3PL: Outsourcing Logistics Services

Nowadays, many companies that want to reduce their operational costs choose to outsource all or parts of their supply chain to an external company. Thus, although this trend may prove to be a very interesting choice for some companies, entrusting this precious link to an external firm may, however, be a bad choice for others. A meticulous examination of your individual situation is therefore necessary in order to make the right choice. 

Why outsource? 

The reduction of operating costs, the gain in flexibility and the ability to concentrate human and financial resources mainly by increasing the value added for the company are the main reasons why today’s companies are outsourcing certain functions, including distribution and warehousing. Indeed, the high capital investments and specialized skills required by the logistics function propel them to second place in the list of the most frequently outsourced functions, according to a study by Ernst & Young. [1] 

When to outsource? 

Before embarking on any outsourcing process, it is imperative to ensure that this decision will add value to the company and will not generate any loss of know-how internally. Thus, in general, it’s needed to avoid outsourcing a department or service if it represents a strategic lever for the company and if the people working there have developed special skills. Conversely, outsourcing will be considered if the department or service in question adds no value to the product and if a specialized firm could take over this aspect of the supply chain more efficiently and cheaply. In addition, temporary outsourcing may be useful for a young start-up company that does not have a lot of financial capital, or just for a company that is seasonal. 

Risks related to outsourcing 

Although outsourcing has a lot of economic and operational benefits, a bad choice of outsourcing can be extremely risky for the company in question. In fact, the main risks associated with this practice are the creation of a non-arm’s length relationship with the service provider, the loss of internal skills related to the outsourced function, the risk of the service provider’s failure as well as the inherent differences to this service. 

Nevertheless, it is possible to protect from these potential risks by drafting a contract that will make possible to define both the expectations of the outsourced company and all the obligations that must be respected by the chosen provider throughout the duration of the contract. In the medium or long term, this contract is strategic because it will become the only way to ensure continuity in the performance of the provider who will incur costly penalties in case of non-compliance of his share of obligations. 

Also, the outsourced company will have to maintain a harmonious relationship with its service providers and keep an open and frank dialogue to maximize the quality of its outsourced operations. Thus, it is only once all these conditions are unified together that a company will reduce its risks and can thus take full advantage of the benefits of outsourcing, this of course if it has previously weighed well the counter depending on its situation. 

[1] Ernst & Young Outsourcing Barometer, 2002