Outsourcing

There is a vast choice of different operations and services that can be outsourced. These include

outward and inward physical flows and supporting processes. Indeed, in distribution and logistics virtually every different function can be outsourced. The ultimate option is to outsource the whole operation, keeping in-house only those non-logistics functions that are deemed to be the core business of the company, such as retail shops for retailing companies. One useful way to understand the breadth of opportunities that are available for outsourcing is to view this as a continuum of services, ranging from total internal logistics management to total external logistics management.

This includes not just the outsourcing of the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in house. The logic of this trend is that the company will increasingly focus on those activities in the value chain in which it has a distinctive advantage and outsource everything else. This movement has been particularly evident in logistics, where the provision of transport, warehousing, and inventory control is increasingly subcontracted to specialists or logistics partners. Also, managing and controlling this network of partners and suppliers requires a blend of central and local involvement: strategic decisions are taken centrally, while the monitoring and control of supplier performance and day-to-day liaison with logistics partners are best managed locally.

For any company that is contemplating outsourcing as an option, there are some important reasons for considering outsourcing opportunities using an approach based on the idea of the outsourcing continuum.

So, the use of the continuum can help:

• to identify where the major benefits of outsourcing might be found;
• to make clear exactly what is included and what is excluded as far as the contractor and the associated contract are concerned;
• to make clear where the boundaries of responsibility change;
• to identify the expected ‘gains’ or ‘wins’ from a contract, whether these are cost- or service-related.

Why to Outsource

There are many reasons to outsource logistics services, but you first need to understand how outsourcing will affect your business and whether it will save you costs or not. Some of the main reasons to outsource logistics services include –

• Freedom to Focus on Critical Operations: Instead of trying to perform logistics services in-house, outsource it to a company that has in-depth expertise and experience in carrying out logistics operations with ease. This in turn will help you free up your resources and allow them to focus on other critical operations
• Reduced Back-office Work: Most 3PL outsourcing service providers have sufficient manpower and the desired systems already in place. They can process thousands of bills and audit them appropriately within short time. Outsourcing logistics back-office tasks to professional vendors therefore frees up your time and increases productivity
• Enhanced Customer Satisfaction: Most service providers specialize in logistics services only. They know the domain better than others and can come up with innovative ideas and strategies to further reduce costs for their clients, as well as deliver better experience. This leads to enhanced customer satisfaction and builds partnerships which can last a lifetime
• Reduced Liabilities: The logistics service providers help to manage all inter-connected carrier contracts, safety ratings, and insurance certificates. More often than not, they have a back-office staff ready to work with invoicing variances, carrier vetting processes, etc. This means you stand to face zero liabilities as all the grunt work gets taken care of by the service provider
• Efficient Handling of Petty Expenses: Small expenditures like insurance costs, docking costs, transportation, or fixed warehouse costs are all taken care of by the logistics service providers. You do not have to deal with petty expenses, thereby freeing up your accounting department’s time
• Economies of Scale: You might end up spending a lot on trying to scale up your existing team to perform logistics services in-house. However, a third-party logistics service provider can help you achieve economies of scale as they specialize only in providing logistics services, thereby being able to ramp up or ramp down services within short intervals
• Efficient Real-time Tracking: Most 3PLs are technologically adept and allow for real-time tracking and visibility of loads. Some of the more popular service providers even provide integration with WMS and ERP. By being able to track your shipments with ease, you spend less time worrying and more time focusing on other core areas
• Good warehouse management system (WMS) ensuring safety of your goods
• Control remains with you, the client
• Easy outsourcing operations process with duly signed documentation

Outsourcing Benefits

As a business owner, you may be well aware of the economic value of outsourcing your company’s supply chain management to a third party logistics provider. However, if you have yet to consider a 3PL provider for one reason or another, now may be the time to reevaluate. Value-added 3PL services offer an array of advantages that many companies are becoming privy to resulting in strong and continued growth in the third party logistics sector. Still unsure? Check out these 10 Benefits to Outsourcing your Company’s Logistical Services:

