Businesses often personify the proverbial Jack of all trades when they try to manage all their supply chain management operations in-house. Why not concentrate on core business processes to avoid being the master of none?
Outsource your logistics to solve your problem.
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Until the 2000s, most businesses managed their own shipping and logistics. Companies owned assets like vehicles and a warehouse, or they’d hire such services directly.
Companies began outsourcing logistics services as supply chains got more complicated and technology-driven.
This article will address the build vs. buy debate many managers face while running logistics.
Article Roadmap
- What Is Logistics Outsourcing?
- Types
- Why Do Businesses Outsource Logistics?
- Benefits
- Challenges
- Logistics Outsourcing KPIs
- Logistics Onboarding
- Should You Outsource?
- Next Steps
What Is Logistics Outsourcing?
Logistics outsourcing is a business stratagem where a company hires an external service provider to fulfill various supply chain operations (transportation, warehousing, inventory or reverse logistics).
Some businesses delegate their entire supply chain management to third-party logistics services (3PL). Less commonly, 3PLs also get hired for IT capabilities like reporting and analytics.
The outsourced provider strategizes to free up in-house staff to focus on tasks that offer value to the brand. These services typically bundle together to create a single point of contact for all (or some of) a company’s supply chain.
Companies in the following industries routinely outsource logistics:
- Paper
- Food
- Heavy equipment
- Chemical
- Electronics
- Construction
Types
No two businesses are exactly alike; it makes sense for companies to outsource only those segments of the supply chain that they need help with.
In the last year, 86% of global shippers outsourced inbound logistics to 3PL firms. Nearly 75% of shippers consulted these services for integrated logistics, while 68% required lead logistics services.
Let’s look at different types of outsourced services and their usage statistics in 2023:
Logistics services outsourced by shippers. Source
Transportation Management
Domestic and international transportation management includes using advanced technology to organize thousands of deliveries across different carriers and modes of transportation.
These services can range from coordinating dry van truckload transit for a single item to optimizing hundreds of shipments across a global supply network.
3PLs have their own infrastructure, as their own fleet or through collaboration with carrier networks. They may have better negotiating power and can negotiate better bids on your behalf if they collaborate with carrier networks.
There are various forms of transportation logistics outsourcing services:
Temperature-Controlled Transportation
- Transporting goods in refrigerated trailers.
- Maintaining consistent temperatures in transit.
Freight Consolidation
- Merging your items with those of other customers in the same 3PL facility.
- Achieving effective delivery to retailer DCs.
Pool Distribution
- Combining your products with those of other businesses.
- Unlike LTL, the shipment skip several stops and travels directly to a pool distribution hub in the destination region.
Dedicated Contract Carriage
- Provide tractors, drivers and fleet management to shippers.
- Trailers are frequently included.
- Contracts can vary from one to seven years.
Domestic Transportation Management
- Offer value-added transportation management services that aren’t asset-based.
- Mostly handle shipments starting in and bound for North American destinations.
- Often, contractual services are provided in combination with freight brokers.
International Transportation Management
- Offer value-added transportation management services that aren’t asset-based.
- Often, contractual services are provided in combination with freight brokers.
Value-Added Warehousing and Distribution
Warehousing and distribution are two of the most costly and complex logistical processes, particularly for small businesses.
Paying for the same amount of warehouse space year after year doesn’t make sense when there are evident seasonal ups and downs. Besides, you also have to keep paying for equipment and other utilities.
When you partner with an external party, you essentially split the costs. Your inventory is also closer to your customers, facilitating swift deliveries. Good third parties add value with services like packing and picking, freight forwarding, kitting and the like.
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Port Logistics Services
Port logistics outsourcing handles imported goods movement from the port of arrival to distribution. They include the following:
Transloading
It’s the process of receiving your container at a 3PL warehouse, examining and processing its contents, and loading them onto an intermodal container or truck trailer for delivery.
Drayage
Drayage transports imported containers to a warehouse for storage, transloading or deconsolidation.
Deconsolidation
Receiving and processing your container similarly to transloading, but with product segregation — often by purchase order or SKU — for loading onto intermodal containers or truck trailers for simultaneous distribution.
