Logistics Outsourcing Partnerships
The logistics outsourcing partnership has a split personality. On one hand, it is often presented as a tried and trusted business move, governed by a few basic principles to ensure smooth sailing. References and case studies abound to show how organisations use logistics outsourcing to become more efficient and more profitable. On the other hand, a number of pundits still consider logistics outsourcing to be an emerging industry, with estimates that as much as 50 percent of such outsourcing ventures fail to meet expectations. The partnership may start off with the best intentions, but something somewhere isn’t working like it should. Could it be that the ‘rules’ about how to succeed with logistics outsourcing partnerships no longer correspond to what is really needed?
Why Closer Client/Outsourcer Integration is Important (and What That Means)
The potential advantages of logistics outsourcing are multiple. Greater flexibility and efficiency, access to new markets, better business focus, improved end-customer service and reduced costs are often what is on offer. Common guidelines for a client to put a partnership in place for this might be:
- Decide what should or should not be outsourced
- Review internal expectations
- Define indicators (KPIs) to measure outcomes
- Assess risks and define the ways to manage them
- Configure or upgrade technology (IT in particular) for correct interworking and information sharing with the outsourcer.
All of this is good advice, albeit tactical, rather than strategic. It works for picking a supplier of services for driving trucks, picking products and managing stock. Some clients however want to take their logistics outsourcing partnership up a level. Keen to have their logistics services provider or 3PL identify with their own business goals and with an eye on the possibility of leveraging the provider’s superior logistics knowhow, these clients seek to integrate the LSP or 3PL more closely into their organisations. The additional engagement of the provider should then increase the chances that the partnership will be in some sense transformational, making bigger and more valuable changes in key aspects of performance.
Bringing one’s logistics provider closer can be done in different ways. One way is to define a closer relationship by appointing a provider to be not just a 3PL for instance, but also a lead logistics provider (LLP). The LLP becomes a privileged single point of contact, managing in turn a network of other 3PLs on behalf of the client. Risk and reward sharing possibilities start to appear in the contractual agreements governing the relationship. Beyond this there is the 4PL or fourth-party logistics provider with an expanded role as a logistics services provider and consultant. Now phrases like ‘strategic relationship’ and ‘partnership’ as well as ‘risk-reward’ make an appearance.
Actions speak louder than words or titles, however; not to mention the fact that industry definitions of what exactly an LLP or a 4LP does tend to vary. Risk-reward incentives address motivation. Technology such as cloud-based applications for joint visibility and information sharing play an enabling role. Multi-level organisational contacts, in which ‘opposite numbers’ exist between the client and the outsourcer at all levels including top management, are however what really cements a partnership, rather than just a contractual relationship with incentives and tools bolted on.
Finding the Balance between Collaboration and Confidentiality
If a logistics outsourcing partnership offers better chances of success by having two organisations get closer, there are still possible issues of confidentiality. People, whether employees or contractors, work better when they know what the end goal is and what they should be doing for that end goal to be achieved. Also, visibility into a client’s supply chain is what helps curb tendencies towards excess safety stock or too many expedited shipments. A strategic relationship relies on shared information on strategy in order for real value to be created. But if as a client your plan to dominate a competitor depends on using outsourced resources in a particular way, normally you’d rather your competitor didn’t know about it – not ahead of time, anyway. Yet once information crosses over an organisation’s borders, a risk of information leakage must be assumed.
Solutions to this problem may be organisational and technological. Information security awareness and policies have to be applied as appropriate both internally and when dealing with the outsourcing partner. Trust has to be built and demonstrably maintained. Collaborative software applications for managing stock and shipments need to offer sufficient separation from other internal systems. This is not only to avoid partners from straying into systems and databases that don’t concern them, but also to prevent hackers from using this as a way to break into a company’s IT.
