A company’s logistics and supply chain management activities are critical to its profitability. A company can improve its profits by outsourcing these tasks but must be careful to avoid potential pitfalls. This article discusses how a company outsourcing logistics services can still maintain control of the process.
The outsourcing phenomenon in the U.S. started slowly and will likely continue to increase over time, but it is still a relatively new — and potentially controversial — concept for many companies. Four basic logistics services can be outsourced: transportation, warehousing, inventory management, and information technology (IT) support.
All four have some similarities, such as a wide-ranging array of potential service providers and possible inefficiencies when responsibilities are not clearly defined or understood by all parties involved. Many factors must be considered before choosing an outsourcing provider; this article focuses on transportation and warehousing activities commonly outsourced by manufacturers.
What is Logistics Outsourcing?
Logistics outsourcing is the process of delegating various supply chain logistics activities, or even an entire supply chain function, to a third party. This concept is not new and has typically been associated with freight forwarders specializing in transportation modes such as an ocean or air carriage.
In recent years, however, companies have increasingly outsourced these services internally to shared business service centers (SBSC), managed by logistics service providers (LSP) specializing in various logistics functions.
One way to think of this evolution—from the shipping company or freight forwarder to shared services center and 3PL—is that over time, service providers have begun offering more extensive outsource solutions while simultaneously becoming more specialized in their particular areas of expertise. This specialization leads to higher levels of efficiency and quality for outsourced services, as opposed to a less-focused carrier or forwarder that may cover various transportation modes.
How Can Outsourcing Supply Chain Activities Help Companies?
Outsourcing supply chain logistics services has allowed many U.S.-based manufacturers to better compete globally by taking advantage of the lower labor rates and high productivity levels common in China (see table below).
It also helps companies avoid major logistical catastrophes that could happen if they are overly dependent on one particular service provider due to lack of internal capacity or control over key processes—such as outsourced transportation providers striking, which has occurred in the U.S. and Canada several times over the last decade or so.
In addition, outsourcing can help improve a company’s profit margins by lowering transportation costs and facilitating better supply chain management planning and execution because responsibility is delegated to professionals with expertise in these areas.
Top Reasons to Outsource Logistics Activities
There are many compelling reasons for U.S.- based manufacturers to consider outsourcing logistics activities and/or the entire supply chain function:
Enhancing Profitability – Outsourcing helps companies improve margins by lowering overall transportation costs (if an LSP has extensive volume-based discounts built into its rates) and facilitating better supply chain management planning and execution.
Differentiated Services – An SBSC or 3PL specializing in certain logistics functions, such as transportation management, warehousing management, and supply chain execution, can provide a level of service that is more attuned to the specific needs of your company based on their deep industry expertise.
For example, suppose a manufacturer has a high-value product mix with a very low tolerance for damage during transit. In that case, an LSP specializing in handling fragile goods (as opposed to one that primarily handles large industrial machines) may optimize overall transportation cost while enhancing delivery performance.
Delivering Superior Customer Experience – Outsourced providers are often held accountable through SLAs for their ability to ensure the delivery of goods. This level of service, combined with companies’ increased flexibility to manage their own resources more efficiently in recent years, has made outsourcing a viable option to meet demanding customer requirements.
Easing Business Continuity Management – An outsourced supply chain partner is responsible for ensuring continued operations when a disaster or other disruptive event occurs, so a company can focus on other aspects of its recovery efforts—instead of figuring out how to continue shipping and receiving goods, for example—with the knowledge that its partners have taken steps to protect assets and workers during adverse conditions.
Benefits of Logistics Outsourcing
Improved flexibility and scalability
Outsourcing gives manufacturers the ability to quickly and easily adjust supply chain operations to respond to changes in market demand without increasing overhead or burdening internal resources. This is especially important given that demand fluctuations are becoming more frequent due to greater competition, shorter product lifecycles, and rapid technological change—all of which can strain a company’s supply chain capabilities if they don’t have adequate flexibility in how they operate.
For example, when a direct-to-retail importer wants additional capacity at its warehouse during the holiday season but doesn’t want additional permanent labor resources, it can deploy temporary workers through outsourcing firms (1099 contractors) to manage the seasonal lift. If work needs to decline at some point during the year, these same contractors can be scaled back to cut costs without having to lay off permanent employees.
Outsourcing firms are especially helpful for managing seasonal and/or temporary capacity needs. They have already established a large network of qualified workers who can be brought in quickly when demand is high and eliminated just as easily if it falls back down again.
Better Focus on Your Core Business
Outsourcing helps companies focus on their core business by eliminating operational activities that add value to the customer. Logistics and transportation are essential components of any supply chain. Still, they are often non-differentiating activities that don’t move the needle with customers regarding how they perceive your product or service offering.
Companies can improve competitiveness by focusing on their strengths while outsourcing logistics and transportation services to a trusted partner who is an expert at ensuring goods flow smoothly through the supply chain—no matter where it starts or ends up along its journey from factory door to consumer shelf.
Risk Reduction
Every business is subject to risk, but outsourcing allows companies to put in place robust mitigation strategies that mitigate supply chain risks and allow them to focus on their core competencies.
For example, early outsourcers of logistics capacity chose their partners carefully based on previous performance to mitigate risks associated with operating a direct-to-consumer eCommerce business – labor costs, potential theft of products en route between distribution centers, and end-customers locations, consumer satisfaction (i.e., through delivery delays), etc.
Increased Service to Customers – Developing Evolving Markets
Today’s distribution channels are more complex than ever, and companies need to have operational flexibility to meet the growing needs of end customers. As a result, it has become increasingly important for manufacturers to fully understand how customers—from retailers who order from multiple suppliers directly or through an intermediary to households that shop online or at physical stores—want goods delivered to them.
Outsourced logistics providers have the intimate knowledge of their customers’ channel-to-channel integration needs and the ability to provide service capabilities like multi-modal transportation and pick/pack services that allow manufacturers to create customized supply chain solutions for each customer segment.
In many cases, these end-to-end customized supply chain solutions can be utilized across several channels and industries from the same platform, leading to high returns on investment.
Drive Efficiency and Cost Savings
By outsourcing logistics services, companies are able to fully utilize their assets while reducing the time spent managing non-differentiating operational activities.
For example, outsourcing networks, car management solutions and transportation management service providers can relieve manufacturers of the burden of managing physical inventory and its associated costs, allowing them to focus on core competencies such as developing innovative products and marketing strategies.
In addition, outsourced transportation providers, for example, which include global freight forwarders like MCC Transport, provide a level of flexibility that inhouse fleets simply cannot match.
This includes the ability to hire space on other carriers’ trucks when capacity is available, adding or dropping trailers when demand requires it without having to invest capital in more tractors or trailers upfront, allocating shipping space based on product category across different carrier networks, and even managing an eCommerce customer’s returns process by picking up products from the end-customer on behalf of the manufacturer.
Conclusion
Outsourced logistics providers have the intimate knowledge of their customers’ channel-to-channel integration needs and the ability to provide service capabilities like multi-modal transportation and pick/pack services that allow manufacturers to create customized supply chain solutions for each customer segment.
In many cases, these end-to-end customized supply chain solutions can be utilized across many channels and industries from the same platform, leading to high returns on investment.