What is Logistics Outsourcing? – Trick or Treat ?
Outsourcing Logistics does not suit everyone. Will it suit you? Get some great video tips here. I have been involved in over 100 Logistics Outsourcing projects and I see people make the same mistakes over and over. I hope these tips on Logistics Outsourcing help you avoid the same mistakes!
“Outsourcing Logistics does not suit everyone. Will it suit you? Get some great video tips here. I have been involved in over 100 Logistics Outsourcing projects and I see people make the same mistakes over and over. I hope these tips on Logistics Outsourcing help you avoid the same mistakes!
Over the last 10 to 15 years, outsourcing of logistics activities to third party logistics companies or 3PL’s has become increasingly popular. And research indicates that up to 75% of businesses report positive impacts from outsourcing logistics, but what of the balance? Why did they struggle to obtain the results that they were hoping for? I’m going to outline, firstly, the reasons why organizations outsource logistics activities and secondly, highlight the key drivers for outsourcing success.
So why do organizations outsource logistics operations?
There are many apparent motives why companies outsource but for my experience there are four principle reasons:
1. Warehousing and distribution management is not a ‘core skill’. The trend to outsource non-core activities continues particularly in the area of logistics. Well, I have to say that for some companies who do outsource, I would have thought that logistics should have been a core skill.
2. Existing performance is Sub Optimal. Related to the core skill issue, often organizations which have a strategic focus other than in transport or warehousing, can’t seem to reach the desired performance levels required by their customers.
3. Reduction in Asset Capital. Warehouses and vehicles are expensive to purchase or lease it can tie up millions of dollars that could otherwise be invested in a core business. Consequently, there’s a trend to remove warehouse assets from the balance sheet and redirect capital gain from sale of assets to working capital and core asset investments.
4. Flexibility and Scalability. Business is becoming increasingly fluid in terms of market focus, structure, mergers and acquisitions and the like. Sometimes it simply not possible to respond quickly to market changes if there is a fully owned or lease network of warehouses and transportation assets in a place. So degree of flexibility, at least, can be very beneficial.
5. Cost of Service. Surprisingly, cost of service although important, is not always a deciding factor or driver for outsourcing decisions. Why? Well very rarely do companies save money through merely outsourcing warehousing and transport. They may attain savings over period of time through process improvement or synergies with other 3PL customers but not simple from the act of outsourcing. The reason is simple, 3PL’s have to pay almost the same operating cosst as other organizations. Well they do develop purchasing power and discount rates with transport sub-contractors and other vendors, there’s often little disparity between the costs of a 3PL and their would be customers. Why? Well the 3PL has to add a margin to their cost to be profitable. So if an organization is seeking to bank savings after outsourcing, they will may be disappointed.
What are the Key Drivers for Success in Establishing a Good Customer and 3PL relationship?
Business Alignment is vital. It’s really important to select 3PL’s that are aligned with your business needs. Look for 3PLs that are experience in your industry sector and that have a good track record. There’s always scope to include some new or emerging players in your tender process but make sure you have a core of 3PL’s that you can be confident or propose solid commercially realistic solutions to you.
Attention to detail. When seeking 3PL quotations and contracts, there’s no room for intuition or best guesses on order velocities, volumes, processes and service requirements. Very detailed specifications have to be prepared with full disclosure of all available data before a quotation from 3PLs is attained. There is really too much information that you can gather, but where there’s an absence of sensible interpretation of data this can cause major issues in the outsourcing relationship. On a number of occasions, I’ve been asked to sort out problems with pricing mechanisms which are based on customer cost of goods sold, volume sold or percent of revenue. On the surface, this appear to be simple pricing methods, but often they force one party, either the customer or 3PL, to prosper or loss on fairly. I have another video on pricing structures that you may want to look at.
Resource Wisely. Both during implementation and the on-going partnership a competent team as essential. But the customer and the 3PL company must create an open and trusting working relationship. Each company’s team should include senior relationship managers from across the organizations who meet regularly to discuss and monitor progress and performance. Too often, once an agreement is signed, implementation is left under the stewardship of the 3PL. This is a mistake. It must be a joint exercise. The best implementations are those that have a key member of the customer on the team to lead, organize and develop the solution to full implementation with the 3PL. Such implementations are usually augmented by robust project management methods to ensure that all milestones are achieved.
Raise potential issues early. From my experience, issues that are not dealt with proactively and in good time can fester into relationship breakers and hidden disaster. So both parties should take a long term perspective and be mature in their outlook and approach. During implementation planning, representatives in each company meet regularly to discuss implementation tasks.
Use KPI’s to manage the contract. The contract and service agreement should be subject to regular review of KPI’s. Data speaks volumes in terms of performance. For both warehousing and transport, KPI should be agreed at the outset. Typical measures will include delivery in full on time, goods lost in transit, stoke damage, alleged which is unexplained loss or damage, inventory accuracy, time to receive goods and time to dispatch goods. As a rule of thumb, no more than 6 to 10 KPIs should be used to manage the contract. But make sure you choose the ones that are most meaningful to your business. In this way, a focus on the facts can help remove emotionally charged opinions and feelings by either party.
So in summary, whether you are an organization seeking to outsource or a 3PL, by following these simple tips, you’ll be better equipped to enter into an outsourcing agreement which is fertile for growth and which is well placed to build into a mature and successful partnership.”
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Here are some handy articles on Logistics Outsourcing:
Here’s an eBook on Logistics Outsourcing: Logistics Outsourcing Guide
Rob O’Byrne is the CEO of specialist Supply Chain Consultant firm, Logistics Bureau.