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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

August 6, 2014

Outsourcing – Flexibility & Speed Are Key Factors

Shippers look to 3PLs for more Automated Solutions

Holste Says:

By combining the elements of skilled people, flexibility, and speed, 3PLs can help shippers quickly adapt to market changes and gain competitive advantages including a broader range of value added services.
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Previous Columns by Cliff Holste

Sorting It Out: Shippers Looking To Increase System Capacity Are Surprised To Find It May Already Exist!

Sorting It Out: For Shippers - Benefits Of Real-Time Control In The DC Are Huge!

Sorting It Out: Shippers Looking to Improve Operations Choose Customer Centric Approach

Sorting It Out: Productivity is a Crucial Factor in Measuring Production Performance

Sorting It Out: Packaging Construction Impacts on Logistics Operations


As supply chains become leaner outsourcing becomes an increasingly attractive proposition, especially for small to medium distributors/shippers looking to compete with the big guys. Good news for 3PLs, but the pressure to deliver increases. For 3PLs looking to win this emerging business, flexibility is a ‘must-have’ capability. To achieve their client’s growth objectives, 3PLs need to step-up their ability to quickly response to changes in volume, customer order profiles, and shorter shipping/delivery schedules.

Investment by 3PLs in material handling automation is a key strategy for meeting these challenges. Well thought-out choices will have to be made about when and how to invest. Contracts will have to be more comprehensive and, most likely involve extended duration periods.

However, the challenges are more than just technical. There are fears that at a basic level the logistics sector will experience severe skill storages as the industry struggles to attract the level and quantity of talent to meet its growth objectives (see “The Future Of The Logistics Industry Depends on Attracting & Retaining Young Talent”). Because young people are more likely to be attracted to a progressive automated environment…the more highly automated businesses will have a hiring advantage.

By combining the elements of skilled people, flexibility, and speed, 3PLs can help shippers quickly adapt to market changes and gain competitive advantages including a broader range of value added services.

What Shippers Need to Know About 3PLs

The future of 3PLs rests with the Shippers. They however, will need to understand their own operations and reasons for outsourcing. This will better enable them to evaluate what the third-parties are telling them. In that regard, the following bullet points were developed by LTD Management an independent Supply Chain Logistics consulting firm.

There are many reasons for going to a third-party:

  • 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 is 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, i.e., e-commerce?
  • 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 may allow 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”, 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

Going forward, predictably there will be some segmentation and consolidation in the 3PL marketplace 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 can select the one that best meets their current and future requirements.


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