Logistics Outsourcing: A Panacea?
Is outsourcing a panacea? Of coursenot. But depending on your company’s circumstances, it can be a cure.
As we approach the 21st century, outsourcing logistics activities has become a hot topic. The practice is not only popular, it is no longer confined to transportation and warehousing activities. Sourcing and procurement are now fair game. Some companies even have what they call “virtual manufacturing,” a polite term for someone else doing the heavy lifting.
We read and hear of many successes. Companies are living proof that outsourcing can elevate service offerings, reduce costs, and redeploy and releverage precious corporate assets in a wide variety of industries. Strangely, the failures are less publicized, and they can be spectacular.
We have learned by experience, sometimes referred to as “the hard way.” Lessons learned in the past have been valuable in the present in avoiding pitfalls and building up the likelihood of success. It’s not getting any easier, though. The process complexity involved in outsourcing, whether of the third-party logistics or any other variety, has not simplified over time. Instead, it has increased.
In the rush to assess the relevance, scope, and proper timing of
outsourcing, an objective methodology is paramount to
successfully discovering the path that will take you where you need to go. Following a rational, defensible process is the single most important ingredient in reaching your outsourcing objectives.
Also, consider that business leadership (your boss or your boss’s boss) will periodically cut into your timeline and attempt to bring in perceived deliverables, benefits, and savings sooner than they can actually be achieved. An options orientation throughout the process is very healthy.
The methodology The Progress Group has used successfully, following strategic decisions on the scope and role of outsourcing in overall supply chain operations, covers seven key areas. They include:
- Risk assessment
- Request for Proposals
- Contracting for value
Methodologies aren’t exciting on the surface. It is the detail behind the bullet points that give them weight and value. In the end, they are only as good as the experience, insight, and creativity of the
people who are leading their execution. That said, let’s dig a little deeper into what makes up the backbone of a sound outsourcing methodology.
A detailed baseline to include financial and service quality elements is one of the most important tasks in the entire process. It should be
carefully aligned with the company’s goals and priorities. No relief on making the tough choices here.
The baselining should be as organized and reliably quantified as possible—the 3PL companies will hang their Return on Sales (ROS) on the quality of the analysis. It will have to survive the test of a
full audit with your financial leadership and 3PL audit teams. Logistics and related physical distribution costs will need to be delineated at the site/provider/cost center level.
This category is cross-functional in nature and should reflect what is used throughout company operations, not just the logistics and commercial organizations. If outsourcing grows to be a real possibility, the sequencing of actions/plans/communications will be critical to success.
Misplaced workforce sensitivities and attrition of key employees can undermine the best planning at almost any stage, and at more than one point.In the benchmarking category (below) you will find an assessment of the 3PL’s culture. Its compatibility with the company looms as important as the financial and service quality baselining.
Benchmarking, correctly done, involves significant pre-work. It’s not just a visit or flyby; it should be a full physical of an operation’s anatomy and a deep probe of its mental health as well. We suggest benchmarking similar, non-competing operations that are being led by a 3PL.
The full diagnostic should evaluate proven proficiency in:
- Logistics planning acumen—all transport modes, domestic and international.
- Logistics technology/investment.
- Career paths and development of 3PL leaders.
- Carrier and warehouse portfolio integration.
- Business team integration.
- Quarter/year-end proficiency.
- Cost effectiveness.
- Service quality focus.
- Established metrics with historical performance measurements.
The benchmarking team should be comprised of the best and
brightest from Quality, Finance, IT, Sourcing, and Operations.
REQUEST FOR PROPOSAL
A standardized format, which itemizes costs that can be easily compared with the baselining data, is certainly in order. A bold statement, which prohibits asterisks or caveats, will equalize the competitive playing field.
Not all 3PLs are equal in their quality of project management,
technology, and leadership. So you should structure the RFP to
assess/rate these salient attributes, which you should in turn
edit, based on your benchmarking.
International logistics planning and supporting software still doesn’t appear to be a proven 3PL core competency. And, if your logistics network hasn’t been “refreshed” in size, scale, and functionality in the last three to four years, you should upgrade its
composition and direction with a front-end network analysis.
