If logistics outsourcing was such a winning strategy, why isn’t every company doing it, and why is it that so many logistics outsourcing partnerships terminate prematurely?
The answers to both of these questions may well be connected not with the true value of logistics outsourcing as a concept, but with the frequency at which companies make mistakes when planning and implementing outsourcing initiatives.
Want to Know the Right Way to Outsource Logistics?
Logistics Bureau has completed more than 100 successful logistics outsourcing projects, some for clients that had previously experienced unsuccessful relationships with third-party logistics providers.
As a result of our experience, we’ve seen just about all of the traps, pitfalls, and faux pas that can wipe out the anticipated benefits of logistics outsourcing.
In this post—which will build up over the coming months into a comprehensive guide—we’re going to share some of our logistics outsourcing knowledge and insights.
We hope you’ll be able to use this guide to ensure your company makes the right outsourcing decisions, so if and when you contract-out your logistics activity, yours will be a story of success rather than sorrow.
Our logistics outsourcing guide will be published in parts, right here on this page. In order to access all our secrets to outsourcing success, you’ll need to stop by each month and read the latest installment.
Logistics Outsourcing Secret #1: The Practice of Patience
If you’re chomping at the bit to outsource a warehouse or transport operation, we understand your frustration, but we make no apology. Patience is required if you want to get full benefit from this guide, just as patience is required to be successful with logistics outsourcing.
In fact, patience is one of the most important principles of outsourcing—and one which many companies fail to employ.
Reading this guide in its entirety will be a step-by-step, six-month journey. That’s not dissimilar to the process and duration required to set up a logistics outsourcing partnership—if it’s to be done with the right degree of diligence, and hence offer the best chance of long-term success.
As our guide unfolds, the reasons for recommending a four-to-six-month outsourcing-project timescale will become evident, but for now, you can consider the following statement as the first of our outsourcing secrets revealed:
If you were expecting to outsource your logistics operation (or part of it) within a matter of weeks—as some organisations do—you’re probably setting yourself up for failure.
While on the subject of expectations, it should be noted that they play a large part in the determination of logistics outsourcing success, and so it would seem that this is a good topic with which to start our guide proper.
Here in Part 1 then, you’ll find a brief rundown of the main objectives and expectations companies form when they decide to outsource logistics activity.
Part 1: Logistics Outsourcing Objectives and Expectations
Aside from unrealistic timescales for implementation, there are a number of other ways in which companies can run into problems with logistics outsourcing. As hinted upon above though, the difference between success and failure is really just the difference between expectations and outcomes.
If you want to be sure of success therefore, you first need to be sure of what you expect—in other words, what you want to achieve from contracting out your logistics activity.
The following paragraphs outline some of the most common reasons that companies choose to outsource logistics, which might prove helpful if and when your company should consider it as an approach to business improvement.
Cost Saving: A lot of companies turn to logistics outsourcing as a way to trim costs from their business operations. Under the right circumstances, outsourcing can indeed save you money, but it may not do so if your company’s in-house logistics operation is even reasonably efficient.
Be careful then, about considering logistics outsourcing as a cost-cutting measure unless your existing operation is really under-performing and unlikely to improve.
An exception can be made to this rule if your company is a start-up and you don’t want to invest in your own logistics assets and workforce. That said, you must still take care to ensure outsourcing is the best solution when the total cost of ownership is considered.
Access to Competence: Most enterprises need some sort of logistics operation, but far fewer exist to operate logistics. That’s why for many companies, logistics outsourcing is a way to keep internal resources focused on what the business does best, whether that’s sales, manufacturing, or providing some form of service.
In some cases, a company may choose to outsource even when logistics is a core part of its business. This situation would typically arise when it’s found that a 3PL offers stronger logistics competences than might realistically be accessed internally.
Service Improvement: This is perhaps the most common of logistics outsourcing expectations. By contracting-out to a 3PL with the right capabilities, resources, and service ethic, your company might be able to leverage logistics to improve the customer experience, reduce service issues, and ultimately, generate more sales and greater profits.
