Myths of Logistics Outsourcing: Part II
This two-part guest column has been written in collaboration with
Vivek Sood, Chris Merritt, Don Cooper & Rob Sayre
Outsourcing Logistics Limits One's Risk Exposure
o The senior management and the Board of Directors is usually very clear about their responsibility and obligations for the acts of their managers, servants and all their agents including contractors. However, for some reason the vague belief still persists that if the 3PL makes errors related to performance, security or environmental regulations, or even commercial decisions, the risk is borne entirely by the 3PL and that the party that outsourced the logistics operations is absolved of accountability as a result. However, not just the law, but the prevailing customs and practices too, point to a different reality.
o Even if you have outsourced the logistics operations, your customers will still hold you responsible, and possibly invoke penalty clauses if they don’t receive the product within the contracted time. In case of spillage of dangerous or hazardous products the authorities will trace the responsibility back to the seller of the product. Compliance with regulatory and security measures continues to be the seller’s responsibility, no matter who this is delegated to.
o In most cases, the damage to brand, relationships, reputation with authorities, and even bottom line will be borne by the organization outsourcing the logistics – much more than by the outsourced logistics contractor. Since Logistics is a very strategic - even if non-core function - any failures on this front could directly impact customer satisfaction, which might take months or years to recover from ... and this applies no matter how big the contracted logistics firm is, and no matter how much insurance they carry!
Outsourced Logistics is a Win-Win Partnership
o While all the multi-varied benefits of Logistics Outsourcing are very real - whether relating to reduction of costs, increased focus on core competencies or increased quality of service levels to the end-user - it rarely leads to a true 'win-win' partnership. A real partnership, by its very nature, is defined by co-dependence where the relationship is indispensable to both parties, as judged by a measure of how much each party would hurt if the relationship fell apart. The truth, in most case of outsourcing, is that this pain is not too much on either side, as in most cases one of the parties is in the high-pressure sales mode, while the other is trying to maneuver their way to getting the better deal!
o Most 3PLs like to bid for long-term contracts, but their customers today are wary about getting tied into long-term agreements despite the value added services being offered by 3PLs. Since the 3PLs have an asset-intensive model, they cannot afford to rely only on their existing customers for business, and have to develop contingency plans to optimize their asset utilization.
o Even from the customer’s perspective, the increasing modularization of the supply chains has commoditized most of the services provided by 3PLs, despite all the hype surrounding technology integration, business process integration and logistics infrastructure integration. And this is true regardless of the scale or size of the service providers. Finally, even if it were a true win-win partnership - just as within a dancing pair one partner takes the lead to improve the joint performance - it is preferable that the lead be taken by the customer whose business is at stake. Corporations should relinquish the lead to the 3PL only at their own peril!
The tighter the Contract, the healthier your Bottom-Line
o The final and the most persistent myth is that you can have a detailed logistics contract stitched up, which will help you to squeeze every last penny out of your logistics supply chain and thus improve your bottom line.
o While it is essential that contracts are specific and explicit in terms of the tasks, responsibilities and commercial terms, it is the rare business whose logistics requirements do not change from year to year, month to month and day to day. All these variations can be neither foreseen, nor incorporated in a contract, as this is a highly dynamic and fast-changing business environment.
o So where then lies the solution? While the contract is very important, as is the integration process and the relationship management tool kit, the most important element is the selection of the 3PL: An outsourced logistics provider who exhibits a true spirit of service and possesses the flexibility to meet changing needs will go much further than a merely a tight contract in creating and sustaining a mutually beneficial relationship!
About the co-authors of this two-part post:
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).
