By Clifford F. Lynch
Logistics Management, February 2002
There are almost as many reasons
for outsourcing as there are firms who do it, but in a broad sense, most
companies outsource for the same basic reasons.
To many of these, operating costs
will be the most important consideration. Surveys
conducted on the reasons for outsourcing almost always find cost/price to be in
the top three determinants. A 2001 survey by J. P. Morgan Securities found that price was
among the leading factors in choosing a logistics service provider.
The Cap Gemini/Ernst & Young
2001 Third Party Logistics Study reported that 63% of the firms that do not
outsource refrain from doing so because their costs will not be reduced.
This attitude has been encouraged
by the providers themselves who advertise, sometimes inaccurately, that “we
can do it cheaper”.
There is general acceptance of
the fact that outsourcing allows the user firm to improve its return on assets.
By reducing the significant investments in technology, warehouse
facilities, and expensive equipment, returns can be enhanced significantly.
The capital can be invested in those ventures that are part of the core
competencies or basic businesses of the user firms.
Even so, many potential
outsourcers will expect, in addition to capital savings, reductions in operating
costs, as well. Obviously, this is
important and is often the case; but the sophisticated firm sometimes will find
this not to be true. If a company
has an efficient, well-managed distribution system, outsourcing that system may
not reduce operating costs. Subcontracting,
however, may add to the value of the system.
While the absolute dollars spent may be more, the value received can more
than offset the premium.
There are several examples of
value that can be added to an already efficient, cost-effective logistics
network. “Just In Time”
techniques have been utilized in the automotive industry for a number of years,
and many of the associated functions have been performed by outside providers.
One such firm dispatches trucks to its clients’ parts suppliers where
the parts are collected and delivered to a cross dock.
From here shipments are consolidated and shipped to twelve different
assembly plants in North America. The
parts are never warehoused or inventoried at the plants.
In the grocery industry,
Collaborative Planning, Forecasting and Replenishment, or CPFR, links customer
demand with replenishment scheduling. This
joint planning, if successful, can lead to a smooth flow of products through the
entire length of the pipeline.
Designed to reduce inventories in
the system, these techniques result in smaller, more frequent shipments.
Rather than handle these from their own facilities, grocery manufacturers
have turned to the contract logistics companies.
With a multiple client base and sophisticated systems, the providers are
able to combine these smaller shipments into truckloads, reducing freight and
handling costs, as well as enhancing the entire process.
Perhaps the most important value
that has been added to the outsourcing offerings in recent years is that of
information technology. For many
firms the increasing demands for new information systems, resources, and
real-time visibility to products and orders often can be met more efficiently
Today there are firms that can
assist in identifying logistics problems and provide integrated, end-to-end
supply chain technology solutions. In
many cases, some costs can be reduced, but most important, the outsourcing firm
is able to obtain a technology capability that would be impossible to implement
Obviously in outsourcing some
value is added through cost reductions, but the knowledgeable logistics manager
will look beyond this to the total gains in customer service, information, and
A Mercedes costs more than a
Ford, but that does not necessarily make it a bad investment.
F. Lynch is
principal of C. F. Lynch & Associates, a provider of logistics management
advisory services, and author of Logistics Outsourcing – A Management Guide.
He can be found at www.cflynch.com.