Wednesday, August 13, 2008

Outsourcing Without Fear

A strong 3PL-client relationship can take the risk out of outsourcing.

TMSi's Ron Cain identifies the perceived risks of outsourcing and counters them with solutions that guide a company through the development of a respectful and successful 3PL relationship.

The thought of outsourcing can be a concern for any business. Companies and their CEOs have often achieved success through meticulous attention to detail and extensive control over every aspect of business operations. Many companies take the "if it ain't broke, don't fix it" approach, assuming that their internal operations are good enough and improving them isn't worth the perceived risk of outsourcing.

Outsourcing, defined by Rob Handfield of N.C. State University as "the strategic use of outside resources to perform activities traditionally handled by internal staff and resources", often has the connotation of a loss of control, transparency, and security for CEOs and operations managers - a reputation that has been perpetuated by poor outsourcing providers and bad 3PL contracts. Find the right partnership with the right 3PL, however, and you can be free to outsource without fear.

Everyday life is full of examples of outsourcing, from housekeeping to vehicle maintenance. These simple examples show that outsourcing is not as intimidating as it sounds. The criteria to that should be used when considering if outsourcing is right for your company includes:
1. Is the task highly complex?
2. Is there a risk to the business while performing the task in house?
3. Does the task require more than the available resources?
4. Does the task require highly specialised training or tools?
5. Is the task outside of your core competencies?
6. Could outsourcing cut costs and improve service levels?

More and more companies are asking these questions and drawing the same conclusions: it's time to outsource.

According to a study by Georgia Tech University and Capgemini, transportation and warehousing continue to be the functions most commonly and successfully executed through outsourcing. Other frequently outsourced functions include customs clearing and brokerage, forwarding, shipment consolidation, reverse logistics, cross-docking, and many others.

The trend towards outsourcing is steadily increasing, as the study reports that 50% of businesses that currently do not outsource logistics plan to outsource at least some of their operations in the future. The report also found that in the last four years of the study, 80% of companies were using 3PL services, an increase of almost 10% from the first six years.

There are several factors that allow companies to outsource without fear. Creating strong personal relationships on an operational level, and having carefully drafted and signed contracts, have been cited as two of the most important elements in a successful outsourcing plan. A 3PL-client contract should include detailed descriptions of services, performance tracking criteria, clearly measured improvements in service levels, peer-to-peer relationships that provide guidance and sponsorship, and clearly measured cost reductions.

With the right 3PL partner, an outsourcing plan can have significant results: companies who outsource reported an average reduction of 18% in fixed logistics assets, a savings of 13% on logistics cost, and a reduction in the average order cycle length of almost four full days.

Once the decision to outsource has been made, a company must find the right 3PL that reflects its culture and values, and is able to enter into a productive relationship.

First, a company should decide whether its needs are best suited by an asset-based or non-asset-based 3PL. An asset-based 3PL is owns many or all of the assets necessary to run its clients' supply chains. This allows the provider to leverage internal strengths and infrastructures to provide direct, immediate solutions. However, an asset-based 3PL may be internally focused rather than customer focused, can have internal biases, or may falsely overemphasise its flexibility. Also, a customer will often pay for all or part of the assets, resources, and tools owned by an asset-based 3PL.

A non-asset-based logistics provider does not own the assets to manage the supply chain, which means the 3PL is not limited to one infrastructure of assets, allowing for more creative alternatives. A non-asset-based 3PL also possesses greater objectivity and typically delivers better ROI, since more capital is available and they do not need to realise value from an inventory of assets. However, with more pieces to manage, it is imperative that a non-asset-based 3PL has the experience necessary to negotiate effective contracts and realise sources of improvement in every aspect of the supply chain.

Other important factors to keep in mind when selecting a 3PL include commitment to quality, price, references and reputation, flexibility of contract terms, resources, value-added capability, culture, location, and existing relationships.

There are several ways to determine if a 3PL is right for your company. One effective method is to send out both formal and informal/blind Requests for Information (RFIs), followed by Requests for Proposals (RFPs) to those vendors whose RFIs met your established goals and criteria. After evaluating all RFP responses, you should perform as many site visits as possible and begin conducting negotiations with multiple vendors. When the best-suited vendor is found, the contract or partnership can be awarded, and both sides should commit resources to the success of the relationship.

Despite a company's best efforts, not all 3PL relationships are the right fit, and it is important to be aware of the warning signs. Statements like "the 3PL is on its own" show an absence of trust and respect, and a lack of communication that can cause a 3PL-client relationship to fail if not addressed. Other indications that a 3PL relationship has soured is an absence of cost-out and continuous improvement, one or both parties constantly referring to the contract, or no time spent evaluating productivity and success. When this is the case, the relationship must be seriously evaluated and reworked, or a new 3PL selected that is more in line with the customer's culture, goals, and expectations.


Outsourcing is often perceived as complex and error-prone, which indeed it can be unless a strong, respectful 3PL relationship is established. Such a relationship will only be as good as each side makes it, and it should be treated as an equal partnership.

A good 3PL relationship should create a performance-based culture and workforce that conveys high expectations and implements incentives that drive behaviours. By investing in continuous improvement in time and capital, maintaining the lines of communication through a quarterly meeting rhythm (not just when there are problems), thinking right to left by always keeping the end state in mind, and remembering that every business has an Achilles' heel that just needs to be found, a company can feel in control, safe, and secure with its decision to outsource.

Every outsourcing decision becomes a statistic - decide what kind of statistic you want your outsourcing to be, and find the right 3PL relationship to get you there!