it leases from Fetch Robotics of San Jose, Calif., roam the facility. Workers picking parts from shelves can place them on the robot, which then goes to the location where the next part that needs to be picked to complete an order is located. Or, the robot can ferry the parts to a station where the order will be packaged and shipped.
Productivity is improved because workers spend less time walking around the warehouse.
Fetch used the RK warehouse as a testbed for its robots. Magnan said a great thing about being located near Silicon Valley is that the company can “stay on the leading edge of where technology is going…. It allows us to bring the technology in and introduce it to our customers and our employees.”
The warehouse that RK operates for Lam has about 50,000 different stock-keeping units (SKUs). Many of these are small parts for maintenance or repair.
The facility has several Kardex vertical lift machines that can store thousands of small parts in bins or trays that are stacked atop each other within each machine. The machines speed order fulfillment by bringing the needed parts to a shelf where a warehouse worker can easily pick them. The machines even assist workers in finding the right part: a light points to the bin on the shelf where the needed part is located.
Since Lam is shipping both large orders—machinery being installed as a new semiconductor foundry is built, as well as replacement parts for machinery repair and maintenance—the facility has a mix of less-than-truckload (LTL) truckers and parcel companies coming to pick up cargo throughout the day.
Computer screens inside the warehouse help managers keep track of worker productivity, and make sure orders will be ready to ship before trucks are scheduled to arrive.
Global Projection. Lam’s products are shipped worldwide. The Livermore warehouse has a busy early morning shift, so that orders can be trucked to outbound flights at San Francisco International Airport.
Kalune and Magnan, who joined RK from Menlo Logistics, noted companies have different philosophies about outsourcing logistics and those can change over time.
Lam, for example, explained in its annual report to shareholders last year that outsourcing of manufacturing, production warehousing, and logistics functions provides it with “more flexibility to scale our operations up or down in a timely and cost-effective manner, enabling us to respond quickly to any changes in its business.”
Matthew Hutcherson, director of operations at Miele’s North American headquarters in Princeton, N.J., said his company also has an outsourcing strategy and RK has handled the warehousing of the German company’s floor care shipments in the western United States for about a decade.
The company’s products are made in Germany and moved by containership from Hamburg and Bremerhaven through the Panama Canal and are discharged in Oakland, Calif. Then they are trucked to Fremont. Hutcherson said RK handles hundreds of containers annually for Miele.
On the outbound side, RK prepares a mixture of LTL and truckload deliveries to Miele’s customers, as well as parcel shipments direct to consumers.
Hutcherson said the relationship between a manufacturer and its 3PLs “is strategic in nature… The risk to our customers’ service, the energy and disruption risk of switching out a 3PL, means that you’ve really got to be very careful in terms of who you select and then have a very robust relationship management component to how you manage the 3PLs.
“You have a master service agreement, which may be five years, and then your pricing is maybe renewed every two to three years … You don’t really bid out the business like you do on the transportation side, unless you have some sort of trigger event,” he said.
“It’s like a marriage,” he added. A strategic relationship with a 3PL is unlikely to switch unless there has been a significant factor, such as the manufacturer’s business changes, the 3PL has breached its agreement, or the 3PL is unable to meet the manufacturer’s growth.
Real Estate Factors. While the cost of warehousing in the Bay Area reflects high real estate prices, Hutcherson said “If you want to be in a market, there is a cost to be in the market.”
Storing product at a more inland location—Reno, Nevada, for example—might be cheaper, but he said there would be a tradeoff in the form of higher transportation costs from the port.
Kalune and Magnan said real estate prices, as well as location, drive where a customer wants to locate a warehouse and that lower prices are pushing business of cities, such as Oakland and Fremont, to places like Livermore. Prior to the tour of the Lam warehouse, the executives visited a warehouse in Tracy, Calif., where rents are 30-40 percent lower.
They said the company likes the opportunity to work with clients who want a high level of service. In addition to handing fragile and high-value products, such as semiconductor manufacturing equipment on a continuous basis, other companies may hire RK for only a limited period of time for a specific project or during a start-up phase.
Case in point: RK is providing construction logistics for the Italian company Estel, which is providing interior glass, furnishings and window coverings for the new headquarters of Apple in Cupertino. It’s a big order—the Italian building trades magazine Arkitepo, estimated Estel’s contract with Apple is worth $100 million.
RK has a warehouse devoted to supporting Estel’s work at Apple, which will wind down later this year after two and a half years.
The company has a warehouse for Estel where, Magnan said, it gets containers delivered on a daily basis. It then delivers the materials to the construction site using special air-ride trailers and Estel employees handle the installation.
