7 Myths of Logistics Outsourcing
During the last 30 years, as logistics outsourcing has become a mainstream activity many myths have accumulated around the business. This article explores and explodes 7 popular myths.
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1. If it does not work you can always bring it back in
This myth pervades thinking in some executive circles based on the assumption that the decision to outsource or insource can be easily implemented. In most cases that is far from the reality. Outsourcing is a strategy not a tactic. You are making a multi year commitment, not only because of the contract, but to make the financial reasoning work – you have to unload PP&E, systems and people you have built up over time.
To insource, you will have to recreate the infrastructure, which is a large undertaking, in a shorter period of time. This is often a bigger, and more difficult to implement, decision the going out in the first place.
2. The smartest people in the game work in 3PLs
This myth and the next myth are really reverse of one another. This one has roots in the early days of transportation and warehousing when finance, sales and marketing were the stars of every corporation, and warehousing and stores were perhaps the doghouses. The saying was that ‘if he (and mostly, if was a he) can count, send him to the warehouse. He cannot do much damage there.’ 3PLs traded off on this type of reputation by claiming that they had the scale, career progression opportunities, core functional focus, brand and the cachet to attract the best and brightest – which internal supply chain departments could not. The reality is very different now. In our experience, there are good people on both sides of the fence, and they keep jumping across from time to time.
3. The smartest people in the game work on the customer side
Opposite of the above myth, and perhaps partly to counter it, was a more recent myth that 3PLs do not offer job satisfaction, control, and holistic view of the business that a corporation offers. The current saying in corporate logistics circles is that ‘those who can – do; and those who cannot – work for 3PLs’. Again, this is equally apocryphal, we can think of many great logisticians who make a career as logistics service providers, greatly enjoy it and maintain a fairly broad and deep dialogue with executives from all walks of life.
4. Once you outsource, you can relax and let them handle all the work
This is perhaps the most pervasive myth in the higher echelons of the corporate circles. Even some of the most astute business executives believe the hype that once they outsource the logistics function (generally considered non-core), they can leave it all to the service provider/s. The reality is far from this. Putting together an outsourcing arrangement does not hand over your problem to 3PL, rather you replace one set of problems with another – internal logistics management problems with logistics relationship management problems. While this topic calls for an article in itself, we will confine the discussion here to some of the problems likely to surface only after outsourcing begins. Surprises such as cost creep, technical ability not as per expectations, inflexibility to incorporate changing business needs, additional (potentially very high) charge out for minor (and low cost) activities that might have been assumed to be included but in fact were not included in the contract, loss of real visibility, control and direction are some of the problems often cited in this context.
5. It’s an equal win-win partnership
This is another pervasive myth – often perpetuated by 3PL organizations. A real partnership, by its very nature, is defined by co-dependence where the relationship means a lot to both parties. The test here could be how much each party would hurt if the relationship falls apart. The truth, in most case of outsourcing, is not much.
Most 3PLs have a multitude of customers and keep bidding for every 3-5 years for work with those customers. Moreover, most 3PLs have learnt not to rely on just a few customers for their business, for obvious reasons. Even if a few customers pulled out, 3PLs would normally have contingency plans to optimize their asset utilization.
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
6. Your logistics service provider is responsible for their own mistakes
Most directors and officers are clear about their responsibility and obligations for the acts of their managers, servants and contractors. However, for some reason the a vague belief still persists that if the 3PL makes a mistake related to performance,
security, environment, health or even commercial decision making they will be responsible, and the customer will not suffer as a result. Not only the law, but also the custom and practice, point to a different reality.
Your customers will blame you first if they don’t get the product in time. The authorities will trace back the owner of the product in case of spillage of dangerous products. Compliance with regulatory and security measures is your responsibility, no matter who you delegate it to. In most cases, the damage to brand, relationships, reputation with authorities, and even bottom line will be borne by the customer – much more than by the contractor. And this applies no matter how big is the contracting firm, and how much insurance they carry.
7. Lock it in a contract and squeeze the last penny out of your 3PL
The final, and the most persistent, myth is that you can have an ideal logistics contract stitched up, trying to squeeze the last penny out of your logistics service provider. While it is essential that contracts are specific and explicit in terms of the tasks and terms, there is a rare business whose logistics task does not change from year to year, month to month and day to day. All these variations can neither be foreseen, not incorporated in a contract.
While, the usual answer to the problem – partnership is also a myth (as discussed above), a spirit of service in a flexible manner goes a long way to create and sustain such relationships because essentially a 3PL outsourcing arrangement is a service contract within a highly dynamic business environment. The contract is very important, the integration process is also important, the relationship management tool kit is also important, but the most important thing is selection of the 3PL with right attitude across the company (not just in the key salespeople, or account managers).
About the Authors
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
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