There remains one other potentially thorny issue. If such a partnership leads to measurably improved logistics performance and the outsourcing provider can replicate such improvement to help other customers, does the outsourcer have the right to do so? Industrial patents aside, if a client wants to keep such an improvement for itself, it will probably need to make a prior agreement with its outsourcing logistics provider. On the other hand, if the provider comes up with a bright idea for improving logistics performance, it may be more difficult to restrict its application. It may even be more beneficial to the partnership to let the outsourcer use the idea in other non-competing contexts to encourage further generation of good ideas and cross-pollination from other sectors back into the client’s own logistics.
Moving the Cursor from Cost Reduction to Strategic Advantage
Cost reduction is a natural, but often short-sighted goal of logistics outsourcing. It may or may not be achievable – after all, logistics outsourcers have their own enterprise costs to fund and need to make a profit too. Without other added value, the goal and the relationship are often both shorter-term too. Logistics service providers (LSPs) operating at this basic level must be prepared for a higher turnover of customers when the only criterion is price. 3PLs may keep such a relationship with a client going for longer by calling on different LSPs as subcontractors. However, for a real partnership to exist, the 3PL will need to offer proactive performance as well as cost improvements.
When the cursor moves towards performance improvement rather than (just) cost reduction, the partnership starts to develop in several dimensions. Services provided by the outsourcer become more complex. At the same time, the client is entrusting greater responsibility to the outsourcer and also receiving the added value of being able to focus more on its core (non-logistical) business. The average contracting period between the client and the logistics outsourcer lengthens. Client loyalty towards the outsourcer increases, hopefully because of the increased business advantage, but also because client engagement with the outsourcer increases.
Does the logistics sector lead or lag other industry sectors in moving towards strategic advantage? There is an interesting comparison to be made with the construction industry, generally considered one of the stodgier sectors. With approaches such as integrated project delivery and gainsharing, construction projects are already moving into risk-reward relationships. In terms of collaboration and information sharing, construction projects also benefit from many advanced online tools for teams drawn from different organisations to plan, organise and visualise the whole of their building life cycles, including ongoing maintenance after delivery.
Yet similar tools for joint (cloud-based) information sharing, forecasting and modelling have been slow to appear for the logistics sector and for supply chain management in general. With SCM proclaimed as today’s competitive differentiator for many enterprises and with logistics accounting for a large proportion of supply chain costs, it seems strange that the cursor has not moved further or faster towards strategic advantage in this sense. It seems even stranger that logistics and outsourced logistics partnerships in particular are lacking in another commodity that is widely cultivated elsewhere: innovation.
What’s the Problem with Innovation in Logistics Outsourcing Partnerships?
Clients must already take a leap of faith when they hand over logistics operations to outsourcing providers. Poor performance or bad service from a provider can backfire on the client in terms of supply chain interruptions or end-customer discontentment. Trusting a provider to come up with smart ideas that will work for the client’s business requires a yet higher level of trust, one that some clients may not feel ready to give. This accounts for the view that even at the level of the 4PL, the outsourcer often remains client-driven instead of being a change agent in its own right.
Unfortunately, the client may not be in the best position to drive innovation. By outsourcing its logistics services, it puts its own logistics innovative ability at risk. In theory, ‘two heads are better than one’: the client with its business goals and the logistics outsourcer with its logistics sector expertise should be able to come up with ways to transform as well as improve the client’s logistics. However, that also depends on the client handing over the reins to some degree at least to the outsourcer.
Conventional wisdom from some logistics consultants includes ‘clients not outsourcing what they don’t understand’ or ‘not trying to outsource problems’. They see these actions as being responsible for the failure of logistics outsourcing agreements to live up to expectations. While there is sense in starting off a relationship on a firm foundation, over time this rule will likely need to be bent, if not broken. If logistics providers are albeit unwittingly the keepers of logistic innovation, clients must be able to say to them ‘We don’t know what to do, you are the logistics experts, now help us innovate’.