Other Logistics Outsourcing Expectations
Costs, competence, and service are most commonly used as the rationale for logistics outsourcing, but there are others, any of which might be valid to your company’s mission and business strategy.
If your company decides to consider an outsourcing arrangement, ask yourself if your expectations are to save costs, access competences, improve service, or to achieve any of the following competitive advantages:
- Access to global capability
- Increased flexibility in your logistics operations
- Advantages of superior logistics technology
- Access to economies of scale
- Transformation from fixed-cost to variable-cost model
Setting realistic expectations is the very first step to a successful logistics outsourcing initiative, which leads nicely on to…
Logistics Outsourcing Secret #2: Expectation is a Benchmark
When you are clear on two or three primary goals for using a logistics service provider, you’ll be able to…
- Determine if logistics outsourcing is the right way to go
- Target the right potential partners and evaluate them accurately
- Make better choices regarding what to outsource
- Project your company as a desirable customer for 3PLs
- Choose the right partner from a realistic shortlist
- Negotiate a more effective outsourcing contract
- Put the right measures in place to track partnership performance
Expectation then, is the real benchmark by which outsourcing success is measured, and if your company’s expectations are based on incorrect projections or presumptions, your project could be in trouble before it even gets started.
That’s why it’s vital to know exactly what challenges you wish to address through logistics outsourcing, and why you might want to have some expert external help to establish the likelihood of outsourcing as a viable solution.
Bookmark This Post for More Logistics Outsourcing Secrets
Here in Part 1 of our logistics outsourcing guide, we’ve taken a brief look at the typical reasons for logistics outsourcing and the importance of holding clear expectations before deciding to contract your company’s logistics to a 3PL.
When outsourcing-objectives are not carefully explored and clarified, things can quickly start to go wrong, but now you know this secret, erroneous expectations should be no issue for your business.
However, setting realistic expectations is just the first step in getting logistics outsourcing right. In Part 2, we’ll look at some of the ways in which outsourced logistics can fall short of even the most realistic expectations (and why it can happen), while in Part 3 and beyond, we’ll focus much more on how to avoid traps and achieve the right outcomes from logistics outsourcing.
Part 2: 4 Ways in Which Logistics Outsourcing Can Bite You
It’s important to understand that outsourcing to a 3PL is not a venture guaranteed to succeed. As mentioned in Part 1 of this guide though, success can often be a subjective condition, based upon whether or not outsourcing outcomes match expectations.
Some companies for example, make the mistake of considering outsourcing as a strategy in and of itself, which it should never be. If your internal logistics operations are reasonably cost-effective and performed with some degree of competence, placing processes in the hands of a 3PL might lead to disappointment.
Outsourcing should be considered as a tactic, not a goal. Even then, the decision to outsource logistics should not be taken lightly.
4 Outsourcing Problems that Can Become Pitfalls
We’re going to look at how 3PL outsourcing can go wrong, but it’s important to note that more often than not, outsourcing clients bring problems on themselves. Although I have seen issues that arose through no fault of the client, they are relatively rare.
This is not intended to be a criticism of outsourcing clients, however. After all, the only real outsourcing experts are those who work for 3PLs.
Still, if you know how outsourcing can go wrong, you’ll be better equipped to enter the process with open eyes and take the necessary steps to protect your company from pitfalls. So let’s move on now and explore four of the most serious issues that can crop up in client/3PL relationships.
1. Customer Service Problems
Be careful about outsourcing activities that involve direct interaction between a 3PL and your customers, especially if those customers are consumers or small-businesses. I’m talking especially about last-mile distribution, where your 3PL’s truck drivers are responsible for making deliveries to your customers.
It only takes a couple of tactless or bad-tempered drivers to start your customers’ tongues wagging, and many customer complaints these days are made on social media channels where bad news spreads like wildfire. Always research a 3PL’s reputation for service to end-customers as part of the selection process.
