Supply Chain

Logistic Outsourcing (E)

What is the benefit of outsourcing of certain segments of business? What is the power of outsourcing for the company and the logistic agent?

Posted: Feb 2012

Logistic Outsourcing Concept

Logistic is important segment of every market oriented company. First of all, it is the extended hand of the company that reaches the customer, and delivers the product. Having the customer at the center of activities, it is important to maintain adequate service level.

Secondly, logistic is the significant contributor to the overall company’s cost. Logistic is expensive segment of the business, especially to the companies that possess bulky products with relatively small value ( beverages ).

Considering these two factors, it is important to keep the balance between service to the market and related costs. This implies that service need to be continuously improved, while costs need to be as lower as possible, without jeopardizing the service.

This is a huge demand and stress to the company. Constantly increasing of service level combined with optimizing the costs is possible only with continuous improvement of processes and application of modern technologies.

Logistic outsourcing is one of the methods of increasing organizational efficiency. Since logistics is bulky part of the business, its outsourcing can simplify activities related to repetitive operations.

The resources of the companies that are released from operative activities can be redirected to development and improvement of processes. Still, the company that outsourcers the logistic need to take care about negative and positive aspects,

Benefits of Logistics Outsourcing

Benefits of logistic outsourcing are recognized through opportunity of the company to shift from operative work to development, planning and process design activities. Outsourcing brings different benefits:

Variabile costs – Pay per performance. The logistic outsourcing decouples the resources from workload. Since workload is variable, therefore the cost should be too. Outsourcing gives opportunity to the company to directly link activity to the cots and avoid unnecessary cost of idle resources.

Heacount Reduction – Outsourcing is the opportunity to balance the headcount. With outsourcing there is no need to permanently engage employees, only for purpose of covering seasonal peaks.

Capacities on Demand – Most of the companies have some seasonal pattern. Beverage or ice-cream industries are having summer peaks. Companies that sell liquors or spicy food may have seasonal peak at winter. Both types of companies require variable capacity, depending of the season. Keeping permanent capacity is too expensive, due high rate of idle capacity.

Drawbacks of Logistics Outsourcing

Beside benefits of outsourcing, there are certain drawbacks that need to be taken into consideration.

Lower service level toward market – It is possible that 3rd party delivery service will have lower level of service. Despite service level agreement between company and 3 party logistic, it is very possible that relation of 3pl delivery drivers will be lower than the one from employees of the company.

Lower direct control – Since the company is not controlling the 3pl’s employees directly, it is possible that responsiveness, engagement and commitment of those employees will be lower than own employees. This can directly affect the overall performance of the company. Therefore, it is necessary to clearly define the key business indicators that need to be respected.

Contracts, additional administration – Outsourcing through 3PL requires additional administrative work related to contract, service level agreement, reporting, evaluation, etc.

Conclusion

Outsourcing through shifting of 3PL gives certain opportunities to the companies. Beside certain drawbacks, bottom line is that outsourcing has the future. From one side company is skipping execution part of the business and can focus on business development.

On the other side logistic companies specialized on execution can obtain higher cost efficiency due to effect of learning curve and principle of economy of scale. Combined, both types of companies can profit from the deal.