A Growing Reliance on Outsourcing Warrants a Change in Logistics Management

Greg Aimi, Supply Chain Research Director, Gartner [NYSE: IT]
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Greg Aimi, Supply Chain Research Director, Gartner [NYSE: IT]

Your company’s performance is most likely becoming more dependent on third-party logistics (3PL) providers as the demand for logistics outsourcing grows. This dependence mandates a change in the role of today’s logistics professional from a master of execution to a master of orchestration.

Aggregate global revenue for the 3PL sector continues to rise and more shippers are increasing their use of 3PL services. To sustain this trend, the role and responsibilities of the corporate logistics professional must change, moving from an internal execution focus toward orchestrating and managing outside parties. Logistics outsourcing contracts and relationships, performance management, and governance need to become core competencies.

The overall market for the U.S. 3PL providers has surpassed $116 billion after six consecutive years of expansion. In line with that growth, two-thirds of shippers plan to increase their use of outsourced logistics services, as opposed to keeping logistics functions in-house (26 percent). Several factors are driving continued growth in logistics outsourcing:

• Outsourcing continues to save companies money, with an average logistics cost reduction of 9 percent. In addition, 3PL providers continue to invest in technologies like Radio-Frequency Identification (RFID), Customer Relationship Management systems (CRM), and mobile technologies, closing the IT gap in the process.

• The complexity of operating today’s advanced value chain networks requires increased knowledge and capabilities as companies try to balance inventories with demand across a much more complicated global supply chain network. Specialized competency is imperative. Increased reliance on outside experts to navigate the complexity is necessary, considering the internal supply chain talent issues.

• Outsourcing continues to gain acceptance in the C-level suite, as companies now consider 3PLs for a multitude of non-traditional business functions such as customer service, managed IT systems, manufacturing assembly, and packaging.

  ​Logistics outsourcing contracts and relationships, performance management, and governance need to become core competencies   

Although a majority of companies are increasing their use of logistics outsourcing, 53 percent of them also maintain they are reducing or consolidating the number of 3PLs they use. Most companies desire to consolidate their portfolio of logistics providers by using more services, wider geographical reach, and specialized capabilities from a smaller set of 3PLs. Logistics providers are responding to this trend in customer demand by expanding the breadth of logistics services they offer, as well as their geographic availability. There has been an increase in mergers and acquisitions over the past 10 to 15 years as 3PLs attack this challenge.

Logistics professionals need to know how to assemble and evaluate the right set of providers that can deliver the needs of the organization globally, which can be challenging given the current state of evolution in the 3PLs industry. They want their 3PLs to possess cultural qualities that align with their own, and an operating mentality that puts the customer’s business objectives first.

I recommend establishing talent management strategies that nurture the skills required to manage external partners. Senior logistics professionals must manage relationships and facilitate collaboration between internal operations and 3PLs, which requires different skills than managing an internal logistics function.

Consider having your own cloud-based logistics information capability that allows all third parties operating on your behalf to participate and provide real-time data about the execution of your supply chain. Use this system to monitor and control logistics processes across providers and to help integrate logistics knowledge, as necessary, upstream and downstream within the company. Alternatively, consider outsourcing this system and management requirement to a trusted third party, acting as a fourth-party logistics (4PL) or lead logistics provider (LLP) on your behalf. Be aware of the advantage this gives the single provider and the risks of not having ownership of your critical logistics information system, especially if the provider fails to meet expectations.

Logistics professionals should evaluate the following additional capabilities, qualities, and characteristics when determining the right 3PLs to work with:

• Do they provide consistent excellence in the execution of the basic logistics functions?

• Are they proactive in service failure detection?

• Do they have pre-planned issue resolution procedures?

• Do they deliver a seamless experience to the customer, regardless of which internal 3PL division is providing the specific service?

• Do they offer more end-to-end process improvements by integrating across traditionally disjointed functions?

• Do they develop and maintain integrated systems and technology with standardized interfaces across the spectrum of services and across regions? Are they devoted to simplifying the process of integration maintenance for the customer?

• Do they provide extreme responsiveness at the local team level and have decision power to act quickly on behalf of customer needs? Is this supported by a corporate management structure that provides local needs when they span the corporate resources or when needs are outside of regular policy?

• Do they offer proactive innovation, share the advances achieved with other customers, and bring industry solutions to the company that they may not be able to accomplish on their own?

Logistics professionals should resist the traditional approach to “procure” logistics services as commodity transactions, especially when the 3PL is intended to design, manage, and improve processes. Shift beyond functional excellence to include strategic alignment, opportunities to achieve desired business outcomes, and fit with company culture.

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