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KOT S., Collaboration in Logistics Outsourcing Relations. [in:] MANAGEMENT 2008. International Conference. In
Times of Global Change and Uncertainty. Part I. Eds. Stefko R., Frankowsky M. Presov 2008, s. 88-95, ISBN 97880-8068-849-3,
Collaboration in logistics outsourcing relations
Sebastian Kot
The Management Faculty, Czestochowa University of Technology
e-mail: [email protected]
Abstract
Based on the meaningful impact of outsourcing on present business processes proved by the rising
value of outsourced logistics functions, the paper presents types of relations between outsourcing
partners as well as areas and stages of collaboration: engagement, improvement and communication.
The Author also identifies the problem areas and the remedies for them.
Key words
outsourcing, relations, third-party
Introduction
"If there is something we cannot do more efficiently, more inexpensively and better than our
competitors, so there is no sense we do it. We should employ somebody for executing this work who
will do it better"1. With such a assertion Henry Ford characterized very appositely phenomenon which
is specified today with name of outsourcing. He didn't foresee at the same time probably that the
assertion just even often unwittingly is a base for today's entrepreneurs' wondering reflections above
applying outsourcing to one's companies.
Outsourcing describes the deliberate movement of a series of connected business processes to a which
manages them on behalf of the company. The classic processes were IT, warehousing and distribution,
facilities management, and payroll – and to these can now be added call centers, manufacturing, web
development, home shopping, credit cards, and even merchandising and design. In these movements
the commercial risk and assets are usually passed to the outsourcing company.2
No doubt that outsourcing has become big business. From early beginnings in the mid- to late 1970s,
many companies have traveled the outsourcing road, and as technology and accessibility to shared
electronic data have increased so has the range of services offered by outsourcing companies.3
The global logistics market has an estimated value of 972 billion US dollars4. The Asia Pacific market
was the largest with the share of 412 billion USD spent on logistics. Europe, Middle East and Africa
regions spent about 290 billion USD, while Americas accounts for the balance of 270 billion USD.
It is estimated that 265 billion USD (27%) was spent for outsourced logistics activities. Western
European firms are more likely to outsource logistics and supply chain activity. Capgemini study5
showed that Western European businesses spent 61% of their logistics spend on their third-party
provider services against 44% in North America and 49% in Asia Pacific.
Globalization and increase in world trade has made the fast growth in the outsourcing market. As more
products are sourced across borders, the complexity of the supply chain increases, driving many
companies to outsource to third-party providers. This is particularly true as companies move
manufacturing and operations to regions such as Asia, Eastern Europe or South America, where they
seek to mitigate risk by outsourcing their logistics and supply chain operations.
1
Michałek M.: Nie tylko koszty, czyli co trzeba wziąć pod uwagę przy podejmowaniu decyzji o outsourcingu,
[in:] Gospodarka Materiałowa i Logistyka no. 11/2005
2
Waters D.(ed.): Global logistics. New Directions in Supply Chain Management. Kogan Page, London and
Philadelphia 2007
3
ibidem.
4
Transport Intelligence 2006. Global Supply Chain Intelligence Portal. www.transportintelligence.com
5
Capgemini and Langley C.: Logistics Outsourcing is an Important Driver of Topline Growth and Corporate
Strategy, According to New Global Study. FedEx, Philadelphia 2004
KOT S., Collaboration in Logistics Outsourcing Relations. [in:] MANAGEMENT 2008. International Conference. In
Times of Global Change and Uncertainty. Part I. Eds. Stefko R., Frankowsky M. Presov 2008, s. 88-95, ISBN 97880-8068-849-3,
Reasons for logistics outsourcing
In a general review of the literature on the outsourcing of services, Maltz observes that general
management papers tend to emphasize the potential cost savings, whereas those written by purchasing
and marketing specialists attach equal importance to cost and service benefits6. Much of the
specialist logistics research has identified the demand for higher service standards as the main motive
for outsourcing. This, for example, is the conclusion reached by LaLonde and Maltz in a study of the
outsourcing of warehousing in the US7
In general the reasons for outsourcing can be structured into five groups:
Financial reasons for outsourcing. Companies have to declare in their statutory accounts – and to
many stock exchanges – the value of assets leased and the methodology used by their businesses to
access their markets, but it is still the case that some companies have limited access to investment
funds and see the need to leave the raising of cash to their outsourcing partners. Sometimes the
outsourcing provider can borrow at a better rate than the company since the provider‟s operation has a
lower risk through better focus; sometimes the additional borrowing costs are worth the flexibility.
