When deciding to outsource logistics to a 3PL, read the signs
By David Hannon -- Purchasing, 10/18/2007 2:00:00 AM
There are many reasons to outsource either part or all of your logistics operations and there are as many reasons not to outsource your logistics. Purchasing recently polled a list of third-party logistics providers, asking them to provide supply chain professionals with clear signs that it may be time to outsource—or not. Their responses might surprise you. And be sure to log onto Purchasing.com to read many more signs.
Five Signs that you Should Outsource Logistics
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Your current inbound logistics network has manufacturing plants waiting for supplies. John Fitzgerald, vice president of global sales and marketing for Seko in Chicago, says that if the current logistics operations are not flexible enough to meet requirements of after-hours deliveries and expedited service for manufacturing facilities when needed, "you may find yourself paying the extra cost by outsourcing anyway, on top of maintaining the huge overhead for an inflexible logistics operation." Flexibility is the key, he says, most notably, "The ability to ramp up or down in production, warehousing, and transportation."
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You need access to quality infrastructure in a new market. Rick Underwood, vice president of contract logistics services at APL Logistics in Oakland, Calif., says that as companies have sought lower-cost manufacturing and supply in countries like China, it has made the prospect of working with 3PLs with presence in these places increasingly attractive. "Many 3PLs offer a fast and easy way to establish a logistics presence in new marketplaces," Underwood says. "The bigger 3PL players often already have facilities in companies' markets of choice, including international markets."
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Your fixed logistics costs are having a negative impact on your bottom line. Fitzgerald says many manufacturers can realize instant savings when consolidating warehouses and/or using shared facilities operated by 3PLs. "This is the key benefit in moving from fixed cost basis to a variable expense which allows flexibility in responding to market dynamics."
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Your logistics performance metrics are not where they need to be. Jim Moore, vice president of automotive, aerospace and industrial at Miami-based Ryder System, points out that improving metrics in areas such as inventory turns, stockouts and on-time delivery can be a challenge for a growing company. If your competitors are gaining market share because your company isn't meeting its logistics commitments, it's definitely a sign you might need to bring in a 3PL.
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You want cutting-edge logistics technology that integrates with your processes. Several 3PLs said companies are outsourcing logistics today as a way to get the right technology lined up with their processes. Seko's Fitzgerald points out that most 3PLs bring a "neat package of technology and process improvements as well as the expected cost reductions." "Many shippers and manufacturers have internal IT departments with a long list of projects to implement, and logistics often falls to the bottom of the list," he says. "Rather than wait for new systems to be developed internally, outsourcing both the technology and logistics to a 3PL realizes both cost savings while expediting the process." And Mike Burns, executive vice president of global sales and marketing at Ozburn-Hessey Logistics in Brentwood, Tenn., points out that "Many companies face the outsourcing decision when their business is required to make a significant technology investment in warehouse or transportation management software."
Five Signs that you should not Outsource Logistics
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Lack of clear objectives. 3PLs say that all too often shippers or potential customers don't have a handle on what they really want from a provider or outsourcing partner. "For example, one company department may tell a 3PL that it wants to improve inventory velocity, while another department may tell that same 3PL that it's all about cutting costs," says APL's Underwood. "This mixed messaging makes it difficult for any 3PL working with their company, because the 3PL lacks the clear mandate it needs to proceed."
And Burns of Ozburn-Hessey points out that "Companies should understand what they are outsourcing, how it interconnects with the rest of their business and more importantly what drives costs. " -
You have not found the right 3PL. It sounds obvious, but deciding to outsource and selecting the right outsourcing provider are two separate processes. Some companies may make the initial decision that outsourcing is their best option, but cannot find a 3PL that meets their needs. Philadelphia-based 3PL Leading Edge Logistics recommends that companies give the selection process the proper amount of time and assessment. "Create an initial list of three to four providers and from that list narrow down the choices to two providers. The five most important criteria in selecting the 3PL are price, technology capabilities, financial stability, customer service capability, and creativity in problem solving."
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Too much internal conflict/lack of C-level support. Outsourcing is such a hot-button issue in corporations today that getting the right support and buy-in is increasingly important to the success of an outsourcing engagement. Jumping the gun could be disastrous. Underwood points out that a 3PL is not a trained therapist to resolve internal disputes. "If your company has a lot of players and departments at cross-purposes with each other, you can't expect your 3PL to achieve consensus," he says.
And Moore at Ryder points out that any major outsourcing project requires C-level support. If you don't have it, don't outsource. It's that simple. -
Logistics is simply too important to entrust to someone else. While it may seem surprising to hear a 3PL say that, several told Purchasing that companies must decide if their logistics operations can, in fact, be run successfully by an outside party. Burns of Ozburn-Hessey cites the retail industry as a good example. "Many retailers view the distribution process, particularly the distribution center, as core to the high velocity model required to keep pace with seasonality and changing demand patterns," Burns says. "And most larger retailers operate their own DCs." So logistics is really a core competency of theirs and a 3PL could not improve on it.
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Your company is solely focused on cost-reduction aspects of outsourcing. Outsourcing logistics usually brings a cost savings, but Ryder's Moore points out that "Cost reductions are only a one-time hit and are typically not enough to stay competitive." Burns says North American, companies generally expect 8–10% cost improvement from outsourcing, in addition to fixed-asset reductions, order-fill rate improvements, and reduced-order cycle times. "Without evidence that a 3PL can make and sustain these improvements, the outsourcing becomes less attractive. The cost of change and longer-term change management challenges outweigh the benefits of outsourcing if measurable and demonstrated benefits are not present."
And this is just the beginning.Go to the new
Purchasing.com Logistics Outsourcing and 3PL Resource Center
to read MORE tips from a variety of 3PLs. You'll also find a variety of 3PL and logistics outsourcing case studies there.
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