• Time Saving – Outsourcing cannot only save you money in the long run but it will also save you something of equal value – you’re time. Relieving yourself and your employees of the burden of daily logistical tasks allows for you to spend more time on growing your business.
• Cost Efficiency – Don’t saddle your business with the cost and hassle of establishing your logistical needs when a 3PL services will provide you with warehouse space, technology, and transportation for you.
• Accountability – Putting an aspect of your company into someone else’s hands isn’t easy. A good 3PL service provider will take responsibility for your business and be held accountable to your standards.
• Innovation – Much like you are an expert if your scope of business, 3PL providers are an expert in theirs. A provider has the ability to work with you and apply their knowledge to enhance and improve your bottom line in an innovative way.
• Expertise – Most 3PL providers are passionate about what they do. As a result, they will integrate their level of expertise with your business practices to ensure the best customer service experience possible.
• Adjustable – As a 3PL provider owns the warehouse space and transportation, they also have the ability to increase all your logistical needs as your business grows. Also if your company offers a seasonal product or sales are cyclical, a good 3PL provider will adjust your needs accordingly.
• Optimization – Having the necessary resources that you may not have access to on your own, helps insure that your logistical needs are met in the most effective manner.
• Technology – 3PL companies have the ability to make significant investments in their technology and software that would be unfathomable for a smaller business.
• Network– 3PL providers have a vast network of resources and established relationships with providers that can offer the most cost-efficient service possible.
• Reduce Risks – Outsourcing your company’s logistical needs not only reduces labor risks on your end but it also reduces your financial risk of an investment in property, equipment, and transportation in the even your company or business downsizes.

3PL

A third party logistics company is one that works with shippers in order to manage another company’s logistics operations department. 3PL is the action of outsourcing activities that are related to logistics and distribution. Third party logistics providers usually specialise in integrating operations, warehousing, transportation services, cross-docking, inventory management, packaging and freight forwarding.

These services are scaled and customised to the customer’s specific needs based on their market conditions and the different demands and delivery service requirements for their products or materials.

4PL

The concept of a 4PL provider is an integrator that accumulates resources, capabilities and technologies to run complete supply chain solutions. Functions provided by a 4PL company are procurement, storage, distribution and processes. A 4PL company takes over the logistics section of a business. This could be the entire process, or a side business that’s imperative to have as part of the main business.

Operations to Outsource

There is a vast range of different operations that are provided by third-party service companies. Some companies may specialize in a certain type and style of operation, while others may offer all of the many alternatives that are available. An outsourced transport operation might cover just the contract hire of a single vehicle, the provision of a complete fleet of vehicles or even a fully dedicated operation including vehicles, drivers and complete transport management. A fully dedicated supply chain-oriented package might include storage and warehousing, primary and secondary transport, management services, order processing and stock control among others. The main services offered are described below.

Warehousing and storage

• Distribution depot operation – Typically this will include all of the normal functions to be found in the operation of a distribution depot. Normally the complete set of functions is outsourced, including goods inward, reserve storage, pick, pack and consolidation for delivery. This is because it is difficult to only partially outsource such a physically intensive operation.
• Excess storage – Probably the original form of outsourcing where externally owned general warehouses were used to store, in particular, goods that could not be stored in a company’s own warehouse due to a lack of space. Typically used if large orders are received or if goods must be stockpiled for a particular event, eg Christmas or the summer season.
• Cross-docking – Cross-docking is oft en used to enable customer orders to be consolidated from goods that are sourced from a number of different locations. As physical deliveries from these sources occur, orders are immediately assembled and on completion the final customer deliveries are made.
• Trans-shipment – Similar to cross-docking, but trans-shipment often refers to the sortation and onward delivery of ready-picked orders. Some third-party providers operate satellite depots in rural areas for this type of operation.
• Break bulk – Examples of break bulk operations are where containers or full vehicle loads are received from abroad for final delivery in a country. The loads are broken down into individual orders by the operator and then dispatched as required to the appropriate delivery points.

Stock and inventory

• Inventory management – Linked very closely to the storage operations previously described, this includes the additional responsibility of the management of all of the stock and inventory that is held.
• Specific stock responsibility – Many companies like to have full control and vision of their finished goods inventory, but there are occasions when the control and management of certain types of inventory can be outsourced. Good examples are spares inventory, packaging and unit loads.

