Successful Supply Chain Outsourcing

- Still A Mystery
Raymon Krishnan The Logistics & Supply Chain Management Society Released in conjunction with SCM Logistics World 2012. 2012 All Rights Reserved

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The growing complexity of the Supply Chain and Logistics pipeline requires a greater collaborative effort among shippers, intermediaries, and consignees. Much of this expectation and onus falls on 3PLs.
INTRODUCTION The concept and practice of Third Party Logistics is certainly not a new concept. Globalisation, competition and other market pressures now make using a 3PL in some part of our Supply Chain the norm and a basic necessity in any organisation. The industry and the marketplace has developed to the stage where we are now looking and in some cases implementing Fourth Party Logistics (4PL) /Lead Logistics Provider (LLP) relationships and even using technology to manage Combined Distribution Networks (CDNs). The rationale for this is simple, business realities require us to constantly increase efficiency and effectiveness whilst at the same time ensuring key areas like Environmental Health & Safety and Corporate Social Responsibility, are robust and in place. Feeding off growing economies in many Asia Pacific countries, expensive information technologies, and an industry inclination towards outsourcing, 3PLs are thriving. Whilst shippers lament the increases in Supply Chain costs and carriers are almost always one step away from filing for bankruptcy, we are constantly hearing reports of 3PLs posting good or record profits. As adoption has increased, so too has customer expectations and competition within the marketplace, driving 3PLs to be "service" providers in every sense of the term. The growing complexity of the Supply Chain and Logistics pipeline requires a greater collaborative effort among shippers, intermediaries, and consignees. Much of this expectation and onus falls on 3PLs. Whilst outsourcing is quite a common practice today, we do not always get the most out of the outsourcing relationship and perhaps more so today, there are many pitfalls that can cause disruptions to your Supply Chain. This paper looks at outsourcing to 3PLs and some of the issues related to and complexity of this much abused term with some practices we can perhaps adopt to perform even better.

Raymon Krishnan, The Logistics & Supply Chain Management Society

2012 All Rights Reserved

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Figure 1

There appears to be some indecisiveness when provision of domestic transportation, especially for last-mile type deliveries, is considered. It also varies significantly between countries and industry types.
WHAT CAN WE OUTSOURCE? Many large multinational companies outsource almost all of their physical and process-related activities, although a variation exists between the types of companies and their preference. The diagram labelled Figure 1 segments outsourcing into three main areas, namely: MUST OUTSOURCE In this category, companies by and large outsource the provision of international shipping of their products either through freight forwarders, integrators, airlines, shipping lines or a combination of these modes. SHOULD OUTSOURCE The Freight Forwarding function including documentation preparation and import or export declaration, application of Certificates of Origin and booking of space with carriers, continues to be an area that few companies are willing to handle themselves. There are, however, successful instances where large multi-national companies like SONY, Mitsubishi and Schneider have developed significant expertise with correspondingly sufficient volumes to justify the formation of their own Logistics or Freight Forwarding business unit to handle the Logistics for the entire organisation. Another area that some companies could include under this category is the provision of professional advice such as taxes and duties, duty drawback and trade compliance issues for special equipment such as in the IT and Telecommunication, Oil & Gas or Chemical industry. Many 3PLs simply do not have the expertise to offer the sort of advice needed, especially when considering the significant differences that exists amongst the Asia Pacific geographies and the constant state of 'flux' of regulatory and compliance issues. Referring to Figure 1, there appears to be some indecisiveness when provision of domestic transportation, especially for last-mile type deliveries, is considered. It also varies significantly between countries and industry types. OPTIONAL OUTSOURCE This category is where we find the greatest potential for companies to examine and consider just what it is exactly that we should outsource, in order to accurately implement the correct model for our Supply Chain and gain significant enough competitive advantage. Raymon Krishnan, The Logistics & Supply Chain Management Society 2012 All Rights Reserved p. 3

