By Clifford F. Lynch
Memphis Business Journal, April 4 - 10, 2003
A continuing, successful trend in the supply chain industry is the practice
of outsourcing various logistics functions to qualified logistics service
Logistics outsourcing is growing at the rate of 15 % annually. But with the
slowdown in the economy and the recent bankruptcies and fiscal irresponsibility
of several large U.S. firms, companies contemplating outsourcing are becoming
more concerned about the health of logistics service providers.
While not as widely publicized as the Enron, Tyco and World Com problems, the
third party industry has seen its share of financial difficulties. Many of todayís
outsourcing contracts are quite large, and firms are finding, sometimes the hard
way, that some providers simply to not have adequate financial resources.
A recent example is the recent bankruptcy of Computrex, a large freight bill
audit and payment firm, which left its clients liable for as much as $25 million
in unpaid freight bills. Shippers had already paid many of those bills, but they
may have to pay them again because freight payment companies are agents of the
shipper, and the payment obligation is not met until the carriers receive the
I believe that the industry is, for the most part, financially stable. Such
isolated failures should not taint the industry any more than the problems of
Kmart should spell doom for all retailers. But these occurrences do demonstrate
the importance of conducting thorough financial due diligence when selecting a
This can be a relatively straightforward matter if you need to investigate a
provider that is publicly held, such as FedEx or UPS. But most providers are
privately held and there is a reluctance, if not absolute refusal, on the part
of many owners to reveal financial information.
The cost of an outsourcing start-up can be quite high, particularly in the
information technology area. The value of many of the products being handled is
quite high as well, and an undercapitalized provider can find itself in trouble
It is absolutely critical that the outsourcing firm satisfy itself of the
providerís financial stability before a contract is signed. Some providers
will furnish serious prospects with audited financial statements before the
final agreement and every year thereafter. Others provide banking information,
which sometimes can be helpful but is not always an absolute indicator of
While there will always be some risk in outsourcing, there are a number of
steps that can be taken to minimize an outsourcing firmís financial exposure.
∑ Insist on inspecting audited financial
∑ Make sure the statements are examined
by qualified financial personnel of the prospective client.
∑ Investigate the reputation of the
auditing firm used by the provider.
∑ If funds are to be advanced, such as
in the freight payment business, be sure that funds are not co-mingled. Also
find out what types of investments are made (with your money) by the provider.
∑ Determine if bond coverage is
available. If so, make sure that bonds adequately cover the risks. Some
coverage, for instance, applies only in the event of theft or conversion.
∑ Explore the possibility of
establishing minimum limits on financial assets. In other words, an outsourcing
firm may decide it will not enter into a relationship with a provider that does
not meet a certain net worth threshold.
∑ Consider awarding contracts only if
the total value of the contract is below a certain percentage of the providerís
total revenue. An LSP should not be too reliant on one or two clients.
Whatever methods are used, thorough financial due diligence must be at the
top of the list when qualifying potential providers. Todayís supply chain
initiatives are complex and expensive and should be considered with the same
care as any other large financial transaction of a firm.