The decision on outsourcing a warehouse, distribution center or transportation management function versus operating it with company resources is a judgment most companies must make at some point in their supply chain evolution. The first step a company should take is to gain an understanding of why a third party is needed or would be beneficial.
The reasons most-cited for outsourcing are that logistics management is not a core competency, flexibility and scale is needed to meet an uncertain business forecast, and the upfront costs to implement an in-house operation are too high. Each of these rationales requires distinct goals, objectives and management.
The definition of the goals and objectives in this early stage—prior to any engagement with providers—will result in the greatest chance for a successful partnership. A clear and concise Request for Information/Proposal (RFI/P) is the best way to document these requirements. Putting these concepts to paper and achieving buy-in from within the organization is a powerful accomplishment. The company will have a benchmark against which potential vendors can be evaluated and future performance can be measured.
Sometimes it is difficult to define the requirements. Any firm introducing a product line, entering a sales channel or targeting a new geography will have uncertainty in its logistics requirements. Outsourcing to a 3PL provides flexibility and scale that can enable the company to meet varying levels of customer demand. The capital and one-time expense of implementing a company-run distribution operation—taking space, hiring staff, installing equipment, implementing software—are resources and energy usually better used on growing the top line. A 3PL can offer economies of scale that minimize upfront capital, fixed cost and much of the management burden of logistics.
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The selection of the right service provider is difficult and has risk. Each provider has strengths and weaknesses that should be aligned or offset with the company’s requirements. A common pitfall is asking a service provider to do activities that are outside of its expertise or experience. It’s tempting to go for the ‘one-stop’ shop and contract for all logistics needs from a single provider. While a single provider might offer a more integrated solution, it is often best to identify the right provider for each specific function.
At some stage in a supply chain’s evolution, ongoing requirements become more steady and predictable. The scope of services required of the 3PL then should be reevaluated. Most organizations can perform specific tasks or bear certain costs and capital expense more effectively than a 3PL. It’s important to understand which of these activities are appropriate for the 3PL to incur and pass through with a mark-up.
For example, a company with strong credit should be able to drive a better real estate transaction than most 3PLs. That company could lease the warehouse space and outsource the labor and support systems to a 3PL. Control of the real estate enables a company later to change providers or to insource within the same facility. Most 3PLs have economies of scale in supervision, labor and warehouse management support systems; but not necessarily in facilities.
A key benefit of outsourcing to a 3PL can be knowledge transfer and relationships that translate to other functions in the supply chain. For a 3PL, management of logistics is its business. Best practices and industry relationships in connected fields like transportation, industrial engineering and equipment have been fostered for decades. As a client of a 3PL, that network of knowledge and contacts should be tapped.
Excellent communication, realistic expectations, trust and accountability all result from people working well with other people. The quality of the relationship between a company and its 3PL service providers is the most common indicator of successful performance.
By Craig Engelhardt, managing director of Savills Studley’s industrial services group and has developed strategies for some of the most recognized companies in the world.