Myths of Logistics Outsourcing: Part I

This guest column has been written in collaboration with
Vivek Sood, Chris Merritt, Don Cooper & Rob Sayre

Introduction

o Since starting in a big way around the mid-seventies logistics outsourcing has come a long way. While most companies are outsourcing at least some part of their total logistics – whether transportation or warehousing or value added logistics services - we can already see some companies that are outsourcing their entire logistics operations!

o However 3PLs who earlier led the way in logistics outsourcing have somehow failed to move beyond their core commodity services, leading to poor branding and fragmentation of the 3PL sector. During the last 30 years, while logistics outsourcing has become a mainstream activity, many myths have mushroomed around the business.

o This collaborative article explores and explodes some of the most pervasive myths.

Myth 1:
If the outsourcing is unsuccessful, the activity can always return to the fold

o This myth is based on the assumption that the decision to outsource can not only be easily implemented, but also easily reversed! In most cases this is far from true. Outsourcing is a strategy not a tactic. Since this only makes financial sense if it is a multi-year commitment, the company outsourcing has to dismantle the processes, systems and human resources that have been built up over time. To reverse the outsourcing decision, not only must the infrastructure be recreated, which is a huge undertaking, but this will have to be done rapidly to preserve business continuity, which may not be possible in the short time period available. Thus the subsequent insourcing is often a far bigger, and more difficult to implement decision than the initial outsourcing!

Myth 2:
The smartest people actually work .... on my side of the fence!

o While corporations claim that the smartest logistics personnel work with them, the 3PLs claim that the reverse is true! Though the 3PL business has contributed greatly to the global economy, they have not done too well for themselves, as they have not been able to drive business efficiencies as well as they would like to have done. This has led to the contemporary expression in corporate circles that ‘those who can – do; and those who cannot – work for 3PLs' thereby implying that the smartest people work within corporations who are customers of the 3PLs, and not with the 3PLs! However it is an absolute myth that 3PLs no longer offer the job satisfaction, control, and the holistic view of the business that a corporation can offer. In these risk-averse times, customers demand that their account be handled by managers having industry experience in verticals relevant to their business to ensure rapid implementations and ROI, so the 3PLs have no choice but to get in high-quality industry specialists specific to the domains of their major customers.

o The 3PLs on the other hand perpetuate the myth that unlike them, most corporations cannot offer the scale, career progression opportunities, core functional focus, brand and the cachet to attract the best and the brightest logistics and supply chain personnel! This myth has its 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 equivalent of the doghouses. The adage heard in corporate circles in those times was that if the logistics executive can count, send the person to the warehouse; the executive cannot do much damage there.’ Of course the reality is very different today. In our experience, there are today excellent people on both sides of the fence (and they also keep changing sides from time to time!).

Myth 3:
Once the function is outsourced, we can forget about it and get back to work

o Perhaps the most pervasive myth in upper management circles today is the belief that once they outsource the logistics function to the 3PL (generally considered non-core), they can stop worrying about the outsourced functions. However in reality, this can be dangerous. Putting together an outsourcing arrangement does not transfer your core issues to the 3PL. Rather, you swap one set of problems with another: you swap internal logistics management problems with logistics relationship management problems!

o While this topic calls for an entire article by itself, let’s look at some of the problems likely to surface after outsourcing begins: Unpleasant surprises - such as cost creep, technical expertise being lower than expected, lack of flexibility to incorporate changing business needs, potentially large cost over-runs on account of services that were assumed to be included in the service contract but were not, loss of real visibility, control and direction - are just some of the problems often seen in this context.

o The fact is that even after the outsourcing, your management will still be working just as hard on the outsourced functions, the sole difference being that the time they save on the management of the outsourced functions will now be spent in managing the relationship, with some relationships even degenerating into games of contract head-butting and variations management for which both the IT outsourcing and the building construction industry are becoming notorious.

Part II of this article will be up on July 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

About the co-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

Chris Merritt: Former COO of Liberty Medical, Chris now consults to the ecommerce and retail sector. More information on Chris is available on www.linkedin.com/in/ChrisMerritt

Don Cooper: Has worked as Senior Director, Project Management for DHL and Exel with over 15 years experience working with Fortune 50 companies and proven ability to lead complex, strategic, and tactical projects.

Rob Sayre: Director of Supply Chain Strategy for Life Fitness (July ‘07), worked as Sr. Manager for Supply Chain Operations at Life Fitness, Outsourcing Manager for North America at Philips Lighting Electronics, a certified Six Sigma Black Belt for Philips, International Business Analyst for Philips, International Manager of Logistics for C. H. Robinson (a 3PL).