Why should small businesses consider outsourcing their logistics?
Our sourcing suppliers expert, Simon Dixon, explains why outsourcing logisticscan 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 doesnt 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
Simon Dixon is the managing director of supply chain and logistics advisors Hatmill. He has worked in supply chain management for the past 19 years, both in industry and in consultancy. Simon's client experience includes the top four UK supermarkets and over 50 other clients spanning sectors such as construction and ecommerce.
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