Soaring e-commerce demand is driving growth in outsourcing to third party logistics companies, commonly known as 3PLs.
Many businesses facing the uncertainty thrown up by the pandemic are wondering how to reduce logistics costs, whether to change their supply chain networks to fit an emerging ‘new normal’ and if outsourcing is the right solution.
Weighing up the pros and cons of using a third-party logistics provider is a perennial debate but the impact of COVID-19 has renewed interest in this topic. Lockdowns and infection concerns have fuelled demand for e-com. The proportion of retail sales online rose to 27.7% in August 2021 from 27.1% in July, substantially higher than the 19.7% in February 2020 before the pandemic. (figures from the Office for National Statistics).
The ‘Amazon effect’ on the retail landscape has been accelerated by the health crisis and this is a major factor driving interest in 3PLs, which tend to excel in fulfilling e-com’s challenging order profile. Of course, as well as being an internet retailer, Amazon itself is a 3PL, accounting for an estimated 60% share of the US 3PL e-com market segment.
With the question appearing to shift from ‘Should we outsource?’ to ‘How much should we outsource? – what factors should business leaders consider in order to achieve the best outcome when entrusting some or all of their logistics operations to a 3PL?
3PL Outsourcing Business Strategy
The main reasons that organisations look to outsource their logistics is to help the business to grow and cost reduction.
A 3PL offers a combination of infrastructure and expertise that allows a firm to scale-up more easily. Outsourcing keeps the supply chain agile, while enabling an organisation to focus on sales and customer service.
For 3PLs, logistics is their total business, so they inevitably do it better than most. When weighing up whether or not to outsource, the key question to consider is whether logistics needs to be a core competency of your business. If it does, then relying on a relationship with an external partner would appear unwise.
3PL Operations and the benefits
3PLs will have a deep and wide experience in logistics operations and are able to manage resources flexibility, (using shared use resources), across their various contracts with – in theory, at least – all clients being able to benefit from operational synergies, improved resource utilisation and the transfer of skills and experience. They often attract highly talented employees with considerable industry expertise who have chosen logistics as a career.
However, if you are outsourcing your logistics, you need to ensure that the right people are deployed by the 3PL to run your operations – and you will need to provide robust oversight for these senior operational roles, as they will be critical to your business performance.
Project Management in third party logistics
If you need to implement changes to your logistics network, remember that this is something that 3PLs do all the time. Indeed, a 3PL will deliver maximum value to you as a client during a period of change (rather than a period of status quo) and having good project management will ensure that the value creation is maximised in the critical implementation phase.
During any implementation project, there will be a need for additional resources compared to BAU (business as usual), so this can be a real drain on your business. A 3PL, however, can deploy the necessary skills for each client on a project by project basis, from the in-house project management departments they run. Your business will then benefit from the experience your 3PL has gained in implementing similar projects with other clients.
This expertise significantly de-risks the implementation of any supply chain changes – and now, more than ever, firms must mitigate supply chain risk in order to succeed.
The role of IT
Getting the right IT infrastructure is key to ensuring that your logistics operation runs smoothly and cost-effectively. This is often a stumbling block as the high salary levels commanded by IT professionals can preclude firms from attracting staff with the right skills. A 3PL, on the other hand, will be able to access this talent and can deploy proven IT systems that have already been configured for businesses similar to yours.
3PLs have a significant amount of capital to bring to the party – such as real estate, materials handling equipment and automated systems.
They also have a network of partners that give them an even wider footprint, as well as the purchasing clout to resolve issues quickly. Of course, they are very likely to demand a higher rate of return on this capital and stipulate fees in the event of early termination of a contract.
Fortunately, the cost savings and long term benefits are easy to measure making management’s job far easier.
Saving money is actually not the top motivation for businesses looking to outsource their logistics. In a recent survey by the global research firm, Gartner, only 34% of respondents named cost optimisation as a priority. Rather, companies are seeking access to the technologies that can support increasingly complex logistics processes.
Advances in robotics, connected vehicles, AI, the Internet of Things and (potentially) blockchain are enabling enhanced data quality, faster speed to market and end-to-end visibility in real time. These are the benefits you should be challenging your 3PL to deliver.
When it comes to control, outsourcing introduces a complicating factor, as your logistics function is now delivered operationally and tactically through the 3PL. However, as the client you still need to make sure that you have the right level of information – delivered in a timely and accessible fashion – and the right contractual levers to ensure you retain control. You will need resources to manage the relationship with the 3PL to make sure it delivers what your business needs – don’t assume that this will just happen automatically.
Outsourcing to a 3PL secures an agreed cost level to a defined level of activity and scope. The outsourced cost will obviously include the 3PL profit margin and overhead contribution either as a visible cost line (open-book) or hidden within the elemental rates they charge (closed book).
When it comes to contracts, the devil is in the detail. Whether you are looking for a full-service solution or something less, the contract determines the cost/service level trade-offs, so you need to make sure that it will result in a working relationship that delivers what you need. In particular, make sure that the incentives are there to drive the behaviours that you want to see in a 3PL.
A careful and professional procurement process will ensure cost competitiveness and that your business is not exposed to exploitation through an unbalanced agreement.
It is important to remember, however, that if you are trying to solve an operational problem in your supply chain, outsourcing may not be the immediate right answer. Many of the challenges in supply chain relate to internal issues within companies. So, outsourcing what is in reality an in-house problem will not necessarily solve it. In practice, outsourcing can often make the issue more intractable as a commercial contract will now be an added complication or even a barrier.
The other key question (after making the strategic decision to outsource) is to make sure you have the right selection criteria to guide your sourcing process. As well as technical and functional capabilities, business focus, geographical reach, commercial flexibility and relationship alignment also need to be considered, as well as cost of course!
Making the wrong selection could create a major problem in your supply chain and switching between 3PLs is definitely something you do not want to do too often.
So, if your business needs to review the efficiency of its logistics infrastructure or adapt to changing customer demands, then you may need to change or even transform your logistics network. This could then be the perfect time for you to take the plunge and partner with a 3PL.
If you would like help in evaluating whether outsourcing is right for your supply chain and some advice on how to approach the 3PL market, please get in touch on +44 (0)1628 487000 or email us at firstname.lastname@example.org
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