The Lie of the Land in Logistics Outsourcing Success Stories
It would be nice to able to point to a list of logistics outsourcing success stories in which logistics innovation played a leading role. Such stories must exist – or else the industry would be in even direr straits in this sense than imagined. However, it is striking that success stories so often omit any reference to logistics innovation. For instance, from one recent list of success case studies:
- Fila US outsourced its footwear and apparel distribution to focus on its business and cut costs.
- Greenleaf Automotive Recyclers aimed at improving local deliveries and gained in routing and scheduling efficiency.
- Kids’ Headquarters, an apparel company, used its outsourcer’s technology to improve supply chain visibility, and improve inventory turns and cash flow.
- Hercules Incorporated, a chemicals manufacturer, outsourced logistics to reduce costs.
- TruServ Corporation, a hardware cooperative, outsourced in order to take control of its inbound transportation, and stated “We didn’t want to be a guinea pig. We were looking for someone that had already blazed the trail.”
- Goodyear, the tire manufacturer, came closer to the logistics outsourcing partnership aspects described earlier in this article with a risk-reward and close multi-level management relationship with its 3PL outsourcer.
This does not mean that the clients concerned did not benefit from their outsourcing agreements, even if innovation was lacking throughout. However, it raises questions about the future of logistics outsourcing and perhaps the opportunity for an outsourcing provider to disrupt and seize a sizable advantage by being innovative where others are not.
Equally striking is the list from consultancy Cap Gemini’s 2010 outsourcing review of reasons why clients decided to do their logistics in-house (insourcing):
- Logistics is a core competency at our firm – 19%;
- Cost reductions would not be experienced – 15%;
- Control over the outsourced function(s) would diminish – 14%;
- Logistics too important to consider outsourcing – 13%;
- Service level commitments would not be realized – 11%;
- We have more logistics expertise than most 3PL providers – 10%
- Corporate philosophy excludes the use of outsourced logistics providers – 9%
- Too difficult to integrate our IT systems with the 3PL’s systems – 8%
- Global capabilities of 3PLs need improvement – 6%
- Issues relating to security of shipments – 5%
- We previously outsourced logistics, and chose not to continue – 5%
- Inability of 3PL providers to form meaningful and trusting relationships – 3%
Once again, logistics innovation is conspicuous by its absence, either as a reason to stay in-house or to abandon an external provider.
What Can Logistics Providers Do to Foster Innovation?
Two approaches could help client and outsourcers to move the cursor still further towards business advantage through innovation, although neither one is a quick fix.
- Logistics governanceBorrowing from the idea of IT governance, logistics governance positions logistics as a strategically important item for enterprises. Good governance then depends on top management understanding logistics enough to make appropriate demands from the logistics provider, while the logistics provider also understands the client’s business well enough to offer insights into the way good logistics performance in one area can be replicated in another. IT governance often involves board-level representation of IT management. While this may be too ambitious in logistics governance and an outsourcing provider, close contacts with sufficiently senior management are key to fostering logistics innovation, as well as the two-way/mutual understanding between logistics and the rest of the business.
- Process-driven innovation, instead of ad hocLogistical innovation, if it happens today, is often the result of a specific client need. It may not immediately be reusable elsewhere. However, an innovation-collection process that captures knowledge from the outsourcer’s personnel can direct the focus to be on innovation that uses technology and processes that are already standard for the outsourcer. This multiplies the chances that the outsourcer will then be able to offer valuable innovation to different clients.
Logistics outsourcing partnerships need rules in order to succeed. Yet as business environments evolve, so must those rules. In some cases, they may need to be broken – or replaced by more suitable ones. The strategic importance of logistics and the difficulties of generating and increasing logistical innovation are currently leading to a situation of risk and opportunity. Clients and logistics providers that do not develop innovation in their partnerships could be stuck at lower levels of business advantage. Those that can break into logistical innovation on the other hand, possibly by breaking a ‘rule’ or two, will be eligible for mutual competitive advantage.