IT and Customer Services
The above 3PL study shows that shippers delegate certain IT requirements. The value of innovative analytics and data-mining solutions (54%), transport sourcing (55%), warehouse automation (64%), international trade management (31%) and network modeling (35%) is growing.
As part of its solutions, 3PLs may also provide customer support management.
Why Do Businesses Outsource Logistics?
Companies outsource logistics to gain a competitive edge. The need to upgrade to the latest technology and manage evolving complications drives outsourcing budget increases.
Supply chain professionals want speedier transitions to the market, better visibility and higher data quality. Even the most advanced 3PL suppliers struggle to meet evolving customer expectations, so companies collaborate with organizations to better manage the logistical life cycle.
A few reasons entrepreneurs like their logistics outsourced are:
- Utilize the Expertise of Logistics Specialists
- Focus on Core Business Capacities
- Harness Cutting-Edge Technology
- Cut Costs
- Free Up Back-End Operations
- Boost Inter-Organizational Ties
- Navigate Newer Markets
- Scale Up Infrastructure
- Boost Brand Image and Customer Service
We’ll discuss these reasons at length in the next section.
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Primary Benefits
The 3PL study says that as of 2023, companies perceive 3PL services positively, with 71% reporting an upshot in customer service due to the partnership. Furthermore, 69% succeeded in reducing logistical costs.
Outsourced logistics unlocks such a host of advantages that it’s best to visualize them segment-wise:
Improve Company Focus
1. Focus on core business capabilities: Supply chain management is a highly technical field requiring expert handling. Instead of attempting it alone, outsource logistics to a firm with extensive knowledge and experience. This tactic, in turn, will allow you to free up resources and focus them on vital processes.
2. Free up back-end management: Boost organizational productivity by trusting a 3PL with billing and auditing tasks. These services reserve sufficient staff and billing systems for that precise purpose.
3. Cultivate best practices: 3PLs tackle delivery snags and other challenges that span industries and terrains. Equipping 3PL providers with specialized knowledge of your operations can boost efficiency further.
Boost Customer Service
4. Increase freight capacity: Freight forwarding is among the most in-demand third-party offerings. A lack of vehicles and drivers hurts shippers’ ability to procure freight volume. 3PLs and brokers provide a massive number of consistent, predictable freight to their carrier partners.
As a result, they are more appealing to shipping partners than a small business bargaining on its own.
5. Boost speed to market and improve performance: On short notice, 3PLs mobilize resources from across their businesses to fulfill demanding deadlines set by customers.
Tracking can be integrated into shipper IT tools. ERP and WMS systems, facilitating immediate exception reporting. This method ensures that end users are consistently updated.
Foster Agile and Flexible Operations
6. Foray into newer markets: Developing and equipping your own distribution capabilities in a new market requires time, which you may not have. On the other hand, the appropriate service provider can bring in inventory, link with your systems and get you to ship in 30-60 days.
7. Scale up infrastructure and labor: Several third-party logistics providers have a nationwide or global distribution network. This access lets you rapidly grow your network in a variable-cost setting.
Outsourced logisticians are proficient in managing a virtual workforce and recruiting temporary personnel to manage demand surges efficiently without adding a long-term cost burden.
Reduce Costs
8. Economies of scale: You may spend significant money attempting to upscale your existing staff to execute logistical services in-house.
A 3PL provider can help you reach economies of scale because they exclusively supply logistical services, allowing you to ramp services up or down at short intervals.
9. Cut down on fleet investments: Dedicated contract carrier options offer a private fleet without the expense of owning the vehicles, maintaining equipment, employing and managing drivers, and handling safety, compliance and liability concerns.
10. Reduce software expenses: 3PLs with top-notch warehouse and transportation management systems save you money on purchases, programming and maintenance. The technology isn’t free, but 3PLs distribute the costs across many clients, and you share the cost.
Challenges
Now that we have established what logistics outsourcing is, its types, importance, and benefits, let’s explore the key challenges of logistics outsourcing.
Loss of Control
Outsourcing logistics operations entails giving up some control over critical areas of your supply chain. Despite this resulting in quicker operations and reduced administrative effort, the trade-off may be a sense of disconnection and a potential plunge in customer experience.
