November 2001 | Commentary | 3PL Line

When Should You Outsource Transportation?

Tags: 3PL

Outsourcing non-core competencies has now become a widely accepted practice across many industries. One company may outsource IT hosting capabilities while another outsources customer service and yet another fulfillment needs.

Consider the many retailers who have outsourced their fulfillment to third-party logistics (3PL) providers the past few years. A retailer's strength is in selling directly to the consumer—its focus is marketing and sales, but without the capability to fulfill orders, it is doomed. So retailers have turned to 3PLs to focus on the back-end operations and fulfillment.

By now most companies understand why they should outsource, but what is less clear is what should they outsource. A good rule to follow: Consider outsourcing if you focus a lot of time, energy, and money on an activity that is not your core competency.

One area that has traditionally had low priority within companies—but is gradually gaining acceptance as an outsourcing candidate—is transportation management.

Delivering to the Customer

While many companies outsource various functions of their business, such as customer service, IT, and fulfillment, they often overlook the most important part of the process—getting the order to the customer's home.

The company, not the carrier, bears the ultimate responsibility for delivering packages to consumers, so companies are finding it increasingly important to examine various transportation management options.

Transportation management traditionally has had low visibility within companies and is usually kept in-house because it is a deceptively simple process. The package has been picked, packed, and is sitting by the dock door—but getting the package to the consumer is the difficult part.

By examining transportation management and trying to determine how to be more effective in the marketplace, companies are turning to transportation management providers for guidance.

Weighing the Benefits

Here's what companies should consider when weighing the benefits of using a transportation management provider.

Volume Discounts. The most significant reason to outsource transportation management is to receive volume discounts. The provider will have significant buying power in the marketplace and will receive deep discounts for their purchases (i.e., trucks, couriers, etc.). Because these discounts are based on volume, they will likely be much greater than discounts companies can receive on their own.

So consider the monetary benefits of using an outsourcing provider. Companies will ultimately save money because of discounts the provider receives.

Information Technology. Logistics IT is evolving rapidly, becoming increasingly sophisticated with each new development. By outsourcing logistics, companies are able to partner with a provider that will make large investments in IT on their behalf and companies will benefit from this investment without sacrificing their own capital. It is important to carefully consider the breadth of the provider's IT capabilities and its ability to scale these capabilities as your business grows, while at the same time still providing quality service to your customers.

Infrastructure. Infrastructure is critical in selecting a transportation management provider. Forecast the volume you expect to move, including during peak season, then examine the provider's infrastructure to determine whether it has the capability to handle significant increases in your volume. Does the provider have the necessary resources to provide top-level service even at your busiest times? If not, look elsewhere for someone who can.

Management Team. Consider the provider's management team and expertise. An effective management team will have specialized logistics industry knowledge and will understand your business. It is common for experts in transportation management to seek companies with logistics as their core competency—something to take advantage of in selecting a dedicated logistics provider.

Customer Success. Reputable providers are generally willing to share their clients' names and their successes. Ask for the names of a few references you can contact. Current clients often will give you valuable insight into the provider and their capabilities.

Financial Stability. Consider whether the provider is financially stable. Who is funding the company? Is it a larger parent company or private investors? Researching the company's finances will help you decide whether this provider is stable enough to survive economic downturns and industry changes.

On-Demand Transportation.

Something to keep an eye on within transportation management is on-demand, or expedited, services. These services, like transportation management in general, have traditionally not been high priority for companies, but they are quickly gaining the attention of CFOs as an area of the company's overhead that is ripe for trimming.

On-demand services are transportation services that are not planned for (or not known about) in advance. The services can range from courier pick-ups to overnight air services to black car service for executives. In each of these cases, the services are ordered on an as-needed basis.

There is an issue of trust with on-demand transportation management providers because there is no advance notice and sometimes unreliable or untrustworthy providers are chosen. By following the same guidelines outlined above for your regularly scheduled transportation needs, however, you may also find a well-established national expedited provider. You may even find one provider who can accommodate both your regularly scheduled transportation needs as well as your on-demand needs.

Outsourcing your transportation management needs can save you plenty of time, money, and resources. Do your research and don't just trust your instincts in choosing your provider. The lifetime value of your customer relationship depends on it.