Companies outsource for many reasons. They look to reduce costs, shorten cycle time, improve shareholder value, decrease inventory, focus on core competencies, gain information technology, increase expertise and more.
Likewise transport, warehouse, forwarder and other logistics service providers want to provide outsource services. They want to improve profits, transition from being a commodity service provider, gain volumes and throughput by leveraging existing core logistics service, increase revenues and more. This creates a mutual need between the two parties. Yet despite this common interest, half of the outsourcing relationships end unsatisfactorily within three years. Half are not able to go beyond a buyer-seller relationship.
The responsibility for the failure often resides with both parties. Reasons for the failures run the gamut and include:
*Poor project design
*Lack of metrics or key performance indicators (KPIs)
*Use of improper metrics or KPIs
*Not fulfilling expectations of either or both parties
*No clear lines of responsibility and accountability
*Inability to evolve the relationship from short term to long term and from static to dynamic
Some reasons for failure reflect symptoms, not causes. Failures are not unique to outsourcing; but outsourcing is unique. Outsourcing goes beyond transport or warehouse agreements and service. Supply chain management is one of largest costs and has significant service impact to companies. Some contract logistics projects are critical to a company’s supply chain and operating success. Therefore outsourcing should be designed not to fail, especially with supply chain management. The impact can be significant to the company doing the outsourcing.
Much is discussed about metrics and service level agreements (SLAs) in defining the outsourcing relationship. These should be after-the-fact and matter-of-fact results of the project definition and design.
Whether the two parties are trying to develop the contract logistics relationship or are striving to make an existing outsourced program succeed, there are three fundamental issues that must be addressed.
Unfulfilled expectations by one or both parties can have dramatic impact on sustaining the program. Each needs to know the desired results and how the outsourcing will achieve the desired result because the answer can directly and indirectly affect the project design and operation.
For the company looking to outsource, it can be an attempt to reduce costs or achieve other benefits that it is unable to realize internally. A 15% cost reduction goal may be attainable; while a 40% may be more difficult and require a different approach as to design, implementation and timing.
Or the desired outcome could be very different, such as an effort to transform the business. The company may want to create a value proposition and capability for customers that it does not perform now. Or it may be seeking to transition away from one business into another or other business transformation. Outsourcing may present the means to make a significant shift to lean supply chain management. So the intent goes beyond having a third party perform the existing activity. It means creating a new operating model, including change management. The “why” can change the type of outsourcing service provider that the company should be talking with, such as a 4PL instead of a 3PL.
The firm wanting to perform the outsource activity may be looking to increase revenues or profits. It could want a certain volume of ocean containers or square feet of warehouse usage for economies of scale. The provider could also be looking to shift into other industries or logistics service niches that have greater growth potential. So the intent goes beyond performing the existing activity. The provider wants to reposition itself as an outsource service company. .
Potential for risks can be hidden. These can include:
The SLA is not an end; it should be a vehicle for ongoing. It must be flexible for collaboration, connectivity, integrated, time compression, six sigma and other demands.
Conclusion. Outsourcing of supply chain management should be designed and developed to succeed. Both parties must take the dialogue deeper. Whether it develops into a partnership depends on mutuality. The three issues frame and drive the relationship, its direction, purpose and its continuity. It should be based on a prudent, rational, open exchange between the firm wanting to outsource and the firm wanting to handle the outsourcing. There should be no rush to judgment and have no artificial deadlines for completion. All this increases the chances for success. Supply chain outsourcing is too important to fail.
LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.