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Warehousing and distribution of finished goods and manufacturing of raw materials inventory is an area of outsourcing that should be more closely looked at in many companies with sufficient volumes. If a 3PL can save you large amounts of money after adding their X% profit margin, you are likely to be doing something wrong in the first place. Logistics-related IT solutions are ever changing and costly to implement. Many companies would not be able to keep up with the developments in the industry that would allow them to provide the same, if not better, levels of customer service as their competition through the use of IT tools that are available today. Management of Logistics outside of a country (regional) or region (global) is an area of the Supply Chain that many companies outsource, without giving it a second thought. The question to ask, however, is why should we do this to begin with? Does the 3PL really have the expertise in country to manage this segment of the Supply Chain for us? If we do answer in the affirmative then the other question we must explore is, can the same 3PL provide the optimum solution in all countries. Many of us would agree that this is certainly not possible. When we outsource Senior Logistics Personnel after we have outsourced our Supply Chain functions, who do we have in our company to manage these relationships? Finally, when we look at the financing of Logistics resources, does it always make sense to lease or rent, as opposed to buying and committing to doing business in a

Does the 3PL really have the expertise in country to manage this segment of the Supply Chain for us?

certain country or region for the long term. Many US based companies have a policy of entering into lease or rental agreements as opposed to the Europeans, like the French and the Germans who are more prone to establishing a more permanent base when doing business in a particular country or region.

Figure 2
Raymon Krishnan, The Logistics & Supply Chain Management Society 2012 All Rights Reserved p. 4

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Figure 3
VARIATION BETWEEN INDUSTRIES As indicated previously, the variation of what is outsourced in your Supply Chain varies greatly between industries. As illustrated in Figure 2, the Fast Moving Consumer Goods (FMCG) Industry is less prone to outsourcing by the very nature of the fact that for them Logistics is their business. Companies like Wal-Mart for example would be removing a significant portion of their valueproposition and have difficulty in implementing practices such as cross-docking if they did not manage their distribution facilities themselves. Singapore based grocery chain, Fairprice would be hard pressed to find a 3PL able or willing to invest and manage coldstore facilities as cost-effectively as the domestic giant currently manages to achieve nor do many of them have the know-how when dealing with the cold-chain and Hazard Analysis and Critical Control Points (HACCP) compliance. In the IT or Telecommunications industry companies like HP, CISCO, Dell and IBM tend to reflect more of the fully outsourced model as illustrated in Figure 3. This practice is also prevalent in the Specialty Chemical Supply Chain. STRATEGIC REASONS FOR OUTSOURCING Overall, the rationale behind the consideration to outsource is certainly a sound one. An ever increasing number of companies globally outsource functions within their Supply Chain, or, in extreme circumstances, the entire Supply Chain. Core Competency The main reason many companies give as their reason for outsourcing is their wanting to concentrate on their core competency. This could be anything from manufacturing, installation, design or research. This is especially true for businesses with a small core of highly technical or creative staff, and is normally true if a business already outsources its production, or never produced its own products to begin with. It is, however, a less compelling reason for large-scale MNCs with large operations that are used to dealing with operational complexity. Having the flexibility and control of employing your own resources, given sufficient volumes, is often a more attractive and economical alternative. This is especially so when the intangible benefits are taken into consideration, in addition to the more tangible benefits. Customer Service Many companies are under the impression that the only way to maintain or increase customer service is to outsource their Supply Chain to 3PLs. For anyone who has however gone down this route, the likelihood of success or the odds of success are not as rosy as one would think. Synergy benefits that we thought existed or an integrated Supply Chain solution does not always materialise. From experience, benefits typically are a result of IT solutions provided by 3PLs rather than about how well 2012 All Rights Reserved p. 5

Raymon Krishnan, The Logistics & Supply Chain Management Society

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they run warehouses and trucks. If expertise is a consideration, then it would appear that 3PLs appear to be lagging behind, based on 2010 figures provided by The Australian Logistics Academy (ALA). The ALA conducts professional and academically linked programmes in 13 countries throughout the world and slightly more than 50% of their students are actually shippers or end users of Logistics services, with 3PLs only accounting for about 32% of its student base. Another interesting fact is that when it comes to learning concepts, theories and practice in Supply Chain Management, the non-3PLs tends to fare better overall in terms of results or driving of change that will affect performance outcomes. Growth A third reason why companies outsource is that they are experiencing massive growth and/or are entering new markets. In the long run they may choose to run their own Logistics operations in country, but only if they have the volume to justify it, procedures and competent people in place to do so. Headcount Reduction Many managers, in a knee-jerk reaction to reduce operating costs in the short term, resort to outsourcing as a simplistic way to meet performance objectives. Often this results in lower customer service standards, especially when cost is taken as the primary criteria in coming to any decision in this area. Mergers & Acquisitions Not only are 3PLs merging or being acquired, shippers are also experiencing the effects of this global business trend. It may be the policy of the controlling company to outsource and the company being acquired has to follow suit in order to align itself with new corporate objectives.

