A fairly complex topic. We aim to answer the questions – what, why, when, and how.
What does logistics outsourcing mean?
In the past, for years people did things in one particular way. Companies managed their own production, transportation and logistics, all in house. Now a days, it has become more common for companies to seek out for a third-party logistics provider.
Now a days outsourcing to third party logistics providers (3PLs) is a fairly standard practice across many businesses. There are plenty of logistics operations of a company that can be taken up by a 3PL. Few core services a 3PL may provide are:
These are just some basic services. There are many more.
Why outsource logistics?
There are many reasons to outsource logistics for your company. The primary reason being cost, for most companies. Naturally, businesses are always looking to save money and maximizing profit. Having said that, there are more reasons to outsource.
Logistics is not a cheap venture. It requires lot of capital investment. By hiring a 3PL, companies eliminate numerous costs. For instance, a 3PL has its own equipment and labor force. You can save employee and maintenance costs through these two areas alone.
Access to technology
Technology is ever evolving and rapidly so, even in logistics. A 3PL that specializes in logistics will be at the forefront of those evolving technologies, they need technology to be effective. Technology comes in many forms. For instance:
TMS (transportation management system)
Fleet management software
Each firm needs to focus on their USP. Production and relationship with customers takes precedence. And because one needs to focus on these areas, ability to also stay on the cutting edge of logistics technology usually gets compromised.
3PL can help with customer relationship as well. When we hire a 3PL, we look at a long-term solution for your firm. Usually a company’s branding is adopted when dealing with customers. This includes logo, uniforms etc. A 3PL performing at a high level representing ones brand positively affects ones customer relationship.
On the other hand when we hire a transportation broker, he only represents himself. So the focus is solely on getting freight from Point A to Point B. Whereas, a 3PL stands to benefit from a positive relationship with the customer.
3PLs are designed to adjust as per customer requirements. For instance, assuming that the demand for a company’s product has increased significantly. A 3PL usually has the right infrastructure to manage the demand. Whereas when one is handling this alone as a company, one is open to sunk costs.
For example, one might buy additional equipment to meet the increased demand. However, if that demand is seasonal or temporary one will end up paying for equipment which the company won’t be using – a fast ticket to profit loss.
When should outsourcing of logistics make sense to a company?
It should be understood that outsourcing doesn’t make sense for everyone.
One of the easiest measures to consider 3PL is company’s growth. As a young startup company, it is easier to handle everything in house. As the firm grows bigger they need to focus on their key tasks: namely, whatever they are producing. This causes difficulties to stay ahead of the curve in logistics. The moment business outgrows capabilities, one should outsource.
How Does Logistics Outsourcing Work?
Once the decision to outsource to a 3PL is made, one needs to know that there are several 3PL options. Research the 3PL companies available. There are a range of services offered. A checklist is required of exactly what services one needs help with.
Next is to find out what a 3PL’s long-term goals and vision are. Alignment of goals and visions of both 3PL and the firm are essential. There needs to be a long-term arrangement for a 3PL to be effective. A long-term association is required to see cost saving benefits.
However, it is still your responsibility!
Outsourcing logistics to a 3PL doesn’t absolve one of responsibility. Ultimately, one is still in charge of ones business. The firm and the 3PL should be working in tandem. Trust the 3PL to do their work rightly, but still stay in control as it is your company and you are responsible for satisfaction of your clients.It’s a full-blown commitment, therefore choose the 3PL carefully.