The solution is transparency, paired with a partnership based on mutual benefit. The supplier may not have direct control over the logistics department, but they must be aware of what’s happening at all times. Monitoring and supervising outsourced activities is crucial to ensuring the quality and dependability that clients expect.
Strategic Misalignment
Making sure your company and its selected logistics provider are strategically aligned is one of the biggest obstacles in logistics outsourcing. Inefficiencies, disagreements, and poor service emerge from misalignments.
Getting everyone to work toward the same goals could be problematic when multiple businesses are involved in your operations. Always ensure clarity on the following fronts:
- Your strategic goal.
- What you anticipate from each provider.
- The precise KPIs you’ll use to measure the provider’s performance.
Perform careful due diligence when choosing a supplier and developing clearly defined service level agreements (SLAs) to prevent misalignment.
Open communication and consistent performance reviews can keep both sides on the same page.
Security Breaches
Entrusting sensitive logistical information to a third party is risky at a time when data leaks and cyberattacks are widespread.
You’re giving a third-party provider access to sensitive consumer data. Inadequate security precautions (such as high-grade encryption) could result in a data breach that exposes client information.
Implementing robust data protection mechanisms like encryption and secure communication routes is essential. Service providers should have their cybersecurity processes properly investigated to reduce the danger of security breaches.
Cultural Differences
Since the objectives of each party in logistics outsourcing agreements are frequently varied, several viewpoints are taken into account while determining the partnership’s commercial viability.
Firms may also have varying levels of administration and management styles. The viability of the joint venture and the partnership’s future success depends on accounting for these considerations.
Cultural differences can be a significant obstacle in the context of global outsourcing. Time zones, work cultures, and communication conventions may cause miscommunications and delays.
It’s crucial to provide open lines of communication, support cross-cultural training and encourage a collaborative atmosphere that cuts across cultural boundaries.
Software Incompatibility
Surprisingly, cost concerns rank relatively low on the list of outsourcing motivations. S&P Global found that logisticians prioritize tech adoption in operations, with 67% of logistic firms confirming a digital transformation plan where they’d harness the latest software to simplify outsourcing.
The most significant barrier preventing the industry from achieving its tech ambitions is a skills gap, which may be at least partially filled by using digitally enabled technologies like cloud computing, IoT and AI/machine-learning analytics.
Although this adoption is in progress, it’s still in its early phases.
You may not be able to integrate new or proprietary technology as quickly on your own, but 3PLs can frequently provide access to it. Your software must communicate with the 3PL’s systems to streamline customer orders and data exchange. If not, you’ll need to find another 3PL that is compatible or upgrade your software.
Brand Reputation
The caliber of your logistics management strongly influences your brand’s reputation. Using the wrong 3PL provider when buyer issues arise can jeopardize your company. Mistakes made by your logistics provider could have a detrimental impact on how people perceive your company.
Choose a service with a solid track record and conduct thorough checks to combat this. Be sure to investigate the company’s history and customer satisfaction level.
Responding quickly to problems can support trust and protect your brand’s reputation.
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Logistics Outsourcing KPIs
Regardless of your motivation to outsource logistics, hurdles like losing ownership of your products or mounting costs may inhibit you. The decision to outsource ultimately boils down to managing costs and plugging gaps.
Before choosing a 3PL service, consider and evaluate the following KPIs:
Performance Gap Analysis
This KPI addresses the classic “build vs. buy” debate. Use it to determine how well your logistics outsourcing partner performs compared to your in-house operations.
Gap analysis involves the evaluation of strengths and weaknesses, identifying appropriate logistics partners and developing a cost-benefit analysis for a world-class logistics endeavor.
To conduct the analysis, first define your metrics. They can range from order accuracy or on-time delivery to inventory management or last-mile delivery. Measuring these metrics will give you a baseline for comparison between various partners.
After outsourcing, track these metrics to establish a performance trend, and you’ll begin to identify areas of strength and performance gaps.
Post-logistics outsourcing, you can draw up a report outlining your provider’s performance against the baseline. Now’s the time to assess these results and consult your 3PL provider to discuss scopes for improvement.
Cost Analysis
A detailed cost analysis can help you to estimate the financial impact of outsourcing logistics activities. Here’s how:
First, calculate the direct costs of logistics outsourcing, such as transportation, warehousing, labor, technology and administrative expenses.
