Our sourcing suppliers expert, Simon Dixon, explains why outsourcing logistics can make great business sense, along with advice on picking the right provider.
Lots of organisations outsource non-core activities. These are activities that the business doesn’t feel are critical and closely related to its strategic purpose. Logistics services are often seen to fall into this definition and are frequently considered for outsourcing.
Third-party logistics providers (3PLs) provide warehousing and/or transport services to their clients. Typically, the clients own the stock and the 3PL provides the infrastructure, systems and equipment to manage the distribution of the stock. Although this provision can vary from contract to contract.
Many businesses use 3PLs as they do not possess, or wish to possess, the skills, expertise, systems or physical infrastructure to manage their own logistics operations and see them as “non-core” to their business.
There can be many benefits to using a 3PL:
- They can operate shared user facilities or share delivery routes so fixed costs can be divided between two or more clients
- They have significant knowledge and efficient working practices to operate low cost operations and achieve high service levels
- There may be pre-existing physical capacity in a 3PL’s network that would match the business’s requirements, avoiding the need for the retailer to find premises, often a long a drawn out process
- Access to lower cost services, through the buying power of large 3PLs, such as carrier rates
However, there are also a number of factors to consider regarding the use of 3PLs before deciding on a course of action.
Is the operation of the logistics operations a core competence of the business?
Many businesses, particularly retailers have an obsession about product. Whilst this is understandable it can often lead to a devaluing of the delivery of the product to the shelf or customer.
Would the cost of a 3PL management fee increase the total logistics costs above the savings they will deliver?
The business needs to be clear on the business case for outsourcing. What cost savings will the 3PL deliver? What will they need from the business to achieve those savings? Is that realistic? Where have the 3PL done this before? What references have you taken?
Would it be a challenge for the business to operate to a set criteria of service provision (e.g. providing data and accurate forecasts) to the 3PL to allow them to operate efficiently?
A typical cause of inefficient and ineffective logistics operations is a lack of quality information flowing from the business. If this is the case then outsourcing will not resolve the situation, it will simply exacerbate the costs.
Is the expectation of outsourcing to a 3PL and, in doing so, the resolution of all current logistics problems a realistic one?
3PLs are effective at setting up logistics operations using best practice and expertise gained from doing so repeatedly. If the issues to be resolved are specific to the logistics function and not dependent on other departments then it may be that a 3PL is the answer to improve service and costs.
Picking the right provider
If the considerations above lead you to conclude that a 3PL is the way to go then there are things you can do to ensure you pick the right provider with the right resources and skills to support your business:
(1) Be clear and realistic with your requirements
Define the services you require, the forecasted volumes to be handled and the service levels you require. 3PLs can generally achieve whatever level of service you require, but there will be costs involved for higher service levels.
(2) Start early – outsourcing logistics services takes time
Typical phases of the process would be tendering, presentations, shortlist, detailed planning, award, contracting, transition planning, cut over, go live. This process can take up to a year from start to finish.
(3) Undertake due diligence
Visit current clients (not just the ones they recommend), understand their cost assumptions, challenge them, establish what the mix of fixed and variable costs are – how will this affect you should volume fall below plan? Understand where the 3PL is making its margins and how big they are. You should be tolerant of them making a profit but not excessively. You need them to remain in business in order to support yours!
(4) Understand the people who you will work with
Be certain that the team you’re meeting with when the 3PL are trying to win the work are the same people you’ll be working with for the duration of the contract.
(5) Spend time on the contract
Whilst it may seem arduous to review and add various clauses for “what if” scenarios, it is your only protection against paying more or receiving sub-standard service. Use professional legal advice and logistics advice if you don’t possess it internally.
(6) Don’t underestimate the complexity and difficulty of transferring stock and processes
The 3PL should have enough experience of this to ensure it goes well, but you must fully participate to ensure the plan is jointly owned and all risks are understood and mitigated.
In summary 3PLs can be great business partners, providing cost efficiency and service levels that otherwise could not be achieved. However, outsourcing is not straightforward and should be given sufficient time and attention to ensure the decision to do so, followed by selection, transition and ongoing operation is what was desired.
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