The Growing Pains of Logistics Outsourcing | Article

Growing/Maturing TreeIn a relatively short period of time the logistics outsourcing business has become a multi-billion dollar industry. On a global basis, it represents somewhere between a $30 billion and $40 billion market, according to some estimates, says George Logemann, director of outsourcing consulting, The Yankee Group. Because of the speed in which logistics outsourcing has reached this significant level many changes have occurred within the enterprise — and with these changes come just as many challenges.

“We are dealing with an entire industry that didn’t even exist a decade ago,” says Logemann. “There are a lot of companies out there that are brand new and there are a whole lot of companies that have changed what it is they do as a result of this outsourcing wave. Most of the companies are, in terms of maturity, substantially less than ten years old.”

Before enterprises began using logistics outsourcing as a tool, the back-end divisions that consume logistics, like the warehousing and transportation division, were at the beck and call of information services (IS) and were left with few choices on how to run their end. “Now there are firms coming in that really know how to do this stuff and can speak with a whole different level of authority,” says Logemann. “This alone can lead to some challenges.”

Learning to Talk

According to Logemann, one of the biggest challenges is dealing with interface issues. As the logistic outsourcer looks over a client’s environment and tries to extend and increase its value proposition, it often starts to make suggestions that encroach upon specific areas in the business, particularly upon Information Technology (IT).

“The system that the logistics outsourcer brings to the table needs to interface with the systems in the enterprise that support other elements in the value chain,” he says. “So, community is not supporting the enterprise’s systems. These issues have to be approached with a lot of delicacy.”

A second challenge is that there aren’t any truly global logistics providers, Logemann continues. Logistic providers find it difficult to work out deals with countries because each country has its own set of customs and regulations that must be negotiated. Most enterprises have to seek out the services of more than one logistics outsourcer because no one outsourcer can provide service in every country.

“A vendor needs a significant presence in a country to be effective and it is difficult to have that presence in every country,” he says. “It just hasn’t happened yet?not that it won’t. It just hasn’t happened yet.”

Micromanaging the vendor can also lead to problems. Companies need to manage the service-level agreements, manage the service reporting and understand and examine the root-cause analyses that the vendor produces, if in fact a service level agreement is broken. “Aside from that, let them do the job, and you get the highest success rate because you’re not defocusing the vendor from doing their job,” says Logemann. “The only thing that a company needs to worry about is the service-level agreement and the terms and conditions of that agreement. Don’t worry too much about anything else.”

Too Big Too Fast

One of the challenges for the suppliers of logistic outsourcing is the possibility of growing too fast. Companies like Ryder, UPS, Penske, Nippon and Menlo have been in this business now ten years and logistics outsourcing is not a new invention for them. But vendors have to sensibly manage their growth so that they don’t overextend themselves. “The fact of the matter is that this business has matured very quickly,” he says. “Where vendors can get in trouble is if they bite off more than they can chew.”

The quick development of logistics outsourcing over the last decade has come around for the most part because of new attitudes by the enterprises seeking the service, Logemann, believes. Ten years ago there wasn’t very much attention paid to the concept of logistic outsourcing.

“In the past, companies looked at each discrete part of the value chain and tried to squeeze dollars out of it, but now companies are looking at the value chain and asking how it can most efficiently and effectively manage the whole,” he says. “Each individual department doesn’t necessarily benefit, but overall it is good for the enterprise because there is less inventory stored in certain remote locations.”

And it isn’t only about saving money, as it was a decade ago. Logemann notes that it is still a cost play because an enterprise will always look really hard at the dollars; but now companies focus on other drivers as well — time to market and ability to expand market share. As companies look at those influencing factors, the game is just a little different than it was.

Sharing the Toys

Some enterprises are even allowing their third-party logistics vendor to manage the inventory, and there is talk from some of the major players in the business of permitting logistic outsourcers to own the inventory. “They have all the information to do it,” he says “They know where the inventory is, they know when it needs to be somewhere else, and they know what you have and when you have too much. Why not let them own it and get it off the company’s books?”

Lessons from the Outsourcing Primer:

  • The first thing an enterprise should look at when considering a logistics outsourcer is the pricing flexibility — whether or not using a logistics outsourcer will save money.
  • A second thing considered is whether or not the vendor is someone the enterprise can do business with over a period of time.
  • An enterprise should also examine the vendor’s delivery capability. Can the vendor deliver the company’s goods on time, particularly in global situations?
  • Another important area to look at is the vendor’s technology. Will the vendor stay current and keep up with new technology, and can the enterprise integrate the services the vendor provides?
  • A final consideration is the transition of services — the seamlessness in which the vendor and enterprise can transition the logistics environment from in-house alternative to vendor alternative.

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