Technology. Technology half-lives have fallen dramatically over the last 20 years, and the predictions
are that they will fall faster still. Competitive edge comes from the rapid integration of new
technologies into the company.
Resource management. One facet of the management of a company never changes: managers forecast
resource requirements – and the forecasts are never right. Their allowance for risk and resource
investment is, therefore, either too high or too low. By focusing on core resource business areas you
can probably match investment and requirements more closely than in other business areas. Then in
periphery areas either you have to apply the same focus as to the core areas to manage your resources,
or you will not optimize those areas. Given that many of these areas are likely not to use your core
skills, the likelihood of optimizing them and achieving good service levels and costs is lower than
outsourcing to a specialist. Furthermore, the outsourcing company can act as an independent manager
for your resources should you wish, to pool your resources with others and spread the fixed costs.
Management skills. The point has been made that businesses are better to concentrate their
management and training skills in those areas in which they can make a real difference – or they
should find partners to help them.
Firm owns the vision and strategy that are part of the management and entrepreneurial skills it needs
to run a successful business. Maximizing your selling and procurement skills, ensuring you have the
right products and services to sell to your clients, and ensuring pricing provides the cash return you
need for investment and paying for services bought should be the management skills you provide.
However if outsourcing is the answer, then there are important new skills to develop, namely the skills
of choosing your partners and managing them.
Personal. It is rare for managers to have totally altruistic motives when deciding to insource (take
back an outsourcing contract) or to outsource a series of business processes. Unless there are clear
strategic reasons for a change to be made, bringing back processes can often be to enlarge their role,
just as pushing for outsourcing can be to ensure a job move. In the past, strange decisions have been
made. For example, a major retailer started to backload goods that were delivered by manufacturers to
reduce costs by raising the utilization of its fleet.
The outsourcing risks
Whilst manufacturing costs have undoubtedly fallen because of globalization increase, not all
commodity costs have fallen as well – and shipping costs, for example, have risen as the laws of
supply and demand have remained true. It should be noted that the new extended supply chain hides a
number of potential risks that, if not properly accounted for, could have a severe effect on profits.
Boards need to have identified and evaluated the costs of these risks in order to judge the real business
case for overseas sourcing.
6
Maltz, A.B. „The Relative Importance of Cost and Quality in the Outsourcing of Warehousing‟
Journal of Business Logistics, 15, 2, 45-61, 1994.
7
LaLonde, B. and Maltz, A.B. „Some Propositions about Outsourcing the Logistics Function‟ International
Journal of Logistics Management, 3, 1, 1-11, 1992.
KOT S., Collaboration in Logistics Outsourcing Relations. [in:] MANAGEMENT 2008. International Conference. In
Times of Global Change and Uncertainty. Part I. Eds. Stefko R., Frankowsky M. Presov 2008, s. 88-95, ISBN 97880-8068-849-3,
Supply chain risks. These arise through the new geography that is a backdrop to the outsourcing
arrangements. Many of the problems are the same as in the original supply chain, but the risk of not
resolving the issues increases with distance and the language and culture divide. Good examples are
problems with quality, specifying exactly what company wants after the first proofing runs, and tying
the supplier into business. The company now has lower costs because it has agreed a single long-run
production slot with its supplier – but the slot is usually not very flexible. Thus changes to quantity
and timing are much harder to arrange. Under order stock and ask for a smaller, more expensive
additional run to be slotted into the production schedule, and company may have to have products sent
by airfreight for them to be on the shop floor in time for the sales period. Realizing this additional
cost, may feel forced deliberately to over-order stock at the start. Many retailers now have higher
stocks than they used to have – and this requires larger warehouses and results in lower warehouse
productivity. Then the sales forecasts are not met, and clearing unnecessary stock through the sales
channel generally requires heavy discounting – which means a reduction in profits.
