How to get started in outsourcing logistics

Nov. 7, 2004
by Scott ElliffSo you're taking the leap. The time has come to outsource some or all of your logistics functions to a third-party logistics provider (3PL),

by Scott Elliff

So you're taking the leap. The time has come to outsource some or all of your logistics functions to a third-party logistics provider (3PL), or maybe to expand upon the breadth of supply chain activities to be handled by a 3PL. Either way, it's a big step: the 3PL will be involved in the lifeblood of your company's operations, from moving inbound material to your factories, from managing your precious inventory in their facilities to directly filling your customers' orders and keeping them happy. Your company's overall success or failure can be affected significantly by your 3PL's performance.

Business process outsourcing is all the rage today, of course. Eighty percent of Fortune 500 companies say they outsource some or all logistics activities, and the $70 billion market continues to grow at double-digit rates. So how can you go wrong — just select a provider, hand over the responsibility to them and everything will be peachy, right?

Well, no, actually. Potential pitfalls and problems abound — elusive cost savings, systems nightmares, performance shortfalls, incompatible cultures — resulting in more rather than less of your company's time and effort involved in managing day-to-day logistics operations. While logistics outsourcing can provide substantial benefits in costs, expertise, systems and other areas, it is critical to follow best practices approaches to identifying, selecting and managing 3PL relationships.

Getting your own house in order is Job One. Lack of adequate internal preparation is a common — and potentially fatal — mistake in the 3PL contracting processes. Without a solid understanding of your current situation and your specific objectives, it is impossible for the logistics providers to effectively propose solutions, and for you to assess whether they truly provide value for your company. It's important that you focus on several key foundational elements.

Document your product flows and business requirements
This includes product characteristics; handling and packaging requirements; origin and destination points for today as well as future forecasts and global sourcing changes; interplant flows of product; aggregate volumes today and over the next several years; manufacturing and distribution facility capacities and constraints; delivery cycle times; special customer or channel requirements; seasonality; procedures for returns, spares and service parts; hours of operation; and related factors.

In our experience, this process has significant benefit by itself, even if no outsourcing ever resulted: "Gee, that's the first time we've ever had a comprehensive picture of our supply chain. We didn't even know we did some of those things — or why — and it's highlighted some opportunities for improvement." We typically pull these materials together in a binder at the end of this step — for ongoing internal use and to brief potential 3PL candidates in conjunction with the steps below.

Develop the appropriate scope and clear objectives
Especially for companies who are new to logistics outsourcing, it's critical to take the time to specify what is in scope and what's not — and why. Does "transportation management" include all modes or just some? Is carrier selection and rate negotiation part of the program, or just building loads and tendering freight? Who will have responsibility for auditing and paying freight bills? Are existing dedicated fleet operations open to review and change in this process?

Companies also need to clarify what they are trying to achieve through outsourcing. Is it a reduction in shipping and handling rates? A reduction in error rates? Shorter cycle times? Use of advanced IT systems to plan and optimize operations? On-the-ground expertise in specific new markets or in specialized areas such as security or customs and duty management? Different objectives will point you in different directions in evaluating and selecting-your logistics provider, so you need to have a healthy debate on this subject.

We all know that projects that start out in one arena often end up in another, and that's fine. But get past this hurdle before you begin to engage the logistics providers. We have seen a number of instances where wellqualified 3PLs leave the initial meetings and say, "Thanks, but no thanks. You don't really know what you want, so we can't respond to you and won't participate in your selection process." Having clear objectives from the beginning also makes it much easier to evaluate success later on, as noted below.

Know your current costs and performance levels
Sooner or later, you are going to need to document the impacts of outsourcing logistics:-Have costs actually-gone down? Is performance equivalent to or better than what you had before? Are you getting your money's worth? The only way you can know the answers is to have a baseline of cost and performance today — the "before" in the "before-and-after" comparison.

