Value-Chain Report -- Logistics Outsourcing: An Option Worth Considering

Forward-thinking companies take a closer look at third-party logistics providers to increase shareholder value.

During the last few years several clear trends significantly impacting the supply chain have emerged, including extending the enterprise into a supply web, collaborating among trading partners and the emphasizing supply-chain visibility. These trends have demonstrated the recognition by industry-leading firms that the entire supply-chain network must be responsive to the strategic needs of the business as well as provide competitive differentiation. A great example of supply-chain strategy creating competitive strength is that of Dell Computer, a firm that has become famous for its lean and responsive operating model. One of the most significant trends that continues to gain the attention of forward-thinking firms is the option to outsource logistics activities. A recent study conducted by the University of Tennessee, Exel Logistics and Ernst & Young regarding third-party logistics providers (3PL) noted that there is an increased interest in using 3PL services, due to a growing focus by companies on generating shareholder value. The research underlying this study indicates that logistics service providers have entered the mainstream and, in some cases, are at the leading edge of the rapid changes transforming the economy. But does that mean that logistics outsourcing is for every firm? Not at all. Some of the factors that need to be considered in making a decision to outsource some or all of your logistics activities would include competitive pressures, logistics operational expertise, logistics technology capabilities, flexibility in staffing and labor utilization, and degree of integration of logistics functions. What Logistics Activities Are Being Outsourced? The range of effective logistics outsourcing strategies spans the continuum from traditional outsourcing of transportation services to complete outsourcing of all logistics activities. Research indicates that warehousing, outbound transportation and freight bill payment and/or auditing are the most frequently outsourced logistics activities. Other logistics activities that are gaining attention and growing in popularity include packaging and assembly operations, inbound transportation and freight consolidation. Warehousing and Warehouse Management In outsourcing warehouse management activities, the business strategy is to reduce costs associated with distribution and warehousing operations. The value in outsourcing warehousing activities results from reduction of fixed assets associated with the physical warehouse(s), increased capacity for executing transactional and tactical warehouse processes and overall operating cost reduction. In addition to capital and cost related benefits, there are other reasons to consider outsourcing of warehousing activities, including access to leading practices, access to "best of breed" warehouse management systems and incentive or performance-based contracts that drive continuous improvement. These benefits should be balanced against potential weaknesses, including a tendency for "one size fits all" approach by logistics service providers and that efficiency gains may be limited to activities within a facility rather than on the entire supply chain or distribution network. Transition from internal management of warehousing operations to an external provider will require significant up-front involvement in providing initial data, industry or customer expertise and oversight during transfer of responsibilities. Freight Payment and Audit The objective in outsourcing freight payment and/or freight bill auditing is to reduce the cost and complexity associated with logistics-related labor. The advantage in outsourcing freight payment and/or audit activities is that costs and issues associated with managing a typically low skill level and/or part-time pool of workers. In addition, HR-related tasks, such as interviewing, benefits management and other functions, can be eliminated for these workers as a result of the outsourcing process. Although the expertise and contributions of the outsourcing provider are likely to be somewhat limited to lower value activities, cost reductions and efficiency gains can be expected to result from scale and knowledge of site and/or market specific conditions. However, given the nature of freight payment and freight bill auditing activities, there are typically limited opportunities for innovation that would result in order-of-magnitude improvement. Outsourcing freight payment and/or audit activities may require multiple providers to manage regionalized or global operations and also may require a substantial continued involvement to provide oversight and industry-specific expertise, particularly through an initial transition period. Transportation and Freight Management The overall business strategy in outsourcing transportation and freight management activities is to reduce the cost and complexity associated with these logistics processes, while simultaneously adding value and competitive differentiation. The advantages to outsourcing transportation and freight management activities are that logistics service providers are much more likely to possess a greater capacity to efficiently execute both the transactional and tactical processes involved, as these are core competencies. In addition to execution efficiencies, there are other reasons to consider outsourcing of transportation and freight management activities, including access to leading practices, access to "best of breed" transportation management systems and, similar to outsourcing warehousing activities, utilization of incentive or performance-based contracts that drive continuous improvement. Like any outsourcing activity, the benefits need to be balanced against potential weaknesses. Asset-based logistics service providers are not likely to be mode or carrier neutral. That is, they will tend to exhibit a bias for modes and carriers that provide the greatest financial incentive. Continuous innovation and/or optimization can be difficult to achieve because of conflicting objectives between the provider and the client company, which can be overcome by structuring performance-based contracts with improvement incentives. Have Realistic Expectations If you choose to outsource some or all of your logistics activities, it is important to have realistic expectations. Those firms that do outsource generally are satisfied that they have met the following business objectives:

  • Asset reduction
  • Workforce reduction
  • Freedom from restrictive labor environment
  • Expanded geographic coverage
  • Operational flexibility
  • Reduced cycle time/improved responsiveness
  • Supply-chain integration
  • Logistics operations cost reduction Does this mean that outsourcing of logistics operations is the best answer for every company? Not at all. But, for those firms that may be seeking competitive advantage, an opportunity to redeploy capital that otherwise would otherwise be tied up in assets to support logistics operations or do not possess deep internal logistics expertise, outsourcing may be an option that should be considered. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.
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