Management risks. The longer the supply chain, the greater the number of nodes, the greater
management time that is required to achieve a smooth result. This resource will be more than the
company currently has, and even if functions are outsourced there will be the need to coordinate the
outsourcing partnerships. The greatest concern in this area for most retailers is quality. It can be
difficult to oversee the accreditation and auditing of suppliers and manage proofing runs over a long
distance. Once product is agreed, production schedules have to be monitored – and this requires time,
personnel and particular skill sets. Outsourcing requires regular contact between the various parties to
make it work. The question to bear in mind is: has the cost of the additional merchandising and quality
management been taken into account?
Outsourcing is not about abdication: company still need to control the strategy, and company need to
spend time integrating the outsourced service. The more central the activity is to the heart of the
company, the more time that is required to really ensure the outsourced operation is integrated. How
the organizations are linked is one of the keys to the success of outsourcing.
The other management risks are that company did not define what the strategic changes that is looking
for, and may not have shared them with the prospective partner. Company may not have decided how
success and failure will be judged and therefore have not decided whether any form of gain share is
appropriate to the contract. Another risk that needs to be dealt with is the risk of poor internal
communication about the potential to outsource and once the contract is implemented communicating
the successes.
Financial risks. Suppliers like hard currency, Euro or US dollar, and thus a significant proportion of
company costs will be exposed to the fluctuations of that currency. Firms are forced to try to reduce
the purchase price, which may result in reduced product quality and greater finishing costs.
It is possible to hedge the Euro or dollar by buying in advance, of course, but there is a cost to these
transactions. Shipping costs increase markedly as routes become more popular, resulting in a reduction
of profit margins. If the price of oil increases, so will the shipping surcharges.
Political risks. These are very hard to assess but some examples include EU trade quotas, instability in
some countries, and suppliers having very different working conditions to those in European plants.
These risks can directly affect the ability to trade, and can become consumer relations issues that affect
particular brand.
Risk analysis. The risk analysis required is a detailed review of each step in the extended supply chain,
starting with ranging and supplier selection and following the course of the product and information
flows through the supply chain. At each stage the possible failures (the risks) to the process need to be
understood and assessed.
Relationship between outsourcing partners
The 3pl/customer relationship is one where “partnership” can provide the basis for the business
relationship and outsourcing success. The confirmation of this can be words of J. Rodriguez: “If you
understand the customer’s business model, the markets and geographies it wants to penetrate, the
verticals it wants to target, its different manufacturing options and so on, you can continue to find
KOT S., Collaboration in Logistics Outsourcing Relations. [in:] MANAGEMENT 2008. International Conference. In
Times of Global Change and Uncertainty. Part I. Eds. Stefko R., Frankowsky M. Presov 2008, s. 88-95, ISBN 97880-8068-849-3,
low-hanging fruit. But if your relationship is just as a vendor of logistics services, you hit a brick
wall.”8
Continuing, partnership has to be on both fronts. The customer has to allow the service provider to
become an intricate part of its business and look beyond the service it currently is providing. Good
partnerships share joint development, benefits and common strategic vision.
Collaboration with high degree of trust is next step of engagement in relation between outsourcing
partners. J. Grubic9 writes that the degree of trust in a relationship determines the level of flexibility a
customer will allow the 3PL in operating the best of its capability. He also argues that this flexibility is
necessary to deliver best-in-class process and solutions and in turn achieve the required performance
and cost objectives. Good collaboration will support business change and challenges, allowing both
parties to review continually the current state against the vision and to agree actions to be taken to stay
on course.
Sometimes outsourcing partners went to a business trap when thinking that all problems with logistics
and supply chain processes have gone away to the 3PL. In fact some problems may now be a
responsibility of the 3PL, others still remain firmly the responsibility of customers, and moreover there
are some new issues to do how to manage the relationship.
Outsourcing will not work unless the customer stays deeply involved.10 It is really important that
customers stay involved but they should focus on managing the 3PLs on strategic level, not to be
involved in every decision taken by the 3PL. However, a good customer will want to collaborate
around those activities that directly impact on service and where is a touch-point with their business.