CONTRACTING FOR VALUE
Contracting for value is intended to improve financial and service quality performance, not lop off costs and risk customer relationships. Gainsharing and activity-based contracting can lead to effective 3PL partnerships.
Gainsharing is a mechanism that can reward, on a prorated basis, both the company and the 3PL for delivering savings. It can be particularly effective in reaching, and even exceeding, “stretch” targets. The gainsharing savings can become a major contributor to a manager’s ability to meet company-imposed productivity and savings performance targets.
Activity-based contracts can tilt benefits toward the company,
particularly in cases when customer demand is volatile or seasonal. While the company might enjoy minimal costs during periods of low volume, the 3PL can easily become disenchanted by an irregular—especially an unpredictable—revenue stream. Interesting project scope and value-added services discussions generally follow these conditions.
Depending on what components of the supply chain you are looking to outsource, risks and rewards on inventory management might not be easy for a manufacturer to relinquish, and would almost
certainly be difficult for the 3PL to take on, if the 3PL’s scope doesn’t include forecasting and demand planning. Also, you will probably face superficially less attractive savings if your budget doesn’t reflect imputed interest charges incurred at the corporate level.
Be wary as discussions evolve during the contracting process, and the length of the agreement’s term creeps upward to five, or even 10 years. It is generally very complicated and very costly to get out of a multi-year deal with a 3PL that is well integrated into your
business processes. (Always have a contingency plan. Always.)
The selection step assumes not only that the preceding steps have been executed, but also that you and your management feel good about all the previous assessments and development work. At this point in the process, some well-known companies have split their outsourcing award, or assigned sites between two lead 3PL companies.
We are convinced that this leads to supply chain fragmentation and inordinate confusion. The selected service providers must be intimate and integrated with you to gain the greatest benefit, and to
achieve the promise of outsourcing. They can’t be treated the
way companies used to treat competing materials suppliers,
which leads to a wrong kind of competition and a misdirection
of energy and effort.
The only valid premise for selecting multiple service providers is one in which each would have clearly defined roles and responsibilities, based on their capabilities and geographic presence, in a three-way relationship with the company.
Implicit in the selection step is the development of an explicit company-CEO and 3PL-CEO bond, in which they co-develop common visions and objectives for the outsourcing initiatives.
Far too many CEOs (and sometimes logistics professionals) underestimate the complexity of even niche outsourcing, let alone a total outsourcing solution. Here are some Golden Rules to keep in
mind as you plan and proceed with implementation:
Implement on a full fiscal year calendar cycle (unless business needs are compelling). For example, begin 1/1 as opposed to 8/1 to make the quarterly and year-to-year financial comparisons significantly cleaner.
Don’t downsize the existing logistics team prematurely; individuals may fit with the 3PL company’s plans or needs.
Assign singular project leadership to the 3PL, with joint direction from a company/3PL directorate. Joint project management doesn’t work.
Plan early and often, and do as much as possible beforehand. Site conversions are almost always rushed.
Build in operational and business case contingencies for unforeseen delays that could dilute or delay savings realization.
Take the longer view on where to house 3PL project leadership, placing them where the real action is. They can lead on the floor, but they can only follow from headquarters.
Revisit risk assessment, probabilities, dependencies, and mitigation actions/strategies for the details of the implementation plan.
Logistics outsourcing is a major cultural integration, whether you manufacture and distribute or simply distribute as you go to market. If your company’s business strategy, capitalization, or reinvestment ratio do not lead to investing in logistics processes and technology annually and in a major way, outsourcing can make more than good sense. It may be the only practical way for you to satisfy the service needs of your customers as the pace of competition steps up.
Remember to keep the options orientation, do a world-class job of baselining, choose a 3PL as if you were selecting a spouse, and build multi-level organizational bonds within the 3PL partnership relationship.
ABOUT THE AUTHOR
Randy Telfer joined the supply chain practice ofThe Progress Group in 1999 as director of logistics strategy and third party logistics practices, specializing in applying customer-centered metrics and information technology solutions to generate competitive advantage and speed products to market. Prior to joining TPG, Randy spent 23 years in logistics, finance, sales, marketing and customer service positions within the General Electric Company.