Focus on Human Assets

May 7, 2008
Logistics operations are mired in transactions that could be outsourced to reduce costs.

Cost challenges will continue to escalate and markets will consolidate as the effects of the US recession ripple through the global economy, notes Pradeep Vachani, head of logistics for WNS Global Services. Currently, there is demand in Asia, but how long can the pace of economic growth continue in India and China? And reaching those markets or others where demand is strong requires flexibility.

Given the volatility of global demand and cost drivers, the critical question many medium- and large-sized companies are asking is, “How do I service growing markets without creating the asset laden operations and infrastructure traditionally used to serve markets in Europe and the US?” The answer for more and more companies, says Vachani, is to look at information technology (IT) providers, business process outsourcing providers and third party logistics companies (3PLs) and say, “If I can outsource what is not core to me, it creates a competitive advantage.”

That’s a better model than creating those asset-intensive operations and infrastructures, he continues. The demand is there today and I need to service it, but what if it slows down and I’ve created assets that are going to make my cost structure different from my competitor who has outsourced?

Business process outsourcing (BPO) is accepted as a sound business practice in the US and increasingly in Europe, says Vachani. It helps with the demand and supply mismatch for people and helps leverage logistics talent without geographic constraints. One prime opportunity Vachani sees centers on the fact that about 60% of the processes in logistics are paper based and continue to be paper based despite technology developments. Of that, Vachani estimates 70% can be neutralized from a location point of view and can be done in a low-cost location.

In other words, functions like documentation, preparation of air waybills, bills of lading, or cargo bills, finance, accounting and back-office support functions can be handled by skilled workers without regard for where they actually perform the work. Even some compliance-related and freight audit functions aren’t tied to geography.

“Manufacturers are interested because a big portion of their costs are related to logistics–movement of goods–both on the raw materials side and finished goods. They’re outsourcing many of those functions,” says Vachani. These are all functional organizations, he points out, and they are typically run as cost centers. As such, there is tremendous pressure on headcount because reducing headcount cuts cost.

These smaller departments face the same volume (or more) of transactional detail which doesn’t allow them to focus on more value-added work such as analytics. A $3 billion to $4 billion company typically spends $100 million on logistics, says Vachani, and its management would like to analyze that spending and optimize rates and monitor contracts. Moving much of the transactional detail to a BPO can free those internal resources to perform more of that analysis and focus on supplier and customer relationships.

In many cases, the technology tools of the BPO can support that analysis and even help the contracting firm upgrade its abilities. Some firms have implemented analytical tools and even layered business intelligence tools on top of that, but, in many cases they are still strapped for resources, says Vachani.

A BPO will typically look at the processes and people and ask, “Where can this work best be done?” It’s not a new phenomenon, says Vachani, manufacturing has been doing this for 35 years.

Whether the drivers are energy costs, compliance, security issues or just shippers and logistics providers looking for new ways to reduce costs, newer and emerging markets offer talent pools and a cultural fit that support the move to outsource much of the transactional portion of the logistics function and may even offer some support for the analytics.

Vachani says the BPO will take a client’s processes, break them down into their components and optimize each. Looking at a process in customer service or documentation, he explains, the work can be broken down into smaller sub-processes that can be handled in any location. Many BPO users prefer to keep more of the customer service and customer facing functions, but that leaves many of the supporting processes open to outsourcing.

While the trend is clearly to use an outside provider and move many of these functions to low-cost regions, some larger organizations have set up captive centers. That work may be done by company employees, but it can now be done in Mumbai or Shanghai or some other low-cost location, says Vachani. Other companies have benefited from the critical mass created by larger organizations outsourcing transactional processes. In areas where these functions are concentrated, the talent pool of skilled transportation and logistics workers benefits shippers, carriers, and 3PLs.

There are other factors to consider in business process outsourcing, says Vachani. On paper it can look like a good deal, but if you have not looked carefully at the other legal aspects, compliance, tax and other issues, it could come back and have a significant impact.

India continues to lead the pack for business process outsourcing, notes Vachani, and people talk about costs going up because of wage inflation. But wages are only typically 30% of the cost structure, he explains. The remaining 70% is related to infrastructure–real estate and telecommunications. And for large players in the BPO arena, those costs are going down. The cost advantage will still be there for at least seven years, he estimates.

Vachani offers an example of a US exporter who must perform deniedparty screening. The process of examining each transaction for compliance and maintaining up-to-date resources can become very labor intensive. The costs of non-compliance are also high. It’s a simple cost equation, he says. The BPO has people at a low rate who can be thrown at the problem.

Outsourcing to a US-based company can solve the manpower issue, admits Vachani, but that doesn’t offer the same cost cutting opportunity as going offshore. Throw in other parties the company is dealing with– 3PLs, information technology providers, etc.–and the problem of managing the details spirals out of control. As things get more complicated from a compliance and security point of view, costs start to rise, and you still have to get the work done in a cost effective manner, says Vachani.

Global trade is booming, concludes Vachani, and rising with it is the challenge of how to take advantage of markets when and where they are developing. Following the shifting tides of trade will continue to demand more of supply chains. Getting the most from lean internal resources will require a less transactional focus and a more strategic view, and that’s where business process outsourcing firms hope their offer will fit a wide range of needs.

The Outsourcing Experience

Already experienced with domestic outsourcing, logistics professionals are expanding their use of third party logistics providers (3PLs).

At the top of most lists of commonly outsourced functions is domestic transportation. Responding to a survey by Capgemini, 91% of European executives indicated they outsourced domestic transportation. (85% of executives in the Asia Pacific region indicated they outsourced domestic transportation, followed by 79% in Latin America and 77% in North America.)

Except for Latin American executives, over two thirds of executives in each region–North America, Europe, and Asia Pacific–said they outsourced warehousing.

The 12th Annual State of Logistics Outsourcing report based on the global study paints a picture of companies focusing on minimizing the number of assets they are committing to in their supply chains. In fact, outsourcing provided overall logistics cost reductions of 13% and reductions in fixed logistics assets of 18%. Latin American and European executives reported the largest reductions in fixed assets–25% and 20%, respectively.

Responses indicated a very low rate of outsourcing for transaction-intensive areas like freight bill audit and payment and order entry, processing and fulfillment. These and other functions are the target of business process outsourcing companies who make the case that taking over responsibility for many of these functions frees a company’s human resources to concentrate on more customer-facing and strategic areas.

Satisfaction runs high for users of outsourced logistics. Latin American executives had the lowest satisfaction level at 76% while executives in other regions were all above 85% in satisfaction with the results of their outsourcing efforts. Virtually every region expects to increase the percentage of logistics expenditures directed to outsourcing in the next three to five years.

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