Outsourcing is an increasingly mainstream component of modern corporate strategy. Generally, the core objectives are reducing operating costs and more effectively deploying working capital. However, in a survey of U.S. and European executives, consulting firm Accenture (www.accenture.com) found that 86% of respondents also believe that outsourcing gives them more control over their business. Plus, 55% said that outsourcing helped them make changes faster and more effectively. Many also confirmed that outsourcing is the best way to manage functions that are not a "core competency" --achieving high performance by maximizing their differentiating capabilities.
All of these advantages have accelerated the growth of comprehensive third-party logistics (3PL) services, as well as the outsourcing of specific activities, such as freight bill audit & payment and contract warehousing. In fact, the stiffer the competition and the more companies globalize, the more interest there is in outsourcing and the more the scope of 3PL offerings and operations expand. The net effect is clear: Outsourcing is here to stay.
But despite its popularity, outsourcing is still a complex balancing act that companies must pursue with their eyes wide open. It all begins with a core set of " thinkthrough" questions:
Are you a good candidate for outsourcing?
What makes a company a good candidate for outsourcing a logistics function? Common incentives might be an inefficient transportation and/or distribution network; an overly costly labor force (perhaps combined with restrictive work rules); out-dated facilities, such as warehouses, vehicles or systems; a lack of resources, expertise and skills at key positions; or perhaps the inability to control costs internally. All of these are potentially valid reasons for investigating outsourcing's potential.
However, there may also be a general acknowledgement that a transformation of all or part of the supply chain is needed, and that the internal capabilities are not sufficient to address the change.
What should you outsource?
After deciding that outsourcing is a viable consideration, the next step is to fully understand exactly what is being put on the table. The options, of course, are extensive, and include: direct transportation service; Customs brokerage; freight payment; warehouse management; freight forwarding; shipment consolidation; carrier selection; reverse logistics; rate negotiation; merge in transit; fleet management; and at least a dozen more.
Most companies are reluctant to outsource their entire supply chain at once. A more common approach is an outsourcing "road-test" — combining low risk and high measurability by launching a pilot for a single functional or geographic area. The specifics depend largely on the size, scope and industry focus of the company.
For a consumer goods company, a common road-test is outsourcing local store deliveries from a single distribution center (DC) in one city. Alternatively, a retailer that uses a private fleet for DCto-store deliveries might try outsourcing a segment of that operation to a dedicated contract carrier (e.g., deliveries from one DC to a set number of stores).
How do you do it?
Strategy, concept design, goal-setting and planning are important intellectual exercises that return nothing until they are combined with execution. As shown in Figure 1, a standard outsourcing process consists of 11 sequential and rigorously applied steps.
- Identify the right candidates. Not all supply chain functions are good outsourcing candidates, nor is it wise to assume that outsourcing everything is the best course.
- Evaluate feasibility and quantify potential benefits. It's essential to develop a business case that offers financial, metrics-based justification for any outsourcing activity.
- Develop capability requirements. What are the key capabilities being sought and how should they be prioritized?
- Produce a Request for Information or Request for Proposal (RFI or RFP). The RFI/RFP process is where all requirements, expectations and performance criteria are documented. Basically, it should contain all the information the company needs to evaluate potential 3PLs and the supporting data the 3PL needs to develop a thorough response.
- Create a preliminary list of potential 3PLs. There are literally hundreds of players, which makes understanding their relative capabilities a complicated but necessary step (see the 3PL Solution Selector on p. 34).
- Assess and evaluate the capabilities, experience and risk-sharing amenability of various 3PL providers. After developing the initial list of potential candidates, it's important to examine and compare candidates' experience, past performance and operating capabilities.
- Develop a short-list of potential partners. Narrowing the field to a small number of contenders is necessary before additional levels of information can be solicited.
- Negotiate. Negotiations test the efficacy of the future relationship and the ability of the parties to find common ground.
- Select partner(s). The final selection is as much about fit and relationship management as it is economics.
- Develop an implementation plan and commence implementation. Investing time and effort to jointly determine how the implementation will unfold, and who is responsible for what, will produce a much better outcome than simply hoping it will go well.
- Continually monitor and measure performance, and take corrective action. No outsourcing initiative gets it 100% right in the design phase. This is why progress must be closely monitored and measured — with mid-course corrections made during implementation.
Who are the right 3PLs?
Hundreds of third parties are available to companies seeking to outsource some or all of their supply chain functions. The challenge, of course, is understanding which 3PL's capabilities align best with the aspiring outsourcer's functional characteristics and goals, and which one fits best with the company's "as is" culture and the "to be" environment that is sought.
To make this happen, three activities must come together:
Assess: Collect enough of the right information about various players to make an informed decision concerning which ones best meet requirements and have the capabilities to follow through.
Select: Narrow the field by eliminating obvious poor fits and introducing additional performance criteria, such as:
- Financial viability
- Specialization in relevant market segments
- Operating performance
- Customer references
- Ability to do the whole job (versus having to work with a consortium of partners).
Execute: Once a choice has been made, the relationship's structure is then forged by defining:
- Contract term (length and renewal options)
- Contract conditions (business rules, expectations, remedies, etc.)
- Roles and responsibilities
- Financial considerations, including compensation and performance incentives
- Performance monitoring/ measurement approaches
- Problem and dispute-resolution processes.
Before launching an outsourcing initiative, it's vital to consider how well outsourcing meshes with the enterprise. For example, if you represent a new, entrepreneurial company with few fixed concepts about what works and what doesn't, outsourcing might not be terribly difficult. However, older organizations usually are less flexible and more subject to labor constraints and other barriers. For them, outsourcing may still be a good fit, but making it happen will probably be more complicated and more time consuming.
Conversely, outsourcing could be inappropriate for organizations that view supply chain performance as a core competency or for which a great deal of effort already has been vested in operationalizing a supply chain vision. However, even these companies would be advised to conduct periodic assessments of outsourcing's potential. If nothing else, it's an excellent way to benchmark yourself against commercially available alternatives.
A second reality check is the need to assess the company's "as-is" environment. After all, you can't effectively evaluate outsourcing as an alternative unless you have a solid and accurate understanding of where you stand today. Self evaluation applies not only to operating costs and capital requirements, but also to underlying performance and service metrics. This is not a small matter. In fact, poor outsourcing performance often results from an incomplete picture of service demands, supply chain requirements, existing operations, or poor data on operating costs and capital needs. Moreover, low visibility forces decision makers to rely on anecdotes, suppositions and the hope that things will simply work out in the end.
It is possible to make outsourcing work in a "foggy" environment. But outsourcing is manifestly more difficult without a solid foundation of data-driven knowledge and reliable metrics against which to view potential partners.
Lastly, it is important to remember that outsourcing initiatives are really capabilitybuilding exercises. Rather than recruiting, hiring, training and funding the development of "organic" capabilities, a third party is engaged to provide turn-key services encompassing people, processes and technology.
Acknowledging that outsourcing is not for everyone is an important step in the process. But outsourcing can be a wise, pragmatic and profitable move for companies with a clear understanding of what to outsource and why; the willingness to develop a sound, data-driven business case; and the ability to coordinate a fact-based, well-documented and rigorous implementation.
Brooks Bentz is a senior executive in Accenture's Supply Chain Management Practice (www.accenture.com), based in the Boston office. His expertise is in transportation strategy and operations, shipper/carrier management, thirdparty logistics and private fleet management, as well as strategic transportation procurement. He has extensive expertise in the transportation industry holding a variety of positions with companies large and small during a career spanning 31 years.