Reprinted with permission Transportation & Distribution magazine, May 1996
Copyright Penton Publishing Company
Outsourcing is estimated to be a $400 billion dollar market in the U.S. and $500 billion in North America.
Add international logistics and the total potential market is huge. Unfortunately, not everything that is
called third-party logistics is really logistics. Some firms have established logistics divisions or subsidiaries
to exploit this market opportunity.
In addition, some third-party services take on more than they can handle. They exceed their capabilities
or they do it to generate business for their real core business. The end result is that the concept of third-party logistics loses and so do the shippers who could use the services.
True third-party logistics is developing a tailored, customer-specific logistics program to meet the
requirements of an individual customer. The scope includes the elements of logistics--transportation,
warehousing, systems, planning, and whatever else is required to meet the specific need.
The present emphasis on third-parties seems to be on asset-based providers. Many asset-based third-parties
are part of an organization which also has transportation, warehousing, freight forwarding or other
capabilities. That's okay if you understand that such operations have assets, the utilization of which may
not match with the outsource candidate's tailored needs.
A third-party provider should be a standalone business. It may be part of the corporate umbrella for
financial or computer resources, but its existence should not depend on how much business it generates
for the transport, forwarding or warehouse business of the parent company.
The future of third-party logistics services rests with the shippers. They must understand their reasons for
outsourcing and they must understand their own operation. This will better enable them to evaluate what
the third-parties are telling them.
There are many reasons for going to a third-party:
- to acquire an expertise, talent and resources that don't exist internally
- to let the company focus on its core competency which it has determined is not logistics
- to develop value-added capabilities to better service its customers
- to improve operations or customer service.
- or simply to improve its processes.
All these are good and positive reasons. Then there are other less positive but still valid reasons:
- to cut costs
- to avoid capital expenditures
- to avoid labor problems.
- to avoid costs of regulations.
Given the differences in logistics service providers and the differences in why firms outsource, the firm
must look hard at both the provider alternatives and its reasons for outsourcing. It must ask some difficult
questions:
- What am I looking to outsource--all of my logistics operation or a portion of it?
- Why am I looking to outsource?
- How do I describe my logistics and company operation?
- What are the costs of the operation to be outsourced? Fixed costs? Variable costs?
- What are its capabilities? What are its strengths, limitations?
- What do my customers require of each of their own supply chain specifications?
- How well do I service my customers?
- If there are service problems, what are they and what causes them?
- What do we expect from the third party? How will we know if it is meeting our expectations?
- What about the management responsibility of the third party? How will it be done and by whom?
- How do I effectively transition from my own operations to an outsourced one? How long will it take to
transition? Are there problems during transition? If so, what are they and why?
- What if it doesn't work? What are the down sides to this? How serious are they to my business and my
customers?
Against this self assessment, the firm can begin to look for the type of provider to meet its needs. These
questions will help shippers evaluate potential service providers:
- What do you bring to the table? What are your experiences with my industry, with my customers?
- What problems have you encountered with setting up third-party operations and why?
- What will it cost?
- How will it operate?
- How long will it take to set up and have running properly?
- How will we interface?
- What do you require of my firm? Is this requirement for start-up or is it ongoing?
- Why do you want my business?
- Why should I select you?
If you are looking to outsource, you must thoroughly understand what you are doing and what you want
to do. There are no shortcuts to doing it right, but there are real problems in doing it wrong.
The future of outsourcing is significant. We are in the early stage of the new logistics paradigm. How it
all comes together with supply chain management and with third parties is still formative. There will be
a segmentation in the market as providers better define who they are and what they can do. Shippers must
understand the differences in third parties so they select the one that best meets their requirements.
Top of Page