Management Decision We hear about this almost every other week. Companies especially in the IT and Telecommunication industry are losing market share as a result of weak or inferior Supply Chain Management. Companies like Motorola and DELL have been facing Reverse Logistics challenges and this is affecting overall earnings. One route management may choose to take is to outsource Supply Chain functions. Oftentimes however processes remain as complex but now the 3PL is dealing with them. It could be a danger signal if management wants to avoid the tough part of their business without having better strategic reasons. Cost Savings This is probably the worst reason to outsource. If a 3PL can save large amounts of money, after adding their X% profit margin, the client is very likely to be doing something wrong to begin with. Outsourcing bad processes and practices to a 3PL seldom improves but only exacerbates the situation. 3PLs have struck a chord with their promised ability to choose cost-efficient freight carriers and negotiate favorable rates with freight companies. Some observers are seeing that the tide is slowly changing as far as the popularity of 3PLs is concerned. They say that the outsourcers who employ 3PLs are beginning to question whether or not their services are absolutely essential in all areas of their Supply Chain. For example, many large shippers contract directly with carriers as opposed to booking freight through 3PLs. When a company decides to outsource transportation services to a 3PL, they do so with the hope that this will ultimately save them money. Many companies however, make this move without first conducting a careful cost-benefit analysis or without measuring the

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2012 All Rights Reserved

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There needs to be some form of quantitative or qualitative analysis done to counter the fact that many 3PL managers have obscured the picture by overemphasising alleged savings within individual sectors of the supply chain.
actual tangible and intangible costs. With intangible benefits especially, organizations sometimes feel that they will be unable to accurately gauge the opportunities in dollar or other quantifiable terms. With the increasing use of Six Sigma however, organizations are finding that there is a way to fairly quantify these costs and opportunities. For organizations that have not gone down the Six Sigma route, tools like conjoint analysis can be used to some extent and in isolation to measure benefits. This latter may not be the desirable long term approach to take but there needs to be some form of quantitative or qualitative analysis done to counter the fact that many 3PL managers have obscured the picture by overemphasising alleged savings within individual sectors of the supply chain. Additionally, it is difficult for companies to accurately assess their true logistics costs, since little or no economies of scale are possible due to the nature of 3PL dedication. Even if a clear estimate of logistics costs were possible to obtain, critics maintain, it is unlikely that outsourcing transportation services to a 3PL would result in any significant savings. BARRIERS TO OUTSOURCING Logistics Integral to their Business For some large-scale retailers, Logistics is their business. Walmart for example, as a policy, outsources very little of its Supply Chain functions. For others, their business activities are too tightly interwoven and a radical degree of outsourcing is too difficult. Firms that sell technical expertise as much as their products and where everything needs to be packaged together, fall into this category. Smaller Companies Smaller companies generally avoid using 3PLs, with the notable exception of express and freight carriers. This is due to two main reasons. Only very small 3PLs would be interested in handling the business of these

companies and they in turn may offer little advantage compared to keeping these activities in-house. Secondly, being small, these businesses tend to have less formal general business systems in place. This can make it almost impossible to use a 3PL without going through major re-engineering of its processes, which is a project in its own right. Existing Infrastructure In some cases a company may already own a warehouse as part of its infrastructure. 3PLs can be hired to manage these facilities however, this undermines the economies-of-scale argument many 3PLs use where they claim to co-load deliveries with those of other customers. Confidentiality Although less common nowadays, some customers claim confidentiality as an issue to using a 3PL. They consider it too risky for them because critical information could be leaked. One way around this challenge is by imposing non-competition clauses on 3PLs, stating which of their competitors they may not serve. Network Even within the Asia Pacific region and certainly globally, there are only a few 3PLs who have offices in all countries to manage in-market Logistics. To compound the challenge, not all offices within the same company network operate at same level of efficiency or effectiveness. Many companies with the expertise and know-how adopt hybrid solutions or choose to work with only the best local 3PL in a certain country, arguing that these local set ups have better know how and experience then their global counterparts. Customer Interface If a company relies upon high quality customer contact and information feedback from front-end Logistics staff, companies could lose this advantage. Delivery staff or customer service staff who interacts with customers are very often important sources of customer feedback.

