The outsourcing of logistics services is not a new concept by any means. While it has gained renewed emphasis over the past several decades, the practice can be traced back almost as far as one would care to research it. In Europe, a number of logistics service providers can trace their origins back to the Middle Ages. The first commercial warehouse operations were built in Venice in the 14th century, and merchants from all across Europe used them as collection and distribution points. In more recent years, the outsourcing of logistics operations has been a popular and cost effective technique for serving a firm’s customer base. Each outsourcing firm will have its own reasons for doing so, and reasons are many and varied. In a broad sense however, most companies outsource for the same basic reasons.

To many of these, when choosing a provider, operating costs will be the most important consideration. Studies of the reasons for outsourcing have shown that cost/price are almost always in the top determinants, often being shown as the primary reason. Other studies have shown that a majority of the firms that do not outsource refrain from doing so because their costs will not be reduced. Often this pricing attitude has been encouraged by the providers themselves who advertise, often inaccurately, that “we can do it cheaper.” In my opinion, this representation does a disservice to the industry.

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 required by logistics operations, capital can be invested in those ventures that are a part of the core competencies or basic businesses of 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 sometimes a more sophisticated firm may 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 value to the system. While 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.

In the consumer goods 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 shipments from their own facilities, manufacturers have turned to the logistics service providers. With a multiple client base and sophisticated technology, the LSPs are able to combine these smaller shipments into truckloads, reducing freight and handling costs and improving service.

Now in the retail industry, we have the omnichannel developments. As more firms attempt to offer same day deliveries of smaller orders to consumers, I believe there will be an important role for the LSP. Some providers already are involved. Others are attempting to define exactly what their roles should be, but in my opinion, these roles will become clearer in the near future.

Perhaps the most important value that has been added to the outsourcing offerings in many 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 can be met more efficiently through outsourcing.

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 cost prohibitive internally.

The sophisticated logistics manager will look beyond simplistic cost reductions to the value added in customer service, information, and state of the art techniques.

A Mercedes cost more than a Ford, but that doesn’t necessarily make it a bad investment.

Written By: Clifford F. Lynch