Transport

• Primary transport (trunking, line-haul) – Primary transport is all about moving the product at minimum cost, which generally involves using as large a vehicle as possible and making sure that the vehicle is filled to capacity. Because they have several customers, 3PLs are oft en in a good position to identify and create suitable opportunities for improved utilization and therefore lower costs.
• Secondary transport – Secondary transport operations are both service- and cost-sensitive, and require particular skills for planning and management, as well as some fairly substantial financial investment. For these reasons, most companies now outsource their secondary transport operations to medium and large third-party service providers.
• Collections – Normally, distribution operations are planned and designed to provide a one-way flow of physical product that is delivered to customers. The nature of the delivery vehicle, the unit load, the handling equipment available, or tight delivery schedules, may make it inappropriate for items to be collected via the outbound delivery system. Thus many types of collection operations (damaged product, packaging, unit loads) are oft en outsourced.
• Fleet management/Mobile asset management – Many companies see the day-to-day management of a vehicle fleet as a specialist technical operation best undertaken by specialist 3PLs.
• Contract hire – A classic opportunity for third-party providers is the provision of vehicles and/or drivers to supplement own account fleets when they require additional resources. This might be to cover breakdowns, holidays or seasonal demand increases.

Packaging and unitization

• Packaging – There are various opportunities for companies to outsource packaging operations. These will normally be where special requirements make it difficult for the packaging to be undertaken in-house, such as packaging for export.
• Labeling and product preparation – For some retail products, specific price information or special preparation may be required to make them sales-ready before they are displayed in a retail store. These operations are oft en outsourced.
• Unit loads – For operations that use a large number of unit loads (pallets, roll-cages, etc), it is important to have close management and control. This is an operation that is sometimes outsourced.

Others

• Product inspection – All products that are bought in, especially from abroad, are likely to need to be physically inspected to check for quality. This can be heavily labour and space intensive, and so may be an operation that can be outsourced.
• Reverse logistics – This is an important type of outsourcing opportunity because it is oft en difficult to undertake within an existing transport network.
• Merchandising – Similar to labeling and product preparation, merchandising is another operation that can be outsourced. This involves the preparation of the product for display and sale, and here also involves the review of stock levels in the shop as well as the arrangement of the goods on the shelf in the shop.

Value added services – Services offered by third party logistics providers, over and above the more traditional functions of logistics, are

• Specialist or niche services – Here the complete operational package is specifically designed for the distribution of particular product type. There are many examples in a number of different market sectors – automotive, electrical/electronic, hanging garments, high tech, etc.
• Time definite services – These are set up to support the just-in-time operations of major manufacturers. Typical here are the sequencing centres that have been developed in the automotive industry to support line-side production.
• Production and assembly – Here the final manufacturing or assembly of products takes place outside the manufacturing environment but within the logistics operation. The computer industry offers a number of examples where basic products, such as PC monitors or processing units are initially distributed to the relevant market before being finally made ready for the end customer
• Repacking – For some product offerings it may be necessary for goods to be repacked before they are ready for selling. A typical example is the need to blister-pack two different items that are derived from separate manufacturers or suppliers but are to go out as a distinct retail product – a torch together with a battery.
• Refurbishment – In the light of current environmental legislation many manufacturing companies have endeavored to re-engineer their products so that parts from some used products can be reused. This has provided an opportunity for third party companies to offer this return-and-refurbishment operation.
• Packaging returns – Again linked to environmental legislation, ‘producers’ of packaging waste are legally responsible for the collection of packaging and packaging waste for reuse or disposal. Because this type of ‘reverse logistics’ is difficult to perform through traditional outward-looking logistics operations, a number of third party operators have set up reverse logistics systems, in particular for the large grocery multiples.
• Product returns – Another issue that has arisen due to environmental concern is the recent legislation for the return of consumer products that have reached the end of their working life. In
• Europe, this is reflected in the Waste Electrical and Electronic Equipment (WEEE) Directive. This is extremely difficult to undertake through existing logistics structures, so it is a prime opportunity for third party service providers to set up and run reverse operations to fulfill these legislative requirements.
• Inbound logistics – The provision and movement of goods into a manufacturing company is also seen as an area for additional value added service. This involves the co-ordination of the raw material, component and packaging products that a manufacturing company requires. It typically might include not just the collection and transport of all these different products, but also the stock control, ordering and order progress chasing.
• Pre-retailing – Here, products are prepared for immediate use in the retailing environment. This may involve removing goods from their outer packaging, labeling, etc. In the clothing industry, particularly for boxed items, additional services will include cleaning and pressing to make the garments shop-ready.
• Home delivery – Many third party contractors have developed home delivery operations for products such as white goods and brown goods, covering delivery, installation, return and repair, refurbishment or disposal. They typically provide nationwide fulfillment for consumer electronic goods for manufacturers, retailers, insurance companies and service providers.
• e-fulfillment – The rapid growth in online selling companies, such as Amazon.com, means that internet shopping is now very common and this has led to a similar growth in the demand for the fulfillment (or e-fulfillment) of these internet orders. Although internet access provides a direct and instantaneous link from the customer to the selling organization, the actual physical fulfillment must still be undertaken by more traditional physical means. Very oft en this may necessitate the introduction of a new means of physical distribution, because traditional channels are not appropriate for the type of delivery to the home that is required.
• Information management – Advances in information technology have produced a vast amount of detailed logistics and demand data and information. Detailed information can be made available for individual customers, concerning not just their product preferences but also any customer service requirements that are distribution-specific (delivery time preference, order size preference, invoicing requirements, etc). This has become another niche area of opportunity in which 3PLs and others may specialise.
• On-line communication systems – Some third party operators have identified the area of logistics communication systems as one where there is an opportunity to provide added value. One typical example is that of the provision of on-line information concerning the status of collections and deliveries.

