US manufacturers are increasingly outsourcing their logistics and supply chain execution (SCE) processes to third-party logistics providers (3PLs). These processes include distribution, warehousing, packing, shipping, trade management and returns processing. According to Armstrong & Associates Inc., even with 2012’s slower pace, the growth rate of 3PLs will likely be triple that of U.S. GDP growth rate.
A vast majority of the organizations take a hybrid approach to outsourcing. They run a mix of outsourced and in-sourced logistics operations, i.e., some aspects of the operations are run by 3PLs and others are run and managed internally. This is due to a number of reasons:
- Cost or other business factors that make in-sourcing a better alternative for a certain geography or a product, while letting the same operations be outsourced for other geographies or products.
- A post-acquisition integration plan that may lead to a hybrid logistics approach based on the relative strengths of the two organizations in those processes.
- A senior management mandate to change sourcing strategy for some products, segments or markets and bring it in-house.
- A way to remediate a history of consistently troubled outsourcing relationships and bring that process in-house.
- A healthy look at an old sourcing decision to find the right mix of in-house and outsourced services based on current business goals.
Whether an organization decides to outsource or in-source or run a hybrid approach, the biggest challenge facing them is the alignment of their logistics execution and IT strategy. It is imperative that these two be aligned and complementary. The reason is very simple – unless the information about flow of products is streamlined, the logistics flow suffers, irrespective of whether the operations are in-sourced or outsourced.
Gaps between Logistics and IT
The three most common gaps between a logistics strategy and its corresponding IT strategy are:
- Some key parts of the logistic operations are supported by spreadsheets and other manual methods. Often these include processes such as export compliance, transportation management, tracking of hazardous shipments, etc. This hurts the ability to scale the logistics operations and increases the risk of compliance-related penalties as the business grows or becomes more complex. Such processes need to be automated.
- Other parts of the logistics operations typically have individual systems that do not connect very well with the rest of the systems within the company, leading to local optimization (at the expense of optimizing end-to-end logistics process) and operational silos. For example, many organizations have disconnected (or very loosely connected) order management, warehouse management, shipping, fleet management and trade management systems. These systems contain embedded business rules that are designed, for example, to minimize the transportation cost or inventory costs of that specific process, at the risk of total landed cost or on-time delivery to the customer.
- Finally, key technologies such as event management, which serves as an early warning system that a delivery is behind schedule, are not deployed at many companies. This reduces the ability to proactively address issues that may affect customer delivery dates (outbound logistics) or manufacturing schedules (inbound logistics).
Organizations need to address all three issues if they want to streamline their supply chain execution, reduce overall costs, increase velocity and position themselves to scale their operations.
Getting the Supply Chain In Sync
Thirty-five percent of businesses recently surveyed by Gartner identified the inability to synchronize end-to-end business processes as an issue, triggering a need for supply chain applications convergence. According to Gartner, multiple supply chain applications within a company create functional and application silos, which makes orchestrating and synchronizing business processes across their organizations nearly impossible. This application portfolio fragmentation has been caused by many factors, such as buying different supply chain applications over time in an isolated manner – mostly triggered by organizational structure and SaaS model, mergers and acquisitions, and outsourcing.
Eliminating some of these one-off applications and driving towards application portfolio convergence will allow them to easily model, orchestrate and synchronize end-to-end logistics processes. But how do you decide which logistics and SCE systems should converge, i.e., be a part of an integrated suite, and which ones could be independent, especially within the context of how much you outsource your logistics and supply chain execution operations? The accompanying chart shows a framework to help you evaluate, using warehouse and inventory management systems as an example to illustrate the framework.
In-sourced or Outsourced?
The two axes of the framework are: complexity of operations and part of your operations (in-sourced vs. outsourced operations).
In-sourced vs. Outsourced: A warehouse operation, for example, can be completely outsourced to a 3PL or it may be managed internally as a part of material/customer order flow or could be a hybrid scenario (for some products/regions it is outsourced and for the others it is in-sourced).
A completely outsourced operation is responsible for meeting its service levels at the lowest possible cost of operations, i.e., it does not need to consider any other part of the organization as it strives to drive towards maximum efficiency (i.e., lowest cost and highest throughput). It however needs a mechanism for getting requirements (long-term plans and daily execution details), as well as communicating back status to the manufacturing operation. However, for a manufacturer that has its own warehouses, it needs to look at the warehouse as an integral part of its overall value chain. It must not only be able to do everything listed above (e.g., send requirements and get status updates), but it also must be able to manage all the operations within the warehouse.
Operational complexity: Certain systems are better designed to meet the needs of customers with higher operational complexity. Continuing with the example of warehouse management, the needs of distribution-oriented customers are different from those of a production supply facility. The former need systems that support a higher level of material flow velocity (e.g., high number of transfer orders or line items or high transaction volume), multiple types of material handling equipment, complex material flows or more value-added services (such as special labeling, pricing, packaging and hazardous material notes on shipping documents).
Options Before You
The framework above recommends that when operational complexity is high and a certain logistics/SCE process is a part of your operation, the best solution to consider is the advanced supply chain execution and logistics module from your ERP provider. You will get the advanced capabilities, as well as the highest degree of ERP integration without needing to invest your own resources in an expensive integration. Additionally, this integration will be carried forward as you upgrade to new releases. It will also ensure your environment optimizes on lowest cost to the customer, not the lowest cost of the operation – potentially a key competitive advantage.
With such a solution, you will not only have up-to-the-minute cost and inventory visibility into an individual order/shipment, but the solution will also bring together all of the data points from across your organization to give you instant access to your overall metric, such as perfect-order. If your ERP vendor does not provide advanced logistics capabilities, then you should evaluate best-in-class solutions, but you would need to invest in expensive integration to bring it all together.
If the operational complexity is low, you could deploy the logistics and supply chain execution modules from your ERP vendor. It will provide you the integration you need and give you just the right set of capabilities you would need. But if you expect your warehousing and transportation needs to change significantly over time, then a better option would be to deploy an advanced warehousing and transportation management solution which will cover your current needs but will give you the ability to withstand future changes in business processes with little effort.
When any aspect of the logistics operation is outsourced, irrespective of its complexity, you must have capabilities to communicate requirements/daily plan from your ERP system and get the status updates back into your ERP system. This framework will allow you to pick an IT strategy for your supply chain execution systems that is completely aligned with your logistics strategy to ensure you are optimizing the overall performance of your operations, while planning for future scalability.