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

OUTSOURCING: Let the Buyers Beware

President LTD Management

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:

All these are good and positive reasons. Then there are other less positive but still valid reasons:

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:

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:

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.