Thinking of Outsourcing? Ask Me Two Questions

A potential customer who was considering outsourcing her logistics operations recently asked me two thoughtful questions. The questions are fundamental, yet critical to ensuring that you, as the customer, share with your 3PL providers a common understanding of the task at hand.

Her first question: What is logistics?

The proliferation of logistics directories illustrates the problem of defining logistics. These directories list a host of companies – including freight brokers, ocean carriers, and airfreight companies – all claiming to provide full supply chain management. This is hardly a homogeneous or even comparable group; many are not genuine logistics providers. While all the companies may be “involved” in some facet of logistics, few are committed at the depth and breadth necessary to provide improvements across the entire supply chain.

Industry expert Bob Delaney of Cass Information Systems defines logistics as “the management of inventory in motion or at rest. Inventory is in motion during transportation. Inventory is at rest awaiting production of finished goods or distribution at the final point of sale.” Delaney knows that the real savings (spell that “money”) in logistics is in inventory management and control – inventory reductions. He estimates that a reduction in the average inventory-sales ratio from the 1997 ratio of 1.37 months of supply to 1.3 months would reduce logistics costs by $25 billion!

Why, then, are most “logistics providers” looking to cut costs in transportation, dedicated trucking, and freight forwarding? The answer is because they are overlooking the entire supply chain and focusing on what they know how to do. Their definition of “logistics” is more limited than Delaney’s, mine, and, I hope, yours.

Any company claiming to be a logistics provider that is not attempting genuine supply chain management will never manage “inventory at rest and in motion.” Consequently, they can achieve only limited savings rarely sustained over time, and cannot possibly optimize their logistics solutions across all or most supply chain segments and disciplines. This results in sub-optimal solutions. A transportation broker or carrier who moves inventory from A to B faster and cheaper may miss the opportunity to reduce total inventory in the system (in motion and at rest) and the potential for greater savings. These providers are involved in logistics, but not committed.

My potential customer’s second question: What are the most significant challenges facing the industry?

First, the industry has an identity crisis. By all means, use the directories as a starting point. But recognize that not all so-called “logistics providers” are created equal; not all are committed. If you are interested in outsourcing more than one or two aspects of your supply chain, you need providers who have the broad view necessary to unlock the millions of dollars that can be saved through managing total inventory in the system.

Second, the industry needs far better competitors. The image, reputation, and indeed the future of this exciting industry will be determined by the quality of its competition. Operational excellence and profitability, not market share, will ultimately be the real measures of success. The rush for market share has created growth that has been too rapid, resulting in unfulfilled customer expectations, canceled contracts, and, in a few cases, lawsuits. Logistics providers are not the only ones to blame. Companies that provide 3PLs with incomplete or flawed data, and that use competitive bid processes to pit logistics competitors against one another for the purpose of exacting unrealistic commitments, have not helped themselves or the industry.

What the industry needs is more operationally competent providers who only make promises they can keep, at prices both the customer and the provider can live with.

The third, and perhaps most important, challenge facing the industry is people. Due to the rapid growth of the logistics industry, and the seemingly unlimited market for genuine “logistics” services, there is a great demand for people who can implement, operate, sustain, and continuously improve supply chain solutions that reduce cost and improve service. Technology is wonderful and essential, but no substitute for competent logisticians. Companies that buy the technology sales pitch without testing true operating capabilities are likely to see key positions needed to service their account advertised in the Help Wanted section of their local newspaper. Few companies would knowingly entrust their supply chain to new hires of their own choosing, much less an untested logistics provider. But many 3PLs sell first and hire later.

The shortage of manpower, not technology, will be the principle constraint on growth of the logistics industry. Providers must grow responsibly and resist the temptation to promise whatever is required to get the business, only to hastily hire inexperienced personnel to implement their solutions. Companies need to look beyond impressive sales presentations, the “sex appeal” of technology, and actually examine the 3PL’s credentials and references. What that provider has done (or failed to do) in the past is a good indication of the performance you can expect in the future.

As of this writing, our astute customer has not selected a logistics provider. But based on her questions, she is exactly the kind of customer we look for and want. As the selection process progresses, we will determine whether her needs fit our capabilities, and whether we share the same definition of “logistics.” If these criteria are satisfied, and we are selected, our new relationship will be mutually rewarding and successful. If these criteria are not satisfied, we will not attempt to sell past customer objections or our shortcomings. When we are talking genuine logistics, we are talking about nothing less than the customer’s business lifeline. The consequences of choosing the wrong provider or, for that matter, the wrong customer, are just too serious to risk making a mistake.

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