3PL Outsourcing – Strategic Considerations
Third-party logistics or 3PL Outsourcing, is an option exercised by a business, wherein parts of its distribution and fulfilment services are outsourced to a third party. This can occur for a number of reasons including outdated facilities and warehousing systems, as the business does not have the internal capabilities internally and could be experiencing a reduction in efficiency, an increase in time and costs, as well as a decline in customer satisfaction.
Such ramifications could lead to the competitive advantage of the business, its market share, brand reputation, or profitability being diminished. Thus, to stem the tide, businesses have had to look for external solutions.
In other cases, businesses may have set-up in foreign markets and need to globalise their supply chains to better serve their customers. However, in such instances, being able to completely owning their own supply chain could be prohibitive and an entry barrier into certain global markets. Here, businesses require 3PL support to bridge the gap.
However, businesses do not always have to outsource parts of their elements to third parties. Another method could be that of vertical integration, wherein a business invests in developing and owning some of the sections of the supply chain. This can be exemplified by the Ford Motor Company, which owns forests and steel mills. Another option businesses could use is to franchise the supply chain, which provides relatively tight control and integration over the system rather than outsourcing it entirely.
3PL vendors typically provide services such as contract warehousing, packing and distribution services, transportation management, and freight and inventory management. Here, it is up to the business to analyse the areas where vendors are required and plug the holes as they best see fit.
There is also the relationship between businesses and vendors as many businesses are keen to look to vendors who can align with their goals and objectives, processes, standards and performance, and quality parameters. Such parameters can even be in the form of an economic contract or agreement between the two businesses though it has the risk of allowing vendors to exit the contract as they deem fit.
Thus, depending on the business, its health, performance, market positioning, services, and many other factors, the decision to outsource to third party vendors almost always remains a strategic one. In this regard, there are a number of considerations that businesses must address before entering into such a strategic decision.
Transaction costs are always at the heart of the decision to ‘buy’ or to ‘make’. Here, costs can boost overall, long-term growth or help entry into a new market.
Performance and predictability of performance is another criteria. Businesses are likely to choose those 3PL vendors who offer efficiency in planning, adapting, and monitoring, i.e. where performance is predictable and risk is minimised.
Value addition is another consideration. Businesses are keen to partner with those vendors who add value through embedded knowledge such as competitor behaviour, deep-domain expertise, and market understanding as well as certain unique capabilities. However, such capabilities or value additions are only ‘order getters’ and not ‘qualifiers’. The day-to-day ‘qualifiers’ for 3PL vendors still remain delivery reliability, speed, and price.
However, price may not always be an incentive for businesses. A sudden price drop could arouse doubts and reveal larger problems within a vendor’s functional area or core capabilities.
Further, a 3PL vendor’s IT capability is another significant area that businesses may examine within their own decision-making process. As IT is seen as an enabler to reducing costs, supporting innovation and service quality, it is a core area of scrutiny.
Another area for businesses is the ease of interaction or customer relationship. It is evident that positive and trustworthy customer interaction goes a long way and businesses tend to stay away from vendors who have been known to be ‘difficult to deal with’. Positive dealings could include taking responsibility for notifications about likely delays or identifying parcels that were late, or informing customers in advance along with the reasons for the delay. In today’s highly competitive market, customer satisfaction is paramount and businesses require a vendor who will ensure that delays are minimal, are clearly stated, and can even go the extra mile when systems break-down.
Of course, vendor size is also important. Here the capacity, scale, and reputation come into play. Depending on the nature of the business, companies may opt to choose larger or smaller players within certain markets. This, once again, depends on the business’ own situation within its growth and development cycle.
Finally, there is also the capability for innovation as another option for the selection of vendors by businesses. Innovation is seen as a significant value add and a great customer satisfaction elevator. Here, vendors known to be flexible, unique, or standing out within markets may well be viewed positively, especially where there is less freely open information.
However, despite these factors there are still challenges in the strategic decision-making process for businesses looking to partner with third parties. Some of these include unreasonable and unrealistic expectations from a buyer. For instance, customers may have unrealistic (and unreasonable) expectations that 3PL providers may have the effect of reducing their annual transportation expenditures by 50 percent. Though this is factually incorrect this perception must be addressed before a deal is struck. Not doing so could lead to severe consequences going forward.
In the end business must internally decide whether to opt to use 3PLs. This depends on their own growth strategy, vision, functionality, costs and market forces. Once a decision has been made however, there may space to nurture the partnership given that the right-fit provider has been sourced. To do this there must be clear and transparent communication between both parties, an assessment of ground market realities, and a clear understanding of each other’s capabilities. Of course, the relationship is key and businesses function best with both sides working together and collaborating closely – and in the area of logistics, distribution, and fulfilment, this requires even closer examination.