Shippers expect to spend more on outsourcing supply chain and logistics in the coming years as the functions grow in complexity. But how do organizations decide which operations to outsource and which to keep in-house, and what are some of the risks underlying those decisions?
At this point, outsourcing of logistics services has become mainstream, as evidenced by the $213.5 billion U.S. 3PL market, according to Armstrong & Associates estimates. In an October 2019 study from Gartner, 85% of respondents said they expected to boost their logistics outsourcing budget by 5% for 2020, on top of a similar increase in 2019.
"The question no longer is whether to outsource, but what and how much to outsource," Courtney Rogerson, senior principal analyst with the Gartner Supply Chain Practice and one of the authors of the study, told Supply Chain Dive. "Evaluating different outsourcing strategies has become a priority for logistics leaders."
More than half the respondent companies currently outsource managed transportation services, domestic transportation brokerage and warehousing, fulfillment and contract logistics services. In the survey, 35% said they currently use a 4PL and 42% said they are considering using one in the future.
"The question no longer is whether to outsource, but what and how much to outsource."
Senior Principal Analyst, Gartner Supply Chain Practice
The expected increase in outsourcing reflects the growing complexity of logistics due to emerging technologies, increasing customer expectations and the ongoing quest to do more with less spend. It may be less expensive to outsource fulfillment to gear up for a new e-commerce channel rather than investing in personnel, warehouse space and picking and packing technology. A vendor may have lower staffing overhead for low-skill jobs as well.
The reason for rising investment in outsourcing? It seems to work. About 70% of the survey respondents agreed that logistics outsourcing to vendors helps them meet functional, end-to-end supply chain and business objectives.
Strategic vision drives outsourcing decisions
Outsourcing may have developed a bad reputation over the years because it's been associated with job losses or substandard performance, noted Chris Craighead, a professor of supply chain management at the University of Tennessee. But done right, outsourcing can be a critical strategic decision.
Organizations should view outsourcing at two levels, Craighead told Supply Chain Dive. First is monitored outsourcing, which is the traditional form in which production or service is contracted out to suppliers with infrequent performance evaluations. Using an offshore vendor to manufacture a component for a larger automotive assembly is a typical example.
Orchestrated outsourcing is more common in logistics, where businesses require close coordination with a supplier who has a core competency in a particular discipline. A 3PL is a common orchestrated relationship, in which the provider is part of the day-to-day operations with frequent communications.
As a company moves along the spectrum from monitored to orchestrated outsourcing to insourcing, control increases, but so does the need for management oversight. Many companies use a hybrid approach with a mix of monitored and orchestrated relationships.
"With orchestrated outsourcing, the shipper will closely manage that relationship, because it's part of a bigger strategy," Craighead said.
The companies that receive the most benefits from outsourcing are those who know themselves well.
"When I talk with customers, the conversation always flows around what is core to their business, and when you look within the supply chain, every shipper is different," Joe Carlier, senior vice president of sales at Penske Logistics, told Supply Chain Dive.
Outsourcing opportunities for consumer package goods companies would be different than automotive manufacturers. For one vertical, the movement of freight from manufacturer to distribution may be an afterthought, while in another industry, it's a core competency. Some grocery stores, for example, operate their own trucks and distribution centers while also relying on vendors to stock shelves with soda and potato chips. Online-only retailers such as subscription box companies outsource fulfillment while they concentrate on customer acquisition and product curation. Even within industries, each company has its own way of doing business.
"You look at Ford and GM and Toyota, they all produce cars, but each of them runs their company entirely differently," Carlier said. Toyota's just-in-time vertically integrated manufacturing and assembly process cuts material handling costs compared to the outsource-heavy Ford and GM model.
What's the best fit for outsourcing?
To develop an outsourcing strategy, companies should identify gaps in their current performance and look for solutions in the market to fill those gaps.
Rogerson identified four categories to consider: people and talent, process improvement and innovation, technology and corporate culture.
"For those organizations that have some hesitancy to give up control, we see that those outsourcing engagements don't go as well as they could," Rogerson said.
In the Gartner survey, the top three priorities for outsourcing were updating technology systems, increasing speed to customers and improving visibility.
Any process that's easily definable and routine is ripe for outsourcing. "If you have a steady volume or commodity mix or SKU mix, those activities tend to be easier to outsource," Rogerson said.
Companies should look to outsource activities that aren't core to the business and maintain control over mission-critical parts of the business. A classic non-core example is a cafeteria at a manufacturing plant.
"Do you want to run a restaurant as part of your business? Probably not," Craighead said. "But you can't ignore it. You have to monitor it and see how they're doing."
"If you have a steady volume or commodity mix or SKU mix, those activities tend to be easier to outsource."
Senior Principal Analyst, Gartner Supply Chain Practice
But more than merely outsourcing for lower cost, company should look for partners that provide a higher level of value in critical areas where they have expertise.
"A lot of companies are looking for responsiveness and agility, and there are very few companies that can do that by themselves," Craighead said.
Rapid technological advancements, from robots in warehouses to connected trucks and trailers to warehouse and transportation management systems, are leading companies to look for partners who can help them stay ahead of the curve. For example, Penske uses robotic process automation and is developing expertise in electric trucks and blockchain at level an individual company couldn't match.
"Is it easier for a shipper, based on where their technology budgets and skill sets are, to do that? Or, is it easier for a 3PL?" Carlier said. "There are so many new technologies out there, leading senior executives are looking at their supply chains differently."
Culture for change
A company's culture of control and appetite for change can be a useful guide for outsourcing decisions.
A shipper may decide to implement a transportation or warehouse management system on its own, underestimating the internal resources and change management required to install the system and receive the expected benefits. The shipper may need extensive information technology development so all the systems will communicate. Then managers realize they don't have the in-house capabilities they need.
"Companies often make those decisions without really thinking through what are the material impacts to their day-to-day operations," Carlier said.
Manage the risks
While outsourcing could lead to obvious external risks, the real dangers lie within the company's four walls. The company is ultimately responsible for the customer experience and its own brand reputation.
In the case of tainted products or a product recall, the brand bears the blame in the mind of consumers and media. The massive Takata airbag recall affected most major auto manufacturers. Consumers don't necessarily know what Takata is; they just know their Honda or BMW had to return to the dealer for repair.
"To some degree, you're responsible for the actions and inactions of your outsource partner," Craighead said.
But the risks can go deeper than that. A company may outsource too many core activities, leaving it strategically hollow. It's easy to become complacent and lose sight of how operations are managed.
"You're responsible for the actions and inactions of your outsource partner."
Professor of Supply Chain Management, University of Tennessee
"The secret sauce is in the orchestration part, so when you do outsource, it's how you orchestrate and work with those partners that really makes the difference in performance," Craighead said.
Just because a company decides to outsource, it can't forsake all of the managerial work oversight for a function. Instead, most companies maintain some form of in-house control through a hybrid outsourcing strategy.
"They must preserve enough internal logistics expertise to support those key business decisions and guide the direction of their 3PL partners," Rogerson said. "A lot of times, the risk is around becoming complacent and losing sight of how operations are managed."