Outsourcing, in general, has been a hot topic in American business for the past several years. And the debate only heats up when the outsourcing discussions start focusing on supply chain functions. In theory, outsourcing is simply another procurement exercise, subject to the same basic procurement rules and recommendations as everything else. But we tend to regard supply chain outsourcing in a special light. Supply chains are our lifelines, the way products reach customers.
Providers of outsourced logistics services are prominent—even leaders—in our profession. Yet despite the visibility and good reputations of these providers—call them 3PLs for the moment—estimates are that 25 to 50 percent of outsourcing deals fail, or at least fail to meet expectations.
So, the topic is important; many companies are making "bet the business" decisions on supply chain outsourcing, whether they realize it or not.
Who are the players in the game?
First, what is the game? We've used the term 3PL for a long time. Then 4PL came into vogue. One consultant attempted 5PL, but that didn't fly. A friend in the U.K. tried to tell us that he was heading up a 41/2PL (which is no longer in business).
We prefer the terms promoted by Cliff Lynch: logistics service provider (LSP) and lead logistics provider (LLP). But we're pretty relaxed about calling all of them 3PLs in conversational shorthand.
The distinctions between and among providers are changing. We used to talk about those who had their origins in transportation and those who began life as public warehouses—and it was easy to tell which were which. That was before globalization.
Today, the marketplace is very fluid, with almost daily changes. After waves of acquisitions domestically and internationally, the LSP world is moving toward what will ultimately be a bimodal model, with a few large multinational/global players at one end, and several niche specialty (by function or geography) companies at the other.
As the major leaguers assemble portfolios of skills and establish a presence across the globe, the objective becomes clearer: to plan, manage, and control execution of supply chain activities from manufacturing/extraction sources to customer delivery. Today's LSPs routinely offer a panoply of services in warehousing, transportation, inventory management, reverse logistics, freight audits, freight bill payment, sourcing, order management, assembly, customs brokerage, and more. The scope of services, and continually growing capabilities, change the traditional analysis of when to consider using LSP services and how to do it.
Why consider using (outsourcing to) an LSP?
There are loads of really good reasons to evaluate what an LSP can do for a specific company. They include high internal costs, expansion to new geographical markets, introduction of new products or materials, a need for overflow capacity, expansion into new roles (like order fulfillment or value-added services), a need for operational flexibility, and a desire to preserve capital. The lack of internal resources or skills, or decisions to shed non-core businesses might also provide motives to outsource.
Experience indicates that there may be more reasons to contemplate the possibility than there were 10 years ago. The supply chain world demands more skills than ever before. LSP successes in activities beyond transport and warehousing continue to demonstrate the feasibility of an LSP solution.
Buyer beware
But all is not roses. There are ample opportunities for disappointment, even failure. The major disconnects center on two points. First, contrary to popular opinion, customers are unlikely to see savings from LSP outsourcing in the short term, especially when business processes don't change and communications are less than complete. Second, the transition to the LSP is unlikely to be seamless. The keys to getting past these issues are to avoid becoming fixated on short-term cost savings, and to select an LSP that can react quickly when things don't go quite to plan.
For instance, a study conducted by Georgia Tech showed widespread dissatisfaction with 3PL technology services within the user community. This could result from the stilltoo- common practice of users squeezing the absolute lowest prices out of their LSPs. How much creativity—or leading- edge technology support—can they really expect to get for free?
So how do you get off on the right foot when bringing an LSP on board? Here's a sequence of steps that can get you off to a good start:
- Rough-cut the likely scope.
- Test probability; apply sanity checks to the first effort.
- Do the best you can to get your arms around the possible benefits.
- Select the five to nine candidates most likely to meet your immediate (and next five year) scope of need; get advice to find the right fit of players (don't forget to look at where the business is going).
- Decide early what the show-stopper and nice-to-have issues are—and do it systematically.
- Prepare/send/evaluate requests for information.
- Proceed with the request for proposal process with the three top candidates.
Once you've reached this point, continuing with an organized approach—a methodology, if you will—can be the key to successful implementation and achieving LSP outsourcing objectives. Among other things, that means providing the candidates with the information they need to make informed proposals.
Beyond that, it is also the customer's responsibility to provide good data and hide nothing, to keep contracts simple and clear, and to establish flexible performance targets. In addition, it's important to know the real costs on both sides, to get to know the people, and to find and resolve misconceptions early. Finally, the customer must see to it that a problem resolution process is established at the outset.
With these steps, success is more than a possibility—it is likely.
Editor's note: Useful information about outsourcing and third-party logistics service providers may be found at www.3plogistics.com.