Raymon Krishnan, The Logistics & Supply Chain Management Society

2012 All Rights Reserved

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The failure to manage the outsourcing contract comes right at the top of the underlying causes when things go wrong.
CHALLENGES IN OUTSOURCING Relationship Management Most customers express positive opinions on existing 3PL relationships and in outsourcing in general. Where we have seen outsourcing go wrong, the failure to manage the contract correctly comes right at the top of the underlying causes. Even with a fairly good 3PL, you will need to have a single fairly senior manager as the key interface with the 3PL at the operational level and someone at the Director or VP level to deal with issues at a more strategic level. The issue with this is that many companies see this as standing in the way of cost-cutting initiatives and the task is left to far too junior a level with no review or Quality Control mechanism. Even worse, with many outsourcing initiatives, too much emphasis is perhaps given to the bottom-line or the Sales and Marketing function, where the focus is on sales figures with little consideration for service levels and operational issues. Compatibility Issues Sometimes cultures between organizations are just different and despite the best efforts of everyone concerned, the relationship fails. Where practical, as with any supplier, choose those who will regard your business as being really important to them. If you are not a large MNC, explore the possibility of giving your business to a mid-size 3PL to help avoid this. Who Will Actually Run Your Business? Large 3PLs have global sales teams who operate in isolation to their front-line operational staff. Many large 3PLs themselves outsource their operations to contractors. Companies need to ensure that their key staff who will be managing the relationship meet their 3PL counterparts such as the 3PLs top management, DC management, IT Manager and the like. Terminating the Relationship Very often we focus on implementing the 3PL relationship without focusing on what to do if we want to switch 3PL or manage our Supply Chain ourselves.

Raymon Krishnan, The Logistics & Supply Chain Management Society

2012 All Rights Reserved

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Issues such as compensation to the 3PL for the infrastructure they have set up to service our company, the roles and duties of parties after termination and what is considered best endeavours should be more clearly spelt out at the start of the relationship. As highlighted earlier in this paper, some companies enter a market and use a 3PL until they feel they can manage in-country Logistics on their own. Some 3PL contracts expressly do not allow the right to offer transfers to key 3PL staff who were handling or managing your business. Rewards 3PL contracts should be based on fixed rate per standard unit of measure such as per case, per cbm or per kg with some form of indexing, plus a defined costs basis for special projects. The impact of changes to product mix need to be taken into account. For example, when you combine active IT products such as hubs and routers to passive products such as cable and connectors. The former has high value, low weight characteristics more suitable by shipment by air whereas the latter has low value, heavy weight characteristics. Proposals or RFQs should allow 3PLs to offer solutions to such scenarios and if a 3PL is able to offer a creative solution that results in actual cost savings to the company they should be rewarded. KPIs Closely linked to rewards, KPIs such as on time delivery, complete delivery, inventory accuracy etc. should preferably be linked to a bonus / penalty system and implemented after the set-up stage of the relationship has passed. It should also be noted that we should not implement too many KPIs or have KPIs for the sake of having them without actually measuring critical milestones or steps in our Supply Chain processes. Poor Approach to the 3PL Market Make sure you identify all the credible bidders and that you have a well designed RFQ. A well- designed RFQ will be clearly defined and itemized with volumes for specific lanes or sectors provided. Seek guarantees at the bidding stage such as IT capabilities, Handover Processes and rollout dates and

Closely linked to rewards, KPIs should preferably be linked to a bonus / penalty system and implemented after the set-up stage of the relationship has passed.

service standards. A cornerstone of successful 3PL relationships is good communication. Leading 3PLs even advise prospective customers to perform close due diligence and to be proactive in communicating their expectations and requirements up front, before the contract is awarded. Expertise is sometimes an issue in companies who have policies of rotating staff between various departments. We have seen instances where 3PL relationships or contracts are being managed by staff that has little Logistics knowledge. If necessary, seek guidance at this stage of the process either internally or outside of the company. CONCLUSION & SUGGESTIONS Should outsourcing of Logistics processes to 3PLs be considered in your Supply Chain? The answer is a resounding YES! Should your total Supply Chain be outsourced? The answer is probably NOT as there is little data to support this approach. Today, it is no longer a question of whether you should outsource but more to what extent and what control mechanisms you put in place to measure the relationship, ensure focus is maintained and tangible results are delivered to stakeholders. Some of the 10 takeaways on the next page have been covered earlier and the list is by no means exhaustive. It is simply meant to be a start to help you gain more value from the 3PL partnership. The planning, analysis and other preparation activity discussed here is often a tedious process. Collecting data and analysing fact from fiction both about your own organisation and the potential 3PL requires valuable time and resources. The entire process will require patience, perseverance and persuasion in dealing with internal and external parties. As daunting as this may seem there is no shortcut to this process if a successfully outsourced relationship is to be achieved.