While this seems obvious, we have found that many companies do not have a good handle on their cost and performance levels. For a product or a customer or a shipment routing, it's not just the truckload rate in dollars-and-cents per mile or per pound, it's how much product was on the truck, how often it was late for pick up and for delivery, how frequently damage occurred, whether the carrier was paid correctly and on time, how fast the order was processed, how frequently backorders were involved, how much internal staff time was involved in fulfilling the customer requirements... and all the rest.

3PLs also want and need this information so that they can evaluate what benefits they expect to provide and what goals they're expected to hit, as well as whether or to what extent they will share in gains or losses as part of a performance-based contract with you.

Build the right project team
Logistics outsourcing affects a wide range of activities in your company — manufacturing, purchasing, sales, customer service, human resources — as well as warehousing, transportation and related functions, of course. It's important to get each of these areas involved from the beginning in establishing the requirements and objectives, and in helping to assess the 3PL candidates later on in the process. To get the benefits of outsourcing, all of these groups have to live with the results of the selection process, so it's clearly better to get them involved early and often than to simply announce an outcome that they may resist and thus doom to failure.

In our work, we have found two key success factors at this step.

First, appoint a dedicated project manager who "owns" the project and has clear responsibility for executing the identification and selection process and directing the activities of the team.

Second, have clear and visible top management commitment in setting the tone, making the resources available and breaking through the inevitable log jams that occur. Not only do these factors help the project proceed more smoothly within your company, they can dramatically improve the attention and responsiveness of the 3PLs you are considering. Frankly, they can tell in a flash whether you are committed and disciplined in engaging them — and will react accordingly.

Narrow the field before proceeding too far
While Logistics Today's online Solution Selector (www. lists many of the bestknown 3PLs, there are literally hundreds if not thousands of them, many of them specialized on single industries or even on a single customer. It's not practical to talk with all of them, and many of them probably aren't a good fit for your needs anyway. So once you know what you are trying to achieve, the next step is to sift and sort through the wide range of possibilities.

Initial information gathering and informal meetings with logistics providers can be a good way to identify the firms that have the promise of being a good match for you. Ask them, for example: What other customers have needs that are similar to ours? What is your experience with handling refrigerated products, or sourcing from Malaysia, or fulfillment of critical spare parts, or delivery to remote job sites, or other unique and critical requirements of your company? What share of your customers is approximately our size? How many of your other customers use the same combination of ERP, warehouse management and transportation systems that we have? What do you see as the keys to logistics success for companies in our situation?

You need to give as good as you get, so be willing to share frank information about your situation and objectives if you want to get useful information in return.

In our experience, these informational meetings with 3PLs can focus too much on high-level 3PL corporate capability presentations. PowerPoint presentations can be a great tool, except they can sometimes substitute style for substance and flash for cash. To effectively come up with a short-to-medium-size list of candidates, you've got to ask some tough questions early.

In one recent project that involved substantial global logistics in a range of farflung ports, the client needed to ensure that the potential providers had a strong, "no-kidding" footprint to support its complex operations. In this case the " solution" was a matrix that each logistics provider was asked to fill in, listing the key statistics of their operations at each port: how long they have been in business there, how many people are on the ground, how much warehouse and staging space is available, whether the office is an agent or a company-owned-andoperated location, how much tonnage they move through that port, how many customs clearances they process there, and so forth.

These questions are far removed from the typical "we're global, here's a map of the world with a bunch of dots that shows where we have offices and how global we are" type of presentation that we've all seen too often. Asking these types of questions can help identify the been-there-done-that firms.

The activities described above are simply the first steps in outsourcing logistics. But they represent the critical foundation that will allow you to proceed effectively and efficiently with soliciting proposals, evaluating responses, selecting providers, negotiating contracts, establishing performance measurement procedures and managing the relationships.

Start with this solid foundation, and you are more likely to build a high-value outsourcing relationship that lasts.

Scott Elliff is president of Capital Consulting & Management Inc. (, and works with companies to improve the performance of their supply chains. He can be reached at [email protected]