Logistics Outsourcing… is like Marriage!… Really ?
I’ve had a lot of positive feedback and questions from our last Bulletin, where I mentioned some Outsourcing cost saving tips. So I thought I would provide an easy 1-2-3 step by step guide to Logistics Outsourcing.
I’ve been involved in well over 100 outsourcing projects (I’ve lost count), from both sides of the fence. Helping customers get the right outsourcing partner in place and also helping 3PLs develop their solutions and cost models. So I’m happy to share these tips with you in the hope that they will help you find the right outsourcing partners:
- To provide the right services.
- At the right cost.
- On a sustainable, long term basis.
So in my email Bulletin, I indicated outsourcing is like a marriage! Well it is. You’ll see why shortly. I’ll break down this guide into 3 parts. Parts 2 and 3 will come in the next Bulletins. The 3 parts will be these:
- Part 1 – Why Do It? What are you Expecting?
- Part 2 – Planning the Big Day (The Wedding)
- Part 3 – After the Honey Moon is Over…
Part 1 – Why Do It? What are you Expecting?
Why outsource? OK, so about 85% of organisations in the Asia Pacific region outsource some part of their Logistics operations. But does that mean you have to? There are many reasons why organisations outsource, such as these:
- Logistics is not a core function / capability and it needs to be handled more professionally
- In the hope of reducing Logistics costs. Note I say ‘hope’. As this is often not the outcome
- To gain access to specialist IT, equipment and skills
- To gain flexibility in capacity, and variable cost, due to rising or falling customer demand
- To move Logistics Assets off the Balance Sheet and free up capital.
These are just some of the typical reasons for Logistics Outsourcing. Just make sure that it makes sense for YOU and your Business! There are some businesses I have seen outsource, claiming that Logistics is not a core competency, that I would suggest SHOULD have Logistics as a core competency!
What to outsource? Outsourcing can be infinitely variable in terms of what is outsourced to whom and how. There are no hard and fast rules here at all. The typical functions that are outsourced are these:
Customs Clearance & Brokerage
Supply Chain Consultancy
Freight Bill Audits / Payment
Order Entry & Processing
Lead Logistics Provider or 4PL Services
Hybrid? It’s often the case, that businesses outsource part of an operation and keep some in-house. Large retailers often do this for example. It keeps the capability and skills in house, whilst also allowing greater flexibility in terms of product capacity and throughput.
A word of caution here though. Do NOT try to outsource something in the hope that it will get fixed! I’ve seen this far too often. A problem does not get resolved by throwing it over the fence for someone else to fix. If there are specific parts of the operation that are poorly performing, this needs to be highlighted to any potential outsourcing partner so that solutions can be jointly developed.
Where to look? If you’re currently operating in-house and this is your first venture into outsourcing, you need to carefully assess the market capability to find potential partners. You should be looking for potential partners that:
- Understand your industry and have experience in it
- Are a good cultural fit
- Are well matched in terms of size. You don’t want to be their smallest client
- Obviously provide the types of services you are seeking.
In terms of where to look, you can try:
- Canvassing management within your business, as many will have experience of operating with 3PLs before
- Seeking advice from industry colleagues that you know
- Asking appropriately experienced consultants to advise in the search
- Researching through trade magazines and the internet
When you actually approach the market, which I’ll cover in the next Bulletin, you can do this in an ‘open’ or ‘closed’ manner. Many Government organisations are obliged to conduct open tenders. The ‘open’ part means that the tender is made public and any company can tender for the business. This approach does mean however that a vast number of suppliers may tender, many of whom are not suited to your business and the process of evaluating all the tenders can be enormous.
I always favour a closed approach, where a number of carefully selected suppliers are invited to tender. But more about this in the next Bulletin.
Shape Up… Or Divorce? Now given that 89% or so of organisations have already outsourced part of their Logistics operations, the chances are, that you are contemplating changing your Outsourcing partner, rather than outsourcing an in-house operation. I see this all the time.
Can I just make an important point here? Just because you are unhappy with your current 3PL, does not mean it has to end in Divorce! If your partner has been putting on weight and started snoring at night, it doesn’t mean divorce. They can shape up! Get them on a Diet! It’s the same with your 3PL.
Changing 3PLs can be immensely disruptive and costly to a business. So where there are issues, I would always advise ‘counselling’ first. It may be that the contract needs to be tightened up, or KPIs improved, service improved or specific costs reduced. Whatever the issue, it can usually be overcome.
Sometimes businesses are pushed into re tendering their outsourcing contracts to ‘test the market’. This always makes me uncomfortable as it’s really a bit unethical in my mind. The amount of work that 3PLs have to go through to tender for new business is substantial. And to make a handful of suppliers go through that, merely so that you can confront the incumbent with the ‘market costs’ in your demands for a cost reduction? Well there are other ways to achieve the same thing, such as contract benchmarking and auditing both of which we frequently undertake.
Service expectations? So what are you expecting your outsourcing partner to provide in terms of service? Can you measure your current performance? Be it cost, or DIFOT (delivery in full on time), transport utilisation or other measures.
Whatever it is that you’re outsourcing; warehousing, transport or another function, you need to be able to clearly state what your service expectations are going to be and how you’ll measure these.
This may mean, that you first need to develop a clear customer service policy!
OK, in Part 2, (next month) we’ll look at planning the Big Day. The Wedding! This is rather like Drafting the Pre Nup! Because we need to consider aspects such as:
- Service specifications and expectations
- Commercial terms
- Rate mechanisms
I hope you find this information of value. Feel free to let me know what tips you would like to hear about in our next Bulletin. Just send your requests to my PA Rose.