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  -April 8, 2008 -  

Logistics News: Once You Outsource Distribution or Transportation Functions, Can You Ever Go Back?

 
 

ARCs’ Adrian Gonzalez Says He May See Sign of Mini-Trend; Tyndall Says Key is Not to Outsource All the Knowledge

  
     
 

SCDigest Editorial Staff

If you outsource key logistics processes, can you ever go back?

SCDigest Says:
The question is, how many companies really do it the smart way? Companies focused primarily on cost reduction and short term impact on the bottom line may find it attractive to get rid of almost everything – and find later they are out of options.

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That’s the question Adrian Gonzalez of ARC Advisory Group asked in a recent research note, after saying he noticed a small trend towards some companies pulling formerly outsourced logistics functions back in house.

Gonzalez said that several years ago, he had thought this “Insourcing would often prove too difficult: “The real question is whether you can bring your logistics operations back in-house, because most of my experience is that once you de-invest in an area, it takes a major traumatic occurrence to ever be able to re-invest.”

But Gonzalez is now having some second thoughts.

“It appears that the answer is yes, you can bring it back in-house, and it’s happening with greater frequency,” he notes. He says that farm equipment maker CNH, for example, determined that it could achieve “significant cost savings” by bringing its transportation operations back inside, versus its current outsourcing model.

“CNH is investing a ton of money on IT and overhead to rebuild its transportation management capabilities and it still expects to achieve significant cost savings compared to staying with their 3PLs. Either their math is wrong, or their outsourcing contracts were poorly negotiated or the economics of outsourcing are changing,” Gonzalez says.

There are always ebbs and flows in the outsourcing model, so a few examples don’t make a trend. Gonzalez says he is currently conducting research to see how much reality if any there is to the recent anecdotal evidence he has seen.

“I’m seeing this trend more in transportation than in warehousing, with companies taking back control of transportation procurement, carrier management, and freight audit and payment,” Gonzalez added. “I suspect the hurdle to bring warehousing/distribution back in-house is greater because you probably have to invest in assets.”

He also told SCDigest that one company that he interviewed originally outsourced their transportation operations a few years back because they were having service level issues. The priority then was to improve service levels, not reduce costs. But when they recently looked at what they were paying their 3PL, they determined they could do it for much cheaper if they leveraged their total spend and negotiated with carriers directly and managed the operations in-house.

(Distribution and Materials Handling Article - Continued Below)

 
 
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SCDigest recently spoke with one insider at a major high tech company who said he believes his firm brought some distribution operations in-house specifically as a short term cost savings measure in the face of slumping profits, not as a smart long term strategy. Companies can sometimes in effect eliminate the 3PL’s profit by taking operations back in house, albeit at the cost of deploying existing resources to again managing the operations.

Gene Tyndall, SCDigest contributing editor, questions why a company would want to "insource" in the first place. If the agreement is not going well, the company should re-visit its provider, and consider alternatives, he says.

“Whether there is any rationale to insource or not, the smart way to outsource is to never turn over 100% of the management to a provider,” Tyndall says. He says companies should retain some management and a small staff to manage the relationship, understand how services are being provided.”

“If a company outsources some process the wrong way -- doesn't pay attention and stay involved -- then sure, they lose the skill base,” Tyndall said. “The best practice companies keep management and a small team, and stay integrated. They gain familiarity with the tools that the provider employs. In some smart cases, the provider team even works in the company offices.”

“Success is about relationships and involvement,” he said.

The question is, how many companies really do it the smart way? Companies focused primarily on cost reduction and short-term impact on the bottom line may find it attractive to get rid of almost everything – and find later they are out of options.

When you outsource a logistics function, can you really bring it back? What’s your experience? What are best practices in terms of outsourcing without losing capability? Let us know your thoughts at the Feedback button below.

  
     
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