We can point on following stages of collaboration between outsourcing partners:
Engagement where IT system integration, account management and implants are most important. Part
of the engagement between 3PL and its customer is the way of data interchange. It is extremely
important to tightly integrate the 3PL system with the client‟s ERP system. High level of integration
allows for fast flow of high volume data. The process is extremely reliable, with leading integration
platforms having audit techniques that can signal an alert if message leave one system but are not
received or processed in the other. The 3Pl providers have also seen the opportunity for embedding
implants into their customers operation for some time now. There is no better way to meet the
customer requirement and understand its aims than to provide an implant working side by side in a
planning or other supply chain role. Account management is also important, because of it can help in
the retention of customers, lead to more business with clients, potentially leading to improved profits
for the 3PL and customers as well. By helping the customer to improve its operations, costs or sales,
the 3PL is adding value.
In continuous improvement stage, we can point on the sector expertise, process improvement and
innovation as a main elements. One of the factors that 3Pl offers their customers is expertise in the
industry sector concerned. This provides the opportunity to help clients understand industry best
practices and to provide benchmarking data. Moreover, many times 3PLs provide customers ideas
they had learned in other industries. The continuous improvement contains also process improvement.
Resulting in cost and service benefits. Also, it is clear that innovation brought from 3PLs can be an
element of outsourcing collaboration influencing on whole supply chain market position. Innovations
such as RFID, picking by voice are the sort of solutions that customers are looking for to enhance their
operations.
At last, communication should be pointed as a key ingredient for ensuing a good relationship between
provider and customer. Communication is the responsibility of both parties in the relationship, and to
ensure good level of communication they both need to provide channels for this to happen. Regular
meetings provide a forum to discuss business changes and its impact on needs and priorities, it is also
the best time to understand customer vision.
8
Murphy J.V.: Finding value In mature outsourcing relationships, Global Logistics and Supply Chain Strategies,
June 2005
9
Grubic J.: Leveraging logistics outsourcing relationships. http://logistics.about.com/library/uc040303a.htm
10
Bowman R. J.: In managing outsourced relationships, there are no simple solution. Global Logistics and
Supply Chain Strategies, July 2006
KOT S., Collaboration in Logistics Outsourcing Relations. [in:] MANAGEMENT 2008. International Conference. In
Times of Global Change and Uncertainty. Part I. Eds. Stefko R., Frankowsky M. Presov 2008, s. 88-95, ISBN 97880-8068-849-3,
Summary
To achieve a success in outsourcing relationships the customer expectation should be properly aligned
with the 3PL business model and relationships structure. The customer expectations focuses mainly
on: superior service and execution, trust, openness and information sharing, solution innovation,
ongoing executive level support. The Capgemni study11 showed that, although relations between
outsourcing partners are satisfactory, there is still much to be done and that both parties desire a more
collaborative and strategic relationship. One of the reason this has not happened is that customers see
the issue as the 3PLs‟ responsibility, and vice versa. In truth of course it takes two parties to really
work hard to make any form of relationship work.
Bibliography:
1. Bowman R. J.: In managing outsourced relationships, there are no simple solution. Global
Logistics and Supply Chain Strategies, July 2006
2. Capgemini and Langley C.: Logistics Outsourcing is an Important Driver of Topline Growth and
Corporate Strategy, According to New Global Study. FedEx, Philadelphia 2004
3. Grubic J.: Leveraging logistics outsourcing relationships.
http://logistics.about.com/library/uc040303a.htm
4. LaLonde, B. and Maltz, A.B. „Some Propositions about Outsourcing the Logistics Function‟
International Journal of Logistics Management, 3, 1, 1-11, 1992.
5. Langley J., and Capgemini: 2005 Third-Party Logistics, Results and Findings of the 10 Annual
Study, Capgemini 2005
6. Maltz, A.B. „The Relative Importance of Cost and Quality in the Outsourcing of
Warehousing‟ Journal of Business Logistics, 15, 2, 45-61, 1994.
7. Michałek M.: Nie tylko koszty, czyli co trzeba wziąć pod uwagę przy podejmowaniu decyzji o
outsourcingu, [in:] Gospodarka Materiałowa i Logistyka no. 11/2005
8. Murphy J.V.: Finding value In mature outsourcing relationships, Global Logistics and Supply
Chain Strategies, June 2005
9. Transport Intelligence 2006. Global Supply Chain Intelligence Portal.
www.transportintelligence.com
10. Waters D.(ed.): Global logistics. New Directions in Supply Chain Management. Kogan Page,
London and Philadelphia 2007
11
Langley J., and Capgemini: 2005 Third-Party Logistics, Results and Findings of the 10 Annual Study,
Capgemini 2005