Ozburn-Hessey Logistics

By Purchasing Staff -- Purchasing, 10/2/2007 8:27:00 AM

SIGNS THAT YOU SHOULD OUTSOURCE LOGISTICS

1. Logistics is not a priority for the business. In some cases, either because the logistics function is not considered core or because it represents a very small percentage of the overall value chain for a company, logistics is not a priority. Therefore it receives neither the attention nor ongoing investment required to maintain a competitive level of cost or service. In these cases, companies would be better served to partner with a 3PL that can make supply chain management a priority on their behalf.

2. Company is facing major capital expenses for labor, assets, and/or technology to expand or improve its logistics capability. Many companies face the outsourcing decision when their business outgrows its current network or facilities or is required to make a significant technology investment in terms of warehouse or transportation management software in support of an evolving business.

3. Current performance of your logistics function is leading to high costs, lost customers, lost sales, missed deliveries, out-of stocks and other negative factors. Escalating costs, the inability to fill orders on time, high levels of incorrect or cancelled orders are all signs that your logistics operations may be out of control. A business that is quickly scaling or one that has become much more complex may point to the need for a greater level of capability or expertise. 3PLs work in this environment with many customers and can bring valuable lessons learned and implement proven best practices to successfully manage the growth and change.

4. Company is information/data poor with respect to logistics performance and more broadly, the entire supply chain making it difficult to plan, manage and improve. One of the areas in which 3PLs continue to invest is technology. Two key components to successful supply chain management are visibility and reporting because they enable companies to identify issues, quickly react to out-of-tolerance situations and chart improvement against specific goals.

5. Industry vertical faces frequent and sudden shifts in demand requiring high levels of flexibility. In many industries, shifting demand patterns require flexible space options due to seasonality, consumer buying trends, or fashion cycles. OH Logistics has developed a multiclient campus model whereby we can quickly flex with our customers' requirements from a square footage, technology and labor perspective. This allows for a more variable model with respect to investment and utilization of capital to meet peak demand.

SIGNS THAT YOU SHOULD NOT OUTSOURCE YOUR LOGISTICS

1. Company has recently made and is committed to continuing to make significant investments in personnel, capital, and/or technology in support of its logistics capability. In many cases legacy financial and organization decisions create barriers to outsourcing. Investments in facilities, technology or even management personnel that are not fully amortized can have a significant impact on the evaluation process when looking at an outsourcing decision. While technically sunk costs, they are factors that need to be considered. In some cases, companies have employed a strategy of both in-house and outsourced logistics. If their business model changes and volumes suddenly drop, then often times they seek to leverage the internal assets first.

2. Logistics is core to the overall business model, requiring a high degree of control and the company has built a core competency in this function. The retail industry is a prime example of this. 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. Most department stores and larger specialty retailers operate their own DCs.

3. There is no demonstrated cost or service advantage to outsourcing. In North America, companies generally expect 8-10% cost improvement in addition to fixed asset reductions, order-fill-rate improvements, and reduce order cycle times. Without the evidence that a 3PL can make and sustain these improvements the impetus for outsourcing becomes less important. In general, the cost of change and longer-term change management challenges outweigh the benefits of outsourcing if measurable and demonstrated benefits are not present.

4. The logistics model requires low levels of technology, assets, and sophistication. Part of the value proposition involved in outsourcing logistics are the expertise and technology needed but not available in-house. If additional technology or expertise is not required the value of outsourcing is diminished.

5. Current in-house logistics processes and costs are not well understood. In many cases, a decision to outsource is made because a function is not well understood and there is a belief that turning over the activities to an outsource provider will solve problems. Unfortunately this simply moves the problems from in-house to the outsource provider and will generally set the relationship up for a very rough start-up and stabilization phase and perhaps an unhappy and soon to be terminated relationship. Companies should understand what they are outsourcing, how it interconnects with the rest of their business and more importantly what drives costs. A well informed outsourcer is generally a good customer because expectations are well grounded. Understanding what cost drivers are also provides a benchmark for measuring the success of outsourcing.

Source: Mike Burns, executive vice president, global sales and marketing