Mal Walker of Logistics Bureau provides some tips for Logistics Outsourcing.
It’s estimated that over 80% of companies globally now outsource some or all of their logistics activities, but outsourcing does not suit all companies and some organisations are not happy with their outsourcing results.
“Over the last 10 to 15 years, outsourcing of logistics activities to third party of logistics providers has become increasingly common place. Yet, industry is littered with many organizations who have struggled to obtain the results that they were hoping for. Why?
In this module I will outline firstly the reason why organizations outsource logistics activities. And secondly, what are the key drivers for outsourcing success? Hopefully you can take away the fundamentals and apply them wisely to your business. So, why do organizations outsource logistics operations? There are four main reasons.
Firstly, warehousing a distribution management is not same as the core skill of the company. For example, manufacturers who choose to focus on the “make process” rather than the “move” or “ship” part of the supply chain. Such companies look for experts in moving and shipping to augment their residual experience in making products.
Secondly, performance is sub-optimum. This is related to the core skill issue, often organizations that have a strategic focus, other than in transport or warehousing, cannot attain the desired performance levels and key performance indicators required by their customers. So they seek contract providers who can provide this.
Thirdly, reduction in capital tied up in distribution centers. Warehouses are expensive to buy and run so often companies seek to remove the warehouse assets from their balance sheet and redirect the capital gain from sale of the assets to other parts of the business. Ultimately, they transfer all of the costs of distribution to the profit and loss account. This has become a blessing for third party logistics providers who have won large amounts of work for this reason alone.
Flexibility and scalability, point number four. With the advent of ecommerce, increasing globalization, and rationalization of industries, today’s market place demands fast, flexible and efficient supply chains. Coupled with the shortest strategic planning horizons, use of third party logistics providers gives organizations flexibility to change their method to market and volumes handled with almost immediate effect. It is simply not possible to respond quickly to a market if there is dedicated and rigid network of warehousing and transportation assets in place.
So, to reiterate the four common reasons to outsource they are:
1. Warehousing and distribution is not core business.
2. Performance is sub-optimum.
3. Reduction in capital.
4. Flexibility and scalability.
“Wait a minute”, I hear you say “What about the cost? Where is that coming?” Contrary to common belief, cost is seldom a deciding factor or driver for outsourcing decisions. Why? Very rarely, the company save money through merely outsourcing warehousing and transport. They may attain savings over a period of time, possibly 3 to 5 years, but not simply from the act of outsourcing logistics. The reason is elementary, third party logistics companies have to pay the same operating costs as other organizations. Yes, they may be able to negotiate discount rates with transport companies and other suppliers, but there is often limited disparity between the cost of a third party provider and any other organization. And don’t forget, the third party provider has to add a margin to their cost to be profitable.
In my experience, the cost difference can range from between 5 to 12 percent above the current cost of operation. Now, what are the drivers for success in an outsourcing arrangement?
First one, strategic alignment. The outsourcing decision must align with the company’s strategic direction. This is common sense, but unfortunately not so common. Amazingly, many companies have suffered after outsourcing decisions have been made at an operational level without due regard to the board’s strategy. Such organizational dissonance is a nightmare to remedy after contracts are established, so beware.
The second driver, attention to detail. When seeking third party quotations and contracts, there is no room for intuition or your best guess on board of velocities, volumes, processes, services and service requirements. Very detailed specifications must be prepared with full disclosure of all available data. There is rarely too much information that you can gather. But alas, where there is an absence of good interpretation of data this causes major issues in the outsourcing relationship. The old saying “let the buyer beware” applies, but also extends to the seller as well. So in logistics where partnership-relationship is critical, the adage becomes let the outsourcer and the third party logistics provider beware, take it in.
The third driver is resource wisely, but during implementation and the ongoing partnership, a solid team is critical from both sides, both the customer and the third party logistics company must create an opening and trusting working relationship. The team should include senior relationship managers from across the organization who meet regularly to discuss and monitor progress and performance.
The fourth driver, raise potential issues early. From my experience, issues that are not dealt with proactively and in good time can fester into relationship breakers and end in disaster. So both parties should have a long term perspective and be mature in their outlook and approach, always avoiding disrespectful behavior to the other party, it never helps if one party is kicking the other.
The fifth driver is using key performance indicators wisely to manage the contract and agreement with regular reviews. Data speaks volumes in terms of performance for both warehousing and transport. Key performance indicators should be agreed at the outset. As a rule of thumb, no more than six key performance indicators should be used. But, make sure you use the ones that are most meaningful to your business. In this way, a focus on the facts can help remove emotionally charged opinions or feelings by either party.
So let me summarize the five key drivers for success:
- Strategic alignment.
- Attention to detail.
- Resource wisely.
- Raise issues early and deal with them.
- Use key performance indicators to manage.
Whether you are an organization seeking to outsource or a third party logistics provider, by following these tips, you’ll be well equipped to enter into an outsourcing agreement which is vital for growth and well-placed to build that into a mature and successful partnership.
I wish you every success in your outsourcing planning, implementation, and ongoing management.”
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Logistics Bureau assists customers to determine whether Supply Chain, Logistics, Warehouse or Transport Outsourcing is an appropriate strategy and if required, provide specialist support through to implementation. Logistics Bureau’s consultants do not have commercial relationships with any service providers and so we provide a totally objective and unbiased approach.
Based on that experience we are pleased to share these tips with you here.
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