Over the past year, I’ve had two
conversations, one just a couple of weeks ago, with director-level logistics managers who regularly
evaluate and in some cases benchmark their operation not against other traditional companies, as many do,
but rather against what they believe a 3PL outsourcer could provide in terms of cost and service for
their distribution operations.
The goal is simple: make sure they understand what
the “value prop” for an outsourcing alternative would likely be, and to ensure as best they
can that their operation, their people and yes possibly their own jobs aren’t easy targets for a
lower cost outsourcing option.
“Every year, I take my three key managers,
and we sit down and say, ‘If we were a 3PL, how would we do this?’” one director of a
consumer goods company told me last year.
“It’s very easy, especially if you are
growing, to get a little fat, especially in the overhead area,” he continued. “If you let
that happen, it may make your life easier within the company because you have more resources, but it also
leaves you more vulnerable to a 3PL alternative.”
In reviewing those comments, I struck me that there
was some intersection with our perspective and the following reader discussion stemming from our recent
report on Logistics
Costs. Many companies in the report were using logistics costs as a percent of sales as the key
metric within the company. Especially in a growing company, this could mean staff and cost increase in a
way that still looks good against that metric, when in fact there may be a lot of efficiency that could
be applied by someone from the outside looking at total costs or cost per unit.
Every few years, this director will actually engage
some 3PLs in at least some dialog to get their feedback on what they might do for him. While not of
course getting down to an actual proposal, he says the dialog is often helpful – and encouraging,
as his approach has led the 3PLs to usually admit there is not a lot of opportunity to reduce operating
costs, and instead will start emphasizing that the company could focus on “core competencies”
and that whole line of reasoning for outsourcing.
“Every year, I have a very detailed feeling
for how our operations stack up against an outsourced alternative, and we feel very good about where we
are,” this manager told me.
My other conversation was just two weeks ago with
another director of distribution for an industrial company. His situation in a sense is a little more
urgent, because the company has not typically placed a high value on distribution, and there is a general
trend towards greater outsourcing within its operations. While there is no active effort to look at use
of a 3PL, he realizes it could happen at any time.
“So we want to be prepared,” he told
me. First, he maintains a powerpoint presentation that lists the value and reasons for maintaining
distribution in house, focusing on the group’s performance against goals, continuous improvement,
and all the “value-add” it does for the various businesses.
“You have to maintain a log of this stuff
over time,” he told me. “It’s too hard to remember it all if you need to with some
urgency, and you may not have enough time to do it right.”
Forewarned is forearmed, as they say.
His group also does a similar sort of cost
analysis. Like the other company, they challenge themselves internally about what cost per case they
think they could run the operation at if they were operating it as a 3PL.
“We’re a little above market in terms
of associate pay, but that’s just what we have to deal with,” this director told me. “I
think we can be up to about 10% over outside costs and still feel pretty good due to the risks and
start-up effort of going outsourced, and the service we provide. But we have to stay under that
The growth rate of 3PLs continues to rise
substantially beyond that of overall GDP. For many companies, and even many logistics managers, the move
to outsourcing could be a very good thing, and there are all kinds of relationship models available.
But if for any number of reasons you’d prefer
not be outsourced, doing an annual check-up versus what a 3PL could offer your company to ensure you are
operating “lean and mean” makes a lot of sense.
BTW, don’t miss our first
Videocast next Thursday, on creating a
“performance-focused” logistics workforce". It’s good
stuff, and delivered in a brand new video format. Register here.
Do you think benchmarking against what a 3PL could offer is smart business? What are
your recommendations for doing it effectively? Let us know your thoughts.