Outsourcing logistics has become a common practice over the last decade, with more than 75% of businesses reporting positive impacts. However, not all companies achieve the results they expect. This blog explores what outsourcing in logistics entails, why organizations choose it, and the key drivers for successful outsourcing.
What is Outsourcing in Logistics?
Outsourcing involves engaging external suppliers to provide services that a company either cannot manage internally or cannot manage efficiently. In logistics, this means partnering with third-party logistics providers (3PLs) to handle operations like warehousing, transportation, and distribution.
Decades ago, businesses often managed all logistics functions internally—manufacturing, storing, and transporting goods under their own management. However, as costs and complexities increased in the 1970s-1990s, many companies began outsourcing non-core logistics activities, giving rise to a thriving 3PL industry.
Why Do Businesses Outsource Logistics?
While cost savings are often expected, they aren’t always the primary driver for outsourcing. Here are the main reasons companies turn to 3PLs:
1. Lack of Core Expertise in Logistics
Many companies recognize logistics as a non-core activity and prefer to focus resources on their primary business objectives.
2. Improved Performance Levels
Organizations without a strategic focus on logistics often struggle to meet the performance levels demanded by their customers. 3PLs bring specialized expertise to fill this gap.
3. Reduction in Asset Capital
Warehouses and vehicles are capital-intensive. By outsourcing, companies can free up capital to invest in their core operations.
4. Flexibility and Scalability
Markets are dynamic, and businesses need to adapt quickly. Owning or leasing logistics assets can limit flexibility. Partnering with a 3PL provides scalability to handle market fluctuations.
5. Cost of Service
Although reducing costs might be a long-term goal, initial savings from outsourcing logistics are rare. Instead, companies benefit from process improvements, operational synergies, and economies of scale over time.
Keys to Successful Logistics Outsourcing
Outsourcing logistics isn’t without challenges. To maximize the benefits of a 3PL partnership, businesses should focus on the following:
1. Aligning with the Right 3PL Partner
Choose a provider with expertise in your industry and a proven track record. While new entrants may offer innovative solutions, prioritize 3PLs that understand your specific needs.
2. Detailed Planning and Transparency
Prepare comprehensive specifications, including order volumes, processes, and service requirements, before soliciting quotes. Misaligned expectations often lead to operational challenges.
3. Collaborative Implementation
Outsourcing is not a “set it and forget it” process. Joint efforts between the company and the 3PL during implementation lead to better outcomes. Involve senior managers and adopt robust project management practices to ensure a smooth transition.
4. Proactive Problem Resolution
Address potential issues early to prevent minor problems from escalating. Regular communication between both parties fosters a mature and long-term outlook.
5. Use of KPIs
Establish and monitor Key Performance Indicators (KPIs) to measure success. Focus on metrics like delivery accuracy, inventory precision, and transit times. Limit KPIs to 6-10 critical measures to ensure clarity and focus.
Logistics Outsourcing Trends
The logistics outsourcing market continues to grow, with over 90% of Fortune 500 companies in the U.S. alone relying on 3PLs. Consolidation in the 3PL sector has strengthened the industry, offering shippers more comprehensive services.
E-commerce has been a significant driver of logistics outsourcing, as companies increasingly rely on 3PLs to manage the complexities of online order fulfillment.
Outsourcing: A Strategic Decision, Not a Strategy
While outsourcing logistics can bring immense benefits, it should be approached as a strategic decision rather than a stand-alone strategy. Companies that view 3PL partnerships as transactional often fail to realize the full potential of outsourcing. Instead, a commitment to a strategic, collaborative relationship with a 3PL is more likely to deliver lasting success.
By aligning with the right partner, preparing thoroughly, and fostering a cooperative environment, businesses can unlock the full potential of logistics outsourcing and drive operational excellence.