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2012 All Rights Reserved

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Aim for success in your outsourcing activities in your supply chain by reviewing these 10 key areas
Invest in Resources The people managing 3PLs and your Supply Chain need to be strong leaders, have a good understanding of the market and be able to manage strategic relationships with the authority to act decisively. Invest time in understanding the market This is a continuous process. Make sure you understand the market and the type of services available in each of the countries you operate in. This is costly and takes time but is worth the investment Ensure Alignment We need to align our Supply Chain strategies with that of our oragnisation. Likewise we need to ensure the 3PL understands what our strategies are. We need to ensure there is a fit between the 3PL and our strategies and go one step further by encouraging the 3PL to suggest areas in which this can be further refined. Be willing to enter into long term agreements Some relationships will require significant investment on the part of the 3PL. This may require us to enter into more strategic long term relationships with our 3PL with longer exit periods and potentially even penalties for early exit. Let the 3PL tell you what they can do During the knowledge building phase and certainly during the RFI / RFP stage, let the 3PL really tell you what they can do and how they propose the roll-out of your requirements should look like. Many 3PLs have fancy high level presentations but these are opportunities for the good 3PL to really shine and for you to separate the wheat from the chaff. Constantly re-align strategies As markets and businesses continue to change and evolve, so do our Supply Chains. We have STRAP plans or something similar within our organizations to help continual alignment. This practice should be extended to your key 3PL partners to create a collaborative environment. Treat your 3PL as part of your company Many are already doing this, especially in companies where the 3PL has been working for a longer period of time. Instead of this being an unconscious effort, we need to develop this mindset at the outset and with possible every 3PL. Train, train and train Include your 3PL in any relevant training efforts in your organization and a good 3PL will also be willing to invest in good people and even share the development plans of the people working with your organization. Measure Results Set in place KPIs and SLAs that are clear both within your oragnisation and the 3PL.

Reward results A hard sell and certainly a paradigm shift for many but reward 3PLs that exceed targets. This is possible if we set KPI s and SLAs up front.

Raymon Krishnan, The Logistics & Supply Chain Management Society

2012 All Rights Reserved

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ABOUT THE AUTHOR

Raymon Krishnan, manages Logistics & Trade Compliance in the Asia Pacific region for a leading US based Specialty Chemical manufacturing company and currently serves as President of the Logistics & Supply Chain Management Society. His diverse portfolio and experience has included senior academic, consulting, end-user and industry facing roles throughout Asia. In 2012 he was identified by Channel News Asia as Singapores leading Logistics & Supply Chain expert and his work is published in a number of print and online publications. He can be contacted at raymon@logis.com.sg

ABOUT THE LOGISTICS & SUPPLY CHAIN MANAGEMENT SOCIETY

The Logistics & Supply Chain Management Society is the regional professional body for Logistics practitioners. Practically all areas of the Logistics spectrum are represented in the Society. Shippers, Freight Forwarders, Academics, Students, Carriers, Personal Effects Movers and other individuals and organisations form our core. With an emphasis on commercial experience and expertise we are the lead platform for the development of Logistics in the region and work with our members, government, organisations and professionals in raising the profile and expertise through a range of activities. Like most professional bodies, the Logistics & Supply Chain Management Society emphasises a commitment to ongoing education and encourages performance consistent with a generally agreed body of knowledge or standards. Members of our Society are recognised as members of a professional body through the work we continue to perform. The L&SCMS has the proven history, framework, value for money and strategic reach to make it the right choice for you. The Society was formed by Logistics professionals with the following objectives : To promote professional development of Logistics and Supply Chain Management; To serve as a resource centre for its members and parties interested in Logistics and Supply Chain Management; To serve as a resource centre and focal point that demonstrably reinforces Singapore as a global Logistics and trans-shipment hub; and To advance, study and disseminate techniques and applications on Logistics and Supply Chain Management.

http://www.lscms.org

Released in conjunction with SCM Logistics World 2012

The Logistics & Supply Chain Management Society

50 Kallang Pudding Road, #06-06 Golden Wheel Industrial Building Singapore 349326 www.lscms.org Raymon Krishnan, The Logistics & Supply Chain Management Society 2012 All Rights Reserved p. 11