LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

BEAWARE! Outsourcing warehousing to third-party providers

Parcel & Shipping Distribution Small Shipment Logistics Management
February 2000
President LTD Management

Outsourcing has been around a long time. If you do something outside the scope of providing it yourself, then it is outsourcing. Using a common carrier instead of your own private fleet is outsourcing transportation. Or using a public warehouse instead of a company owned facility is outsourcing. Using freight forwarder instead of an in-house group for exports is outsourcing.

Practices in Europe and Japan seemed to have started the outsourcing interest. These examples reflect historical impacts reflecting regulations and tradition. Europeans outsourced because it made good sense with all the customs regulations. Japanese freight forwarders put people into the customer's shipping department because of tradition. However this contrasts with what is happening in the U.S. The U.S. interest comes from focusing on core competency and rightsizing issues.

Not everything that is being called 3rd-party logistics really is logistics. Some involves taking an existing transportation, warehouse or other service, adding enhancements, and calling it logistics. Rather than stay within their core capabilities, firms use the current emphasis on logistics as a stratagem to generate business for their underlying core business.

In addition, some third-party services take on more than they can handle. They do not stay within their framework and capabilities. They have been used to provide a commodity service as the core business, and then try to take on logistics portions they are unfamiliar and not prepared to handle. They may go from providing domestic, U.S. transportation, to offering themselves as an international logistics service provider. Or in reverse, international forwarders offer U.S. distribution capabilities they are not familiar with. These are big changes that can confuse buyers of 3PL.

So what is it third-party logistics? It is more than just transferring assets or internal functions to outsiders. True third-party logistics is developing a tailored, customer-specific logistics program to meet the requirements of your business and your customers. The scope includes the elements of logistics--transportation, warehousing, systems, planning, and whatever else is required to meet the specific need. It requires the use of outside companies to perform part or all of a logistics element.

The emphasis on 3rd-parties is on asset-based providers. An asset-based provider contrasts with the Logistics Service 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. This organizational situation may put the third-party at odds with meeting the needs of the client. Can he really develop a tailored logistics solution that does not involve using the capabilities of the parent company? Can he serve two masters--the parent and the customer?

A 3rd-party provider should be a standalone business. It may be part of the corporate umbrella for financial or computer resources. But its future does not depend in how much business it generates for the transport, forwarding or warehouse business of the parent company. With this focus, it is free to develop customized programs.

With a tailored approach, the warehouse is placed where the customer needs it, not where the "logistics" provider has an existing facility he is not fully using. The transportation network, modes and carriers meet the needs of the customer, even if they do not generate one dollar of business for the parent company transportation or freight forwarding company of the logistics provider.

Logistics Service Providers may not asset-based but are experienced in the total logistics pipeline. Very possibly the drivers and developers of Logistics Service Providers may come from the shipper side, which has broader domestic and international experience. They may drive the outsource decision for their own company and operate the service as an outside company. Or shippers may become the key executives in third-parties, because they have the required knowledge and experience of the international and domestic logistics.

The future of 3rd-party logistics services rests, of course, with the shippers, the customers. They must understand their reasons for outsourcing and 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 3rd-party. Acquire an expertise, talent and resources that you do not have internally. Let the company focus on its core competency that it has determined is not logistics. Develop value-added capabilities to better service its customers. Improve Operations. Improve Customer Service. Then there are other reasons. Cut costs. Avoid capital expenditures. Avoid labor problems. Avoid costs of regulations. These reasons are not as positive as others, but they are valid.

Outsourcing warehousing is a critical issue. Orders must be shipped on-time, complete, accurate and per each customer's requirements. Arguably, warehousing is the important portal to customer satisfaction and service. And there is another twist with warehousing. You can consider whether to have the 3PL come in and operate your existing facility(ies).

Given the differences in logistics providers and the differences in why firms look to outsource, the firm must look hard at both the provider alternatives and its reasons for outsourcing. It must ask itself some hard questions--
*What am I looking to outsource--all my warehouse operations or a portion of it?
*Why am I looking to outsource? Can I readily explain the reason and the anticipated benefits? Is it part of a company strategic effort?
*How do I describe my logistics and company operation?
*Are there problems with the operation being outsourced and will/can outsourcing correct them?
*What are the costs of the operation to be outsourced--fixed costs versus variable?
*What are the internal company ramifications of the change-employee morale in my department, systems, accounting, customer service, manufacturing, purchasing, etc? How do I bring them into this outsource issue, the analysis, selection and implementation?
*What are its capabilities? What are its strengths? What are its limitations?
*What do my customers require with each of their own supply chain specifications?
*How well do I service my customers? Is the answer based on quantifiable information, customer feedback or internal opinion?
*If there are service problems, what are they and why are they caused? Will outsourcing address and solve the real problems and issues?
*What do we expect from the 3rd-party? How will we know if he is meeting the expectations?
*How easy is the transition to an outsider? What are the hidden issues?
*What about the management responsibility of the 3rd-party? How will it be done and by whom?
*How do I structure the relationship? How do I develop a working document for a contract-that changes as our needs do?
*How do I effectively transition from my own operation to an outsourced one? How long will it take to transition? Are there problems during transition? If so, what are they and why are they?
*Worse case, what if it does not work? What are the downsides to this? How serious are they to my business and my customers? Do I need a Plan B for operating, just in case? Do I need an exit strategy-and is there really one?

Against this self-assessment, the firm can begin to look for the type of provider to meet your needs. You can better judge whether you want an asset-based or service provider. You have an idea whether you want to do away with your fixed assets or want an operation in a certain area. Or whether you want to jumpstart your logistics to meet your customers' requirements. You can ask questions of the candidates:
*What do you bring to the table? What are your experiences with my industry? *What are your experiences with my customers?
*What problems have you encountered with setting up 3rd-party operations and why?
*What successes have you had with 3rd-party operations and why?
*What will it cost-start-up, ongoing and termination?
*How will it operate?
*How long will it take to set-up and have running properly?
*How will I know it is working properly? What are the performance measures? Should there be incentives? What about penalties?
*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 assess what you want to move out and why you want to do it. You must thoroughly understand what you are doing and want to do. Then you must select the type of provider, asset or service, and the actual firm to do the work. This requires thorough analysis. There are no shortcuts to doing it right, but there are real problems to doing it wrong.

The future of outsourcing is significant. We are still in the early stage of the new logistics paradigm. How outsourcing comes together with supply chain management and with 3rd-parties is still being determined and formed. There will be 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.