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Logistics Outsourcing: The Benefit & Risks

Logistics Outsourcing: The Benefit & Risks

Around 70% of UK transport and nearly 50% of warehousing is outsourced. The number of logistics contractors and the range of services they provide have never been greater. These statistics might suggest that outsourcing in supply chain and distribution operations is now so well developed that it can be relied upon to run like a well-oiled machine with perfect processes always delivering clearly defined benefits. However, the reality is not so clear cut. 

OUTSOURCING – THEN AND NOW

Outsourcing has been a part of supply chain management since the 1960’s, but many of today’s offerings are radically different from those of the early days. Outsourcing once involved simple agreements for service provision between buyers and suppliers. Today, a lot of deals are more like partnership agreements.

The reasons are easy enough to see. For many manufacturers, goods are made in distant locations, using components sourced from various places, with the finished products transported to multiple end markets. Managing the inbound movements of raw materials to manufacturing plants, then the outbound dispatch of finished products to end marketplaces, is complicated. Plus, generally, customer delivery expectations are now so high that distribution providers have to work very closely with their clients.

These imperatives have changed the average outsourcing relationship from a simple buyer-supplier contract to a more strategic ‘partnership’ deal. If they are to work properly these deals require extreme care and due diligence in the planning, selection and transition stages, as will be discussed later in this series.

BENEFITS OF OUTSOURCING LOGISTICS OPERATIONS

The primary reasons companies consider outsourcing logistics include:

  1. Lower Cost

    By pooling activities, or through operational synergies, a third party provider can normally achieve economies of scale for individual client companies.

  2. Variable Costs

    An attractive feature of outsourcing can be the reduction in fixed costs in favour of activity related charges.  The contractor provides a similar or better level of service but the charges are related to activity rather than resources used.  This can prove sustainable for both parties where the contractor is able to combine traffic flows in order to avoid under-utilised resources.

  3. Flexibility and Speed of Response

    There is no doubt that a major logistics contractor has a level of resource and expertise that gives it the capacity to respond quickly and flexibly to operational changes. A company faced with periods of significant change or restructuring may gain benefit from a contractor able to bring resources to bear as required.

  4. Return on Investment

    A company may be better served by using its investment potential for its core business rather than investing in vehicles and Supply Chain assets. However, today, with the extensive availability of leasing and rental there may be better ways to minimise investment.

  5. Management Expertise

    For small companies, recruiting and retaining the required level of logistics expertise can be challenging.  Outsourcing can therefore be an effective means of ensuring ongoing specialist support. Companies need to be wary, however, because they will still need a certain amount of expertise to manage a contractor. An alternative to using outsourcing to gain expertise is the selective use of consultancy or interim management. These have the advantage of only incurring cost when they are actually required.

  6. Systems Support

    Although the cost of Supply Chain IT systems has fallen considerably, the cost of installation and the expertise required can be a major obstacle, particularly for small and medium-sized companies. Outsource providers with their systems familiarity can significantly reduce the time and risk in installing a system. Companies do need to be careful to avoid the risk of ‘lock in’ whereby they become unable to move their contract to an alternative supplier because of their dependence upon the contractor’s system.

WHY OUTSOURCING CAN GO WRONG

If outsourcing is capable of delivering the benefits listed above, why do we hear of things going wrong? There are many potential pitfalls, but the following seem to be ‘the usual suspects’: 

  1. Unrealistic business outcomes

    Real caution is necessary if outsourcing is being considered in order to sort out a logistics operation that is in disarray. To avoid paying far too much in the longer term, it may well be better to use external support to sort out immediate problems then tender the operation in a controlled manner when a detailed cost and benefit comparison is possible.

  2. Misalignment of business intent and contract terms and conditions

    In general, outsourcing should be based on the ability of a contractor to provide operational and synergistic benefits that are not available to the company and that will justify the management fee paid to the contractor.  Operational and synergistic benefits should evidence themselves through lower supply chain costs and greater flexibility.

  3. Poor or infrequent communications

    Given the long-term importance of outsourcing deals it is surprising how often the communications between a client company’s team and an outsourcer are inadequate. It is self-evident that, if teams do not fully explore and define the issues and expectations of an arrangement, there is every possibility of missing important elements.

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