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About the Author

Cliff Holste is Supply Chain Digest's Material Handling Editor. With more than 30 years experience in designing and implementing material handling and order picking systems in distribution, Holste has worked with dozens of large and smaller companies to improve distribution performance.

Logistics News

By Cliff Holste

December 11, 2013



What Shippers Need to Know About Outsourcing

Factors That Drive 3PL Adoption


Holste Says:

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It only makes sense that Shippers, who are considering outsourcing, understand the differences in 3PLs so they select the one that best meets their current and future requirements.
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Previous Columns by Cliff Holste

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Logistics News : Automation Solutions Preferred By DC Business Managers

Logistics News : Public Relations Verses Process Improvement

Logistics News : Multi-Channel Order Fulfillment Challenges

Logistics News : Growing Economy Drives Investment In Automation Projects

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In our recently published Distribution Digest article titled “How Important Is Achieving ROI?” it was pointed out that outsourcing requires a very different business model. Based on industry surveys and expressed interests in outsourcing, it appears that many companies are currently considering this approach. But first, they need to understand their own unique operations and reasons for outsourcing.

To aid in this process, the following bullet points were developed by Mr. Thomas Craig, President of LTD Management, an independent Supply Chain Logistics consulting firm, in his paper “Let The Buyer Beware”. Distribution Digest originally published excerpts from Mr. Craig’s paper in October of 2010. The complete paper can be found at http://www.ltdmgmt.com/let.asp.

 



There are many reasons for adopting a third-party outsourcing strategy:

 

  • to acquire an expertise, talent and resources that don't exist internally
  • to let the company focus on its core competency which it has determined is not logistics
  • to develop value-added capabilities to better service its customers
  • to improve operations or customer service
  • or simply to improve its processes

 

All these are good and positive reasons. However, according to LTD Management there’s other less positive but still valid reasons:

 
  • to cut costs
  • to avoid capital expenditures
  • to avoid labor problems
  • to avoid costs of regulations

Given the differences in logistics service providers and the differences in why shippers outsource, LTD suggests that the shipper look hard at both the provider alternatives and its reasons for outsourcing. It must ask some difficult questions:


 
  • What am I looking to outsource - all of my logistics operation or just a portion of it?
  • Why am I looking to outsource?
  • How do I describe my logistics and company operation?
  • What are the costs of the operation to be outsourced? Fixed costs? Variable costs?
  • What are its capabilities? What are its strengths, limitations?
  • What do my customers require of each of their own supply chain specifications?
  • How well do I service my customers?
  • If there are service problems, what are they and what causes them?
  • What do we expect from the third party? How will we know if it is meeting our expectations?
  • What about the management responsibility of the third party? How will it be done and by whom?
  • How do I effectively transition from my own operations to an outsourced one? How long will it take to transition? Are there problems during transition? If so, what are they and why?
  • What if it doesn't work? What are the down sides to this? How serious are they to my business and my customers?

Against this self assessment, LTD says that the shipper can then begin to look for a 3PL provider that has the specific capabilities and services it needs. These questions will help shippers evaluate potential service providers:


 
  • What do you bring to the table? What are your experiences with my industry, with my customers?
  • What problems have you encountered with setting up third-party operations and why?
  • What will it cost?
  • How will it operate?
  • How long will it take to set up and have running properly?
  • How will we interface?
  • What do you require of my business? Is this requirement for start-up or is it ongoing?
  • Why do you want my business?
  • Why should I select you?

A company looking to outsource its logistics operations, or a portion thereof, must thoroughly understand what they are doing and what they want to accomplish. There are no shortcuts to doing it right, but there are real problems in doing it wrong.




The Vested Outsourcing Contract

Vested Outsourcing is a new methodology that allows companies to work more effectively with their outsource service providers. Under this approach, they develop service agreements that are based on outcomes, not processes, with added incentives to improve results across a broad spectrum of business metrics. Because the two parties typically share both risks and rewards, they each have a stake in finding opportunities for improvement. Or to put it another way, they become vested in one another's success.

One of the difficulties in choosing the right pricing model for a Vested Outsourcing agreement - one that provides incentives for the best cost and service trade-offs - is that there is often confusion about the different models used to construct the agreement. This confusion is due to the lack of consistency in how terms are applied to specific contract elements.

In their book – “Vested Outsourcing: Five Rules That Will Transform Outsourcing”, which can be purchased at http://www.amazon.com/Vested-Outsourcing-Five-Rules-Transform/dp/0230623174 authors Kate Vitasek, Mike Ledyard, and Karl Manrodt look at the two most common pricing models and explain how to decide which is best for you.


Final Thoughts

It’s important to understand that we are in the early stages of a new automated logistics paradigm. How it all comes together with supply chain management and with 3PLs is still being shaped. There will be some segmentation and consolidation in the market as providers better define who they are and what they can do. It only makes sense that Shippers, who are considering outsourcing, understand the differences in 3PLs so they select the one that best meets their current and future requirements.

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