Then, compare the costs of outsourcing against the costs of in-house logistics operations.
Next, you’ll want to compute the cost per unit shipped or cost per order fulfilled to evaluate the efficiency of outsourcing.
Finally, subtract the outsourced costs from the in-house expenses to calculate your cost savings.
Financial Impact Analysis
Now, it’s time to consider the broader financial implications of outsourcing. Here’s how to measure that.
Calculate the ROI by comparing the overall benefits of outsourcing (cost savings or enhanced efficiency) to the total costs incurred.
Finally, analyze whether logistics outsourcing has enhanced profitability by improving client satisfaction and expediting order fulfillment.
Suitability Analysis
Most business owners stop at ROI calculation. However, this frequently overlooked step determines whether outsourcing is a good fit for your company and if the outsourced partner you choose aligns with your strategic goals.
Here’s how to conduct one:
Determine how well the service provider’s approach corresponds with your company’s goals, such as growth, cost reduction or specialization.
Follow up by assessing your vendor’s performance. Evaluate your outsourcing partner’s responsiveness and ability to fulfill your changing needs regularly.
Assess how well the outsourcing agreement responds to changes in demand, market conditions and business priorities.
Finally, seal the deal by evaluating the outsourcing partner’s capacity to manage risks such as disruptions, data security and regulatory compliance.
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Logistics Onboarding
Once you’ve found the ideal logistics provider for your company and both parties have signed a binding document, a good 3PL will get you immediately into onboarding. Here are the steps to begin outsourcing:
- Build an onboarding schedule right up to the arrival of products at your logistics partner’s warehouse. For instance, a comfortable schedule for shared stocking is 60 days.
- Establish contacts and processes for accounts payable and accounts receivable.
- Define delivery of expected inventory down to SKU details (from you to 3PL). This step allows your provider to design storage layouts before a box is delivered.
- Conduct weekly update calls to hold everyone accountable to the execution deadline.
- Arrange a transfer date for inventory, corresponding to viable suspension of operations. In an ideal scenario, begin by relocating extra inventory so you can keep fulfilling orders from another location.
- When you approach the end of your stock, your 3PL may quickly move the leftover goods ahead. This handover is incredibly convenient if your provider has an in-house transportation operation to handle the movements for you.
- Share the updated shipping locations with your clients so that orders are picked up at the new location rather than the previous one.
Should You Outsource?
While outsourcing logistics services might be a great way to lighten the workload and boost profitability, it may not always produce the greatest outcomes, adding more money and time waste than procedural improvement.
The dialogue around logistics has shifted from Should I outsource? to How much should I outsource?
Knowing which supply chain processes to outsource and to whom is crucial because mistakes can cost you.
How to choose a 3PL service
Creating an RFP (request for proposal) is a great way to assess possible 3PLs, analyze their skills and find the best fit for your company’s needs.
The most critical part of your RFP is that it contains all the essential information.
Use the following parameters to assess companies:
- Experience in the industry
- The type of industries they serve
- Consumer insights and testimonials
- Improvement and upscaling efforts
- Degree of specialized knowledge
Do you need to outsource logistics?
Nothing beats thorough user research and internal analysis to determine whether you could benefit from a 3PL partnership. The following internal questions can guide you further:
- Are you scaling up or down structurally and strategically?
- Are logistics costs weighing you down?
- Are you entering a new business territory, market or customer segment?
- Does any area of your supply chain repeatedly return errors?
- Is tackling logistics keeping you away from core business processes?
- Can the 3PL report on and hold itself accountable for the most critical KPIs of your company?
- Does your service provider’s company culture align with yours?
- How well does the 3PL handle demand spikes?
- How quickly can the 3PL integrate systems?
Next Steps
It might be challenging to decide whether to outsource logistics. But it’s becoming more difficult to do it alone due to fluctuating freight prices, increasing eCommerce, shifting regulations and the continual barrage of new technologies.
Thankfully, newer technologies unlock a host of benefits.
Get a headstart on delegating logistics by first assessing your software needs with our free requirements template.
Outsourcing yet? Tell us about your experience with 3PLs in the comments!