Dedicated or Multi-User

One of the first decisions that a potential user company has to make when contemplating outsourcing as an option is whether to go for a multi-user solution or a dedicated solution. The two alternatives are as follows:

• Dedicated (or exclusive) operation – This is where a complete logistics or distribution operation is provided by a third party company for its client company. The third party undertakes to provide the client with all its distribution requirements, exclusively, on an international, national or regional basis. The resources used may include warehouses, distribution centres, transport fleets, managers, etc. Thus, the service provider sets up a specific operation to run all of these different elements for the client that is exclusive to the client company’s products – an operation dedicated to that client alone. This type of service is most common in the UK but is also used in Europe and North America.
• Multi-user (or shared-user) distribution operation – Multi-user distribution operations are different to dedicated operations because a group of client companies is catered for, within the service provider’s operation, rather than just a single client. Ideally, there will be some similar characteristics to the different companies that are within the same operation so that there are clear advantages gained in linking them together. For example, the clients may all be manufacturers or suppliers of similar goods and their products may all be delivered to the same or similar customers – electrical goods to retailers, food to catering establishments, etc.

Service Level Agreement (SLA)

SLAs should summarize the contract obligations and are usually a part of the initial contract agreement. They are likely to include all aspects of outsourcing provision and, as well as being a definition of the service that is to be provided, they should specify the level of service to be achieved. Both contractors and users should be involved in drawing up the SLA.

Typically, an SLA will include:

• a description of the service to be provided;
• service standards that are to be met
• client and provider responsibilities
• provisions for compliance (legal, regulatory, etc)
• monitoring mechanisms and reporting requirements
• dispute resolution
• compensation for service level failure
• performance review procedure and timetable
• revision procedure for activity or technical change.

Outsourcing Management

An overall approach to outsourcing management has the four key stages in setting up and running a system to manage the outsourcing relationship, encompassing the main methods. The stages are:

• Set goals/establish KPIs: this concerns the determination of goals, as required, with respect to the contract, the SLA, the budget and any incentivization. These are then converted into appropriate metrics within the Management Information System (MIS).
• Track performance: this involves the monitoring of the MIS and appropriate key metrics, which will include activity levels. It should involve regular review meetings (at different hierarchical levels and frequencies) and open book audits (if appropriate).
• Identify opportunities: including both operational re-adjustments (personnel, facilities, etc) and future strategic and tactical improvements.
• Review and refine: implementing strategic, tactical and operational improvements,
• adjusting and re-setting KPIs as necessary.