2. Increased Logistics Costs
When outsourcing, it’s rare to achieve 100% of the cost savings projected, but more to the point, if you outsource for reasons other than cost reduction, it’s possible your logistics costs will actually increase. If your company hasn’t factored that into the equation, the increase may come as a shock, but there will be little that can be done until the outsourcing contract is due for renewal.
Unless you are outsourcing with the specific goal of cost reduction, be prepared for cost increases that are not necessarily related to your 3PLs pricing. Of course, if you are outsourcing for cost reduction and your costs actually increase, sad to say your company has probably made some mistakes in provider-selection or contract negotiation.
3. 3PL Performance Degrades Over Time
Even if you set realistic expectations, perform all due diligence when selecting a partner, and negotiate the best contract imaginable, it is possible for things to go wrong in an outsourced logistics operation.
It’s just not reasonable to foresee and provide for every possible change in fortunes, either for your own company or your 3PL, which may take place over a three-to-five year contract-duration.
It’s not unthinkable that circumstances can arise which result in a degradation of logistics performance, whether that manifests as falling service standards, increasing costs, reduced asset availability, or other issues that impact your business.
Examples of situations to watch out for include:
- Your business growth outstripping your 3PL’s capabilities or capacity
- Your 3PL suffering internal business problems
- Changes taking place in the political, environmental, legal, or economic landscape
- Your own company or your 3PL becoming subject to a merger or acquisition
This is why you should never enter into an outsourcing agreement without an exit strategy, which should include appropriate provisions in the 3PL contract. These provisions might include asset and human reversibility clauses if you will be transferring assets or employees to your chosen logistics partner.
4. Difficulties in the Client/Provider Relationship
As a business partnership, logistics outsourcing relies wholly upon the relationships and understandings between people. The problem is that the people who broker and manage that relationship in its early days can move on.
Good management can become poor management or events can occur that put a strain on the key relationships between people in the partner organisations.
When relationship issues arise, it’s easy to lay blame at the door of the 3PL or the client, but rarely will that resolve anything. Sometimes good partnerships turn bad and that’s just something you have to be aware of when outsourcing logistics. Again, the best protection you can put in place is to have an exit strategy to execute if relationships break down irretrievably.
Watch this video: Outsourcing of Logistics to 3PL Providers
Avoiding the Avoidable in Logistics Outsourcing
Here in Part 2 of our guide to success with 3PLs, we’ve looked at four ways in which logistics outsourcing can go wrong, even when all possible precautions have been taken. More often than not though, problems arise as a result of clients’ mistakes.
In Part 3, which will be published soon, you’ll find a checklist of points to ensure you cover off when planning to outsource, selecting a 3PL, negotiating an outsourcing contract, and navigating the first few months of an outsourcing arrangement.
You’ll be able to use this checklist as a working document if you are involved in an outsourcing project. By working through each of the points and checking them off when complete, you should avoid all the mistakes that most commonly lead to trouble in logistics outsourcing.
Part 3: Checklist for Success with Logistics Outsourcing
In part 2 of this guide, we explored four of the more serious problems that can arise when outsourcing to a third-party logistics provider. There are of course, many more possible traps, but many of them can be avoided if your company takes a thorough approach to planning, preparing, and implementing a service agreement with a 3PL.
To help you avoid some of the most common logistics outsourcing mistakes, you can use the following checklist to keep track of key tasks, making sure nothing gets missed. This will give you the best possible chance of initiating and developing a trouble-free partnership with your chosen service provider.
The Logistics Outsourcing Project Checklist
Initial Tasks at Project Start
- Determine objectives and scope for the outsourcing project.
- Agree project team responsibilities.
- Discuss and document the current issues impacting your logistics operation.
- Prepare outline of task and service specification.
- Identify list of potential service providers.
- Contact listed service providers to advise that you’ll be issuing an expression of interest.
Review of Existing Logistics Operation
- Conduct a review of current warehouse assets, costs and performance. Document a summary of the findings.