“We wanted to do this, and it was a great experience for us to get the foot in the door. This is really our first large-scale construction-type project,” Magnan said, adding that this is an attractive niche given the boom in building in the Bay Area.
Working for Estel “was a great experience for us,” Kalune said, not only because of Apple’s high profile, but it was another opportunity for RK to demonstrate that it can meet the needs of customers who demand an extremely high level of service.
Kalune said the company looks for projects with requirements that “are a little greater than just the normal logistics,” and such work can command a premium.
“We’re not talking multiples, we’re talking a few percentage points difference,” Magnan said. He added “that makes all the difference when you’re operating generally in a low-margin business, like logistics. So, we can pick up a point or two by offering them broader service, or having more complex solutions, and that’s a real advantage for us.”
Kalune noted “that’s not to say we won’t do a standard type of logistics program at a real competitive rate. What we have been able to do is have companies take a look and ask themselves, ‘do we want to do this ourselves? Or, do we want to outsource this?’ And they’ll find their margins are very close to outsource it rather than insource it. Sometimes we’ve been able to put programs together where there’s actually been savings.”
The company took a strategic look at opportunities in the local market about five years ago, trying to determine how it could compete with big multi-national logistics providers like FedEx, UPS and DHL.
One step it took was to establish a subzone of San Jose’s Foreign Trade Zone (FTZ) 18. It now operates FTZ facilities at four locations, including the Lam facility in Livermore and one in Fremont. To operate an FTZ, the company runs bonded trucks, has obtained a Transportation Security Administration license and secured a pharmaceutical license—not so much because it plan to handle drugs, but to make RK more attractive to medical device manufacturers.
The higher degree of control and background checks required for FTZ workers gave the company the ability to recruit different employees and attract businesses that require a higher level of security.
In addition, the company has obtained ISO certifications, improved its IT infrastructure and invested in more talent.
Right People. Attracting workers is difficult in the Bay Area both because of low unemployment and high housing prices. More of its workforce now comes from distant locations in the Central Valley. And retaining workers is equally difficult, because big warehouse companies, including Amazon, have a huge need for workers during the holiday season.
RK has altered its bonus program to give workers more incentive to work with the company during the holidays. It has expanded the number of temporary employment agencies it works with and altered contracts so that it can make temps permanent workers more quickly.
“It’s not only the challenge of finding quality unskilled labor, it’s still also a challenge to find good quality supervisors and managers,” Magnan said. “So, more and more, we’re training from within and bringing people up with a long-term career path—financing education for them, either at the junior college or even sponsoring Master’s programs. So, the idea again is build long-term career paths that are tied to the company”
“We’ve always targeted things that are the most difficult to be certified in,” Kalune said. “We find there is a niche and a shortage of reliable companies that are providing those types of services. We want to be able to do those things, it seems, to bring more of a premium to us, once we get in there and do it. Our people are very dedicated to get these things done the right way.”
The company believes one of its advantages is “speed to market.” Its entire executive team is in the Bay Area to meet with prospective clients and decisions can be made rapidly.
Charged Up. Magnan also said RK is more willing than some companies to take on smaller jobs or those with short duration.
RK has performed a number of short-term projects for Tesla. For example, at one point the automaker changed the seats in its cars and RK was involved in delivering the new seats and retrieving the old ones.
Currently, RK is involved in the logistics for the batteries that Tesla installs in its Model S cars. While Tesla is building a giant battery factory outside of Sparks, Nevada, it is currently importing batteries from Japan.
As ocean containers full the batteries arrive from the port, RK unloads them into its facility and makes multiple deliveries to Tesla’s assembly plant each day in bonded trucks. Since both RK’s warehouse and Tesla’s factory in Fremont are both located in subzones of San Jose’s FTZ 18, duties on batteries can be deferred, lowered, or avoided altogether, depending on how they are used and where they are shipped.
Kalune and Magnan expect that business will be short term, ending when Tesla takes its battery logistics in-house as its new Gigafactory in Sparks begins production.
A new market that RK has targeted is startup companies, especially those in Silicon Valley. One example is Zero Motorcycle.
“As companies emerge out of the incubator space and get into more of the distribution side of their business, they usually lack logistics expertise internally. So we’ve got a few companies now where we’re trying to spread the word that we’re able to do that kind of work,” Magnan said.
“A lot of times these programs again, they may not last for a long time,” he said. As a company grows it may eventually take that logistics over itself, but RK believes that it is good business while it lasts, is something Silicon Valley needs, and may lead to other work in the future.
