Consider Internal Resources Before Outsourcing Logistics Functions

Jan. 1, 2009
As chemical companies look for ways to reduce logistics costs, many are increasingly considering outsourcing as a way to save money associated with freight

As chemical companies look for ways to reduce logistics costs, many are increasingly considering outsourcing as a way to save money associated with freight and personnel costs. Often considered a fast and ready solution to mandatory reductions in the logistics budget, companies should carefully consider the value of combining internal expertise with outsourced technology-based tools and professional services rather than simply replacing internal resources to streamline logistics functions.

With capital funds tight, many companies may find it difficult to acquire the latest state-of-the-art transportation management technology or retain sufficient staff to manage new technology or develop corporate-wide logistics solutions. It is at times like this they often turn to third party logistics (3PLs) to provide the logistics solutions and/or logistics service providers (LSPs) to supply the technological tools and professional services for logistics and supply chain optimization. However, it is the company's internal staff that holds the knowledge base of their supply chain operations to understand the specific risks and merits associated with different cost-saving tactics. Understanding the value of their internal resources, companies should consider supplementing in-house expertise with outsourced resources to optimize specific logistics operations.

A recent survey reports that while nearly 60% of companies did outsource some portion of their logistics function, only about 4% outsource the entire department. And companies that are outsourcing use these resources to achieve savings on a variety of logistics programs involving inbound and outbound traffic, freight costs, current assets, raw material and finished goods inventories.

Rising fuel costs and more limited carrier options have resulted in increased logistics costs for chemical companies, averaging somewhere between 10% and 20% of revenues. Rather than focus on specific logistics tasks, companies are evaluating the total supply-chain when considering logistics enhancements to balance trade-offs between cost and customer service. Through this approach, companies are saving as much as 4% in sales, while improving customer service.

But should companies outsource the entire logistics function? Because logistics is a core business function, chemical companies may find that complete outsourcing can create new barriers as 3PLs and LSPs are simply not as knowledgeable as their own staff about internal operations, customer relationships and business regulations. For example, as the changing business climate warrants increased responsibilities in security and asset visibility, chemical companies may find that many 3PLs do not have as much experience as their own staff to handle these issues.

When considering outsourcing as a means to optimize logistics functions, companies should evaluate how their business operations would change with this new resource and review successful implementations by other companies. Changing market factors should also be considered.

For example, the practice of making staff cuts to reduce costs has slowed in recent years as many logistics departments have reached the point where downsizing may affect business operations. Though cost savings are accrued through reductions, dollar impact is usually near term and the in-house intellectual capital that took years to build is gone forever.

Some 3PLs propose freight rate savings solely based on the larger volumes they command. Studies indicate that lane and carrier market intelligence also can have a significant impact on freight negotiations. In addition, the use of an online bidding tool and supplemental resources allows shippers to execute an RFQ quickly and generate savings much faster than the conventional bid process. After bidding is completed, optimization tools can pinpoint the best carrier mix and savings based on client service levels, capacity commitments and rates.

When considering logistics improvements, experts instruct companies to look beyond cost savings associated with personnel and freight as savings and service improvements can be found in product visibility, inventory and asset reductions, demand planning, improved procurement and freight optimization. And because a truly cost-effective logistics program typically includes organizational changes across different departments, many functions may lie outside a logistics manager's control (including sales, purchasing and manufacturing). This is where logistics outsourcing can help project management on a program and supplement in-house resources.

Chemical companies have reduced specific logistics expenditures by supplementing in-house resources. For example: Looking to reduce less-than-truckload (LTL) freight costs while gaining online visibility of customer orders without sacrificing services, a specialty lubricants company engaged the rate benchmarking and negotiation services of a qualified logistics outsource provider. Maintaining an extensive database of freight rates for carriers in different modes, the LSP analyzed freight costs associated with different carriers to determine optimum carrier selection.

Benchmarking LTL rates of incumbent carriers, the LSP can provide an accurate estimate of cost savings prior to bidding out LTL freight. With this capability, the lubricants company can negotiate the best transport rates and lanes with existing and new carriers for lower freight charges and better delivery performance.

In addition, the LSP's carrier selection and routing tools enable the company to track orders from system entry until completion, rate shipments online and monitor carriers, resulting in more accurate accruals and reconciliation of expenditures.

In another scenario, a global chemical company looking for a solution that would streamline management of freight and increase customer service decided to upgrade their logistics functions by implementing a transportation management system (TMS). Because the company didn't want to make any changes to its staffing or operating procedures, it chose to outsource to an LSP that could also provide strategies for increasing efficiency and outline opportunities for short- and long-term savings.

The LSP provided a web-based TMS that optimized freight operations in key areas such as carrier management, route guide design and compliance, tender management and vendor compliance in addition to providing full visibility into freight spend through online access to data and custom reports. Automatic tracking improved carrier performance from 90% to around 98%.

Advanced contract management functionality offered by the on-demand TMS provides for highly accurate, real-time freight accruals for accurate reconciliation, eliminating the occurrence of wide variances between estimated and actual cost of freight.

Chemical companies as well as businesses in other industries should evaluate the value of their internal logistics resources before eliminating them for a complete outsource solution. Before outsourcing any transportation and logistics functions, tap into the value of your current resources. Money can be saved by using internal staff to manage specific tasks rather than outsourcing complete operations. Companies also shouldn't lose the investment made in building internal logistics expertise over the years. Consider using outsourcing to provide the tools and support needed for your internal staff to better manage logistics functions for greater efficiency, cost savings and customer service.

Steve Hamilton is president and chief executive officer of ChemLogix LLC. The company often works with “best-in-class” shippers, and those aspiring to be, in implementing programs that generate significant logistics and supply-chain savings. E-mail [email protected].