- Conduct a review of distribution resources, costs/rates, and performance. Summarise the findings.
- Conduct a cost, benefit, and risk analysis of current warehouse/DC location.
First Cut of Potential 3PL Providers
- Prepare vendor confidentiality agreement.
- Compile vendor selection criteria.
- Prepare “expression of interest” document for issue to listed 3PLs.
- Issue confidentiality agreement and expression of interest documents to listed 3PLs.
- Await responses from providers.
- Evaluate expression of interest responses from providers that return them.
- Select highest-scoring responders for your shortlist.
Main Selection Phase: Cut to Final 4
- Notify shortlisted providers that they have been selected to receive a request for tender (RFT).
- Establish selection criteria for RFT (cost and capability requirements).
- Add prioritisation and weighting to selection criteria.
- Create timetable for provider selection.
- Create detailed service specification. This should include the following details:
- Customer types and locations
- Demand/freight profile
- Ordering methods and order profile
- Inventory profile
- Operating parameters
- Expected service levels
- Pricing mechanisms
- Special handling requirements
- Interfaces with other partners, suppliers or customers
- Prepare initial draft of 3PL contract.
- Complete detailed contract draft for inclusion in RFT.
- Draft RFT sections, which should include the following:
- Statement of Purpose
- Background Information
- Scope of Work
- Outcome and Performance Standards
- Term of Contract
- Payments, Incentives, and Penalties
- Contractual Terms and Conditions
- Requirements for Proposal
- Evaluation and Award Process
- Process Schedule
- IT requirements
- Potential IT issues
- Strategic issues
- Points of contact for future correspondence
- Perform reference checks on shortlisted providers.
- Complete final RFT draft and obtain sign-off.
- Send RFT to shortlisted 3PLs.
- Await tender responses from shortlisted 3PLs.
- Review submitted 3PL proposals.
- Select final shortlist (no more than four providers).
Final Selection Phase
- Invite providers chosen in step 30 to present their proposals to your selection team.
- Visit sites belonging to providers on final shortlist.
- Conduct workshop to make final selection (select a preferred provider and a fallback provider).
- Notify providers of selection results.
- Enter into contract negotiations with preferred provider (up to two or three rounds of negotiation if necessary).
- Sign off decision to go with preferred provider or switch to fallback (if switching to fallback provider, repeat step 35).
- Sign contract.
- Conduct phase 1 of implementation: Planning phase.
- Conduct phase 2 of implementation: Training phase.
- Conduct phase 3 of implementation: Transition phase.
- Conduct phase 4 of implementation: Commissioning
- Conduct phase 5 of implementation: Post-commissioning. Ensure close monitoring of the relationship by project manager for at least eight weeks after go-live.
- Complete an exercise to compile “lessons learned” from the project, which should be kept on record for reference in any future 3PL implementation.
Next Time: More Logistics Outsourcing Secrets
Please feel free to lift this checklist from our post and turn it into a working document for your outsourcing project/s. In the next edition of this guide (Part 4), we’ll walk through the first sections of the checklist in a little more detail. Along the way we’ll share some more secrets and tips to help you enjoy success with 3PLs—so please don’t forget to bookmark this page and check back in a few weeks.
Part 4: How to Set the Scene for a Successful Logistics Outsourcing Project
So far in this guide to succeeding with 3PL outsourcing, we’ve looked at why your company might wish to outsource logistics and how outsourcing can go wrong if the process is not well-managed. We’ve also provided you with a checklist to help you ensure none of the important tasks in an outsourcing project get overlooked.
For the remaining parts of our guide, we’ll focus on how to ensure success with your outsourcing project and subsequently, the ongoing 3PL relationship.
Using the checklist as a basis, we’ll guide you through some of the key outsourcing activities and offer some tips to help you complete them. Here in Part 4, we’ll cover some of the most important tasks to complete when you are just getting started with your 3PL outsourcing project.
