Outsourcing Transport and Warehousing: How to be Successful

Over the last 10-15 years, outsourcing of logistics activities to third-party logistics service providers has become increasingly popular. Research indicates that up to 75% of firms report positive impacts from outsourcing to logistics service providers. But what of the balance? Why have they struggled to obtain the results that they were hoping for?

In this comprehensive guide, we will explore the fundamental aspects of logistics outsourcing and transportation operations, from understanding why organisations choose to outsource to examining pricing options and ensuring successful partnerships with third-party logistics (3PL) providers.

 Why Organisations Outsource Logistics Operations

There are many apparent motives why companies outsource, but from experience there are four principal reasons:

1. Warehousing and Distribution Management is Not a ‘Core’ Skill

Peters and Waterman in their best-seller ‘In Search for Excellence’ identify one of the eight factors of organisational success as ‘sticking to the knitting’. They warned that companies that stray from their core business risk their employees’ attention being diverted from that business to the point where they lose focus.

Many enterprises have taken heed and determined that inbound and outbound transport and warehousing are ‘consequential’ processes of their business rather than ‘fundamental’ or ‘core’ processes. This has fuelled growth of the third-party outsourcing industry and expansion of scores of logistics service providers.

While many logistics service providers commenced as transport companies, they have diversified to engage in contract warehousing logistics, freight forwarding plus many other value-adding services. On a world scale, there are thousands of providers offering third-party services, yet there are only a handful of very large ones with the ability, network, systems, and infrastructure needed for multinational customers.

2. Performance is Sub-optimal

Related to the ‘core skill’ issue, often organisations that have a strategic focus other than in transport or warehousing cannot attain the desired performance levels and key performance indicators (KPIs) required by their customers. For example, companies that have their own in-house vehicle fleet often struggle to deliver products on time. A service ratio of less than 98% of deliveries delivered on time is a major issue for modern consumers as they have become far more demanding.

3. Reduction in Asset Capital

Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm. Consequently, there is a trend for firms to remove warehouse assets from the balance sheet, and redirect capital gained from sale of assets to working capital and/or core asset investments.

4. Flexibility and Scalability

With the advent of e-commerce, increasing globalisation and rationalisation of industries, today’s marketplace demands fast, flexible, and efficient supply chains. Coupled with shorter strategic planning horizons, use of logistics service providers gives organisations flexibility to expand or change their method to market and volumes handled with almost immediate effect.

Understanding Pricing Options in 3PL Relationships

There are five common pricing scenarios used in 3PL warehousing and transport contracts:

1. Fixed Price

In a fixed-fee contract, the price is held for a specific term regardless of volume fluctuations. The advantage for the customer is that it knows precisely how much it will pay for services rendered. For the 3PL, it can accurately plan its cash flow and resources to service the contract.

2. Percentage of Sales Value

While this method was popular in the early days of outsourcing, it has fallen out of favor. Under this model, 3PLs would charge a percentage (typically 6-8%) of sales value for logistics services. However, many transport companies discovered they were losing money on such deals.

3. Activity-based Rates

These are akin to ‘piece rates’ where a charge is attached to actual volumes handled. Activity rates are common for short-term storage arrangements and can be lucrative for 3PLs who are able to manage effective public warehouses.

4. Hybrid: Part Fixed, Part Variable

Blending activity and fixed rates is becoming more popular in contemporary relationships, especially where the parties have been working together for some years. The fixed-cost component normally includes charges for warehouse space, leasing of mobile and static assets, information technology, and management overheads.

5. Free-of-charge Service

Some 3PLs provide free warehousing services to clients who are prolific users of freight forwarding or transport services across the four modes (rail, road, air, and sea). They incorporate the warehousing charges into the transport rates and ensure sufficient overhead and margin recovery.

Ensuring Successful 3PL Relationships

To establish and maintain successful relationships with 3PLs, organisations should focus on:

Strategic Alignment

The outsourcing decision must align with the company’s strategic direction. This is a ‘common sense’ statement, but unfortunately not well practiced. Many companies have suffered after outsourcing decisions were made at an operational level, without due regard to the board’s supply chain strategy.

Attention to Detail

When seeking third-party quotations and contracts, there is no room for intuition or best-guesses on order velocities, volumes, processes, and service requirements. Very detailed specifications must be prepared by enterprises, with full disclosure of all available data.

Resource Wisely

Both during implementation and the ongoing partnership, a competent team is essential. Both the customer and the third-party logistics company must create an open and trusting working relationship.

Raise Potential Issues Early

Issues that are not dealt with proactively and in good time can fester into ‘relationship breakers’ and end in disaster. Both parties should take a long-term perspective and be mature in their outlook and approach.

Use KPIs to Manage

The contract and agreement should be subject to regular reviews of KPIs. Data speaks volumes in terms of performance. For both warehousing and transport, KPIs should be agreed at the outset. As a rule of thumb, no more than six KPIs should be used, but make sure to choose the ones that are most meaningful to your business.

Conclusion

Whether you are an organisation seeking to outsource or a third-party logistics provider, following these guidelines will help you enter into an outsourcing agreement that is ‘fertile for growth’ and well-placed to build into a mature and successful partnership. Remember that cost alone should not drive outsourcing decisions – instead, focus on strategic alignment, clear communication, and collaborative relationship building for long-term success.