Tom Peter once said, “Do what you do best and outsource the rest”. It is a common practice to outsource logistics and supply chain activities. One would be surprised to know that some organizations strongly believe in insourcing logistics activities. The recent study by CAPGEMINI (2010) revealed few interesting facts on insourcing.
- On an average of 24% of outsourcing companies indicated that they would be returning to insourcing some of their logistics activities, and 36% of 3PL respondents observe that some of their customers are insourcing certain logistics activities.
- “Transportation is most Outsourced”.
- The percentages of 3PL users outsourcing individual logistics activities (versus overall outsourcing) tend to be higher in Europe and Asia Pacific than in North America or Latin America.
- The gap between expectation and satisfaction with regard to 3PL IT capability is widening (54%).
The outsourcing survey conducted by CILTUK revealed that logistics service providers (3PLs) are seen as:
- “A necessary evil“
- “They are only in it to make money these days”
- “Deliver poorer service for disputed financial advantage”.
Further, the same report revealed that 52% of the respondents indicated that the length of the contract reduced. Outsourcing community is aggressive and they do not mince words in sending out a strong message to 3PLs, “don’t sell me what YOU want, show me what I NEED”. In 2009 UK’s largest retailer, Tesco, has decided to take some of its distribution operations in-house. The move follows a company review of supply chain strategy.
What prompts them to Insource?
The CAPGEMINI 2010 outsourcing review listed 12 different reasons for insourcing. And they include:
- Logistics is a core competency at our firm – 19%;
- Cost reductions would not be experienced – 15%;
- Control over the outsourced function(s) would diminish – 14%;
- Logistics too important to consider outsourcing – 13%;
- Service level commitments would not be realized – 11%;
- We have more logistics expertise than most 3PL providers – 10%
- Corporate philosophy excludes the use of outsourced logistics providers – 9%
- Too difficult to integrate our IT systems with the 3PL’s systems – 8%
- Global capabilities of 3PLs need improvement – 6%
- Issues relating to security of shipments – 5%
- We previously outsourced logistics, and chose not to continue – 5%
- Inability of 3PL providers to form meaningful and trusting relationships – 3%
Now let us review top 5 reasons individually and understand whether they are true or system failure is causing outsourcing to fail.
1.Logistics is a core competency at our firm: What is core competency? Core competencies are the key skills, characteristics and assets that any organisation brings to the marketplace. These competencies, on an organisational level, are a synergistic blending of the core competencies that people in the organisation individually bring to work every day.
If we go by the above definition, Logistics is the core competency of any 3PL company because managing logistics activities is their core business. Interestingly, one of the main objectives of outsourcing is to focus on core competency. Modern globalized companies are described as “intellectual holding companies” because they focus so strongly on their core technologies while they purchase other services from companies that excel at delivering them. Thus, their entire operations function at a high level, yet they do not have to maintain high cost infrastructure. They get world-class capabilities without the risks involved in developing them. With rapid globalization, it would be next to impossible to compete in a global platform without strategic alliances. In my opinion, this reason is a myth.
2. Cost reductions would not be experienced: This could be true to some extent. In my opinion shippers equally share the responsibility for this blame. During the initial phase of data collection, 3PL seek the existing costs, business processes, business volume etc., in order to understand the size of the business and develop a cost sheet. Often it was reported that the shippers are hesitant to provide this information citing confidentiality as a reason. Outsourcing should be considered as a strategic solution and the service provider should be considered as a strategic partner. Unless transparency is established, relationships do not flourish and this is one of the fallout. If the shipper could provide all required information to the 3PL and insist on the 3PL to provide the costing using ABB (activity based budget), this may not happen. If necessary go for an open book method which would establish transparency. Many shippers believe that they have very limited role to play in the outsourcing process. Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest. CAPGEMINI 2010 report reveals that outsourcing companies have reported 15% cost savings, 25% reduction in capital deployment, and 11% reduction in inventory. In my opinion if the outsourcing process is managed well one can avoid this problem.
3. Control over the outsourced function(s) would diminish: In my opinion it is a myth. It is true that the shipper may not have transactional control but the overall control will not diminish. Again the responsibility lies with the shipper. If the shipper is able to develop KPIs for all the outsourced activities and monitor the KPIs regularly, one may not lose control over operations. In my recently published article, I have identified 32 different KPIs for warehousing function only. An effective set of interlocking performance indicators provides operational feedback to the enterprise and helps them in directing the 3PL operator effectively. Instead of describing an operation as appalling, if one can explain that 75% of transactions failed to meet the expectations, it would deliver a better message. Controls will never be outsourced, what are outsourced is transactional operations.
4. Logistics too important to consider outsourcing: There is no doubt Logistics is important function. Seamless flow of material information keeps the business moving forward. However, some of the activities within logistics function are mundane in nature. These activities can be outsourced and allow logistics/supply chain manager to focus on the value addition instead of managing day-to-day routine functions. Hence, it is necessary to develop a strategy on outsourcing and identify non-core activities and also develop a SWOT analysis to understand threats and weaknesses of outsourcing. Routine functions such as transportation and warehousing are non-core functions in my opinion. One can outsource them and save costs. In current economic conditions it would be next to impossible to develop infrastructure globally, it would be advisable to farm partnerships and strategic alliances to save costs and expand globally.
5. Service level commitments would not be realized: It is true to some extent. Again the shippers shares 50% responsibility for this blame. As long as the shipper is able to define the measurable service levels and monitor the same periodically and works with the 3PL proactively, this could be avoided. Operational efficiency should be measured on a daily basis. Some of the Fortune 500 Companies recruit specialists or appoint lead logistics service providers to monitor their operations. Nicholas and Amrik of Monash University indicated that formulating and quantifying the requirements was an obstacle to outsourcing in Australia. If you are not sure what to expect out of outsourcing, you have no right to complain about the service levels. Effective operational control will ensure high level of service levels. CAPGEMINI 2010 review reveals that 29% improvement in average order cycle length, order fill rate improved by 11% and whereas order accuracy improved by 7% through outsourcing.
Other reasons include; organizational logistics expertise. 3PL service providers globally consolidated their positions and are able to provide cutting edge solutions which individual organizations cannot afford. IT integration is very simple now days. Without penetrating firewalls one can exchange information through EDI and integration may not be necessary. 3PL capability improvement is an on-going issue; shippers may have work with the 3PLs to get what they want.
However, in my opinion there are two genuine reasons and they are security risks and relationships failure. I have discussed in length about the supply chain security risks in an outsourced environment earlier. It is a genuine reason and 3PLs are expected improve their performance on this subject. As mentioned earlier outsourcing is like a marriage. As long as it is not a marriage of convenience and both the partners are willing to invest time and effort to make the relationships work, the pact should be successful. The outsourcing goes through three phases before it firms up as a relationship. The initial phase is known as courtship where everyone is happy. The second phase would be hardship where the shipper notices inefficiencies and the 3PL struggles with resources and cost overruns. The third phase is battleship, in this phase both the parties involved are in a mood to terminate the relationship because of mounting issues. If both parties proactively work and sort out issues through well-defined escalation process, the outsourcing moves into a relationship mode.
Many organizations get caught up in the hype of the outsourcing craze and forget that it is a complex business strategy and lack of strategy, lack of top level management commitment and not dedicating best and brightest internal resources could lead to outsourcing disasters. If organizations embark on outsourcing with one dimensional approach of saving costs, it would be a big business risk and will have long lasting implications on the business. Ideally develop an organizational strategy, create an outsourcing frame work, and seek professional help (if necessary) to handle the process and select the right match (3PL) and this should work as mantra for outsourcing success.
Read Full Post »