Logistics Outsourcing Secret #3: Know Your Operation Well Before Outsourcing
Before you even start on the tasks in the checklist, you should be sure you have the necessary in-depth knowledge of the way your current logistics operation runs.
You won’t find this task on the checklist (because understanding your processes is something you should consider as a general priority in your business), although you will find a section on reviewing your current operation. However, that’s really a separate activity (covered later in this part of the guide) to be conducted specifically with a future 3PL partnership in mind.
What we’re saying here is that many companies make the mistake of outsourcing an operation without really understanding it, which almost always leads to problems further down the line.
To avoid this mistake—along with many others that arise from a lack of process understanding—conduct a project to map your logistics processes in detail. Process mapping is critical in helping you to understand and ultimately, improve your supply chain performance.
Determine Outsourcing Scope and Objectives
In addition to process understanding, there are two important things to be clear on before you start looking for a 3PL.
You need to know why you want to outsource (which we’ve already discussed to some extent in Part 1 of this guide) and you need to know which activities will be in the scope of your project and of course, which activities will not.
In developing the scope, questions to consider include…
- Will you outsource transportation activities, warehousing, or both?
- If outsourcing transportation, will it include all modes and methods of transportation or for example, just road-going freight?
- Do you want the 3PL to be responsible for payment of freight invoices?
- Do you just wish to outsource freight tendering and load consolidation, or will the 3PL be responsible for carrier selection and rate negotiation as well?
While we’ve already discussed the need to know what you wish to achieve from outsourcing, it’s worth reiterating it here, because your outsourcing objectives should steer your approach to vendor selection.
Your criteria for selection and the questions you ask potential vendors will be different in each of the following example scenarios:
- You’re outsourcing to reduce logistics costs
- You want to improve customer service performance
- You need to reduce cycle and lead times in your supply chain
- You want to access the best logistics technology
- You want to take advantage of specific competencies lacking in your own operation
When outsourcing relationships fail, it’s often because the outsourcing company makes a poor choice of 3PL provider. This is far less likely to be an issue if you are clear on your outsourcing goals and know exactly what elements of your operation are to be outsourced.
Build the Project Team and Assign Responsibilities
An outsourcing project requires involvement from all areas of your business that will be impacted by the changes.
Furthermore, project activities can require your team members to spend quite a lot of time away from their normal duties, which in turn impacts business costs. That’s why you should be sure that you draft the right people onto your project team.
Once the team is active, you can save a lot of time and frustration by ensuring everybody knows the part they’ll play in the project. To that end, it’s a good idea to determine responsibilities, assign them, and make sure everyone understands their role at the very outset.
Logistics Outsourcing Secret #4: Companies Often Fail to assess “Before and After” Performance
Another common reason for companies to be disappointed with outsourcing results is because they don’t establish a baseline from which to measure 3PL performance.
Don’t make the same mistake in your project…
Before you start the vendor selection process, ensure you have a good handle on your current operational performance. That will help you to identify goals and targets for a service level agreement with your new logistics partner, and will also help vendors develop their responses to your RFT.
The Internal Cost and Performance Review
The extent of your internal performance review will depend on the scope of your outsourcing project. For example, if you plan to outsource all logistics activity, you’ll need to evaluate the costs and performance of your warehouse processes, and analyse the benefits and risks associated with your current warehouse/DC locations.
You’ll also need to review the performance of your transport operations, even if you currently rely on external carriers and have no in-house fleet.
If you are only planning to outsource transportation to a 3PL, you might not need to analyse warehouse performance, but on the other hand, this can be a useful activity in any case. The results may even prompt you to consider extending the outsourcing scope to include some or all of your warehousing operations.
Time to Begin the Selection
Once you’ve completed the tasks described above (and in steps 1 through 9 on the checklist) you’ll be ready to start researching and talking to potential vendors. That’s what we’ll focus on in Part 5 of our guide to success with 3PLs. So remember to visit this page again in a few weeks, when you can pick up some valuable hints and tips for the 3PL selection process.