32823693 | Outsourcing | Logistics

The Rise

Outsourcing has moved from a backroom secret to a boardroom strategy.
By Perry A. Trunick


22 | June 2008 | Outsourced Logistics

C. part of the discussion centered on what to call the practice of contracting logistics services to a third party. partnered with the University of Tennessee and PriceWaterhouseCoopers to study supply chain management trends. Georgia Institute of Technology. notes that 82% of the respondents (a total of 1. there are still tactical reasons for outsourcing.287 individuals) identified their organizations as users of 3PL services. The mood among logistics professionals wasn’t much different.. In the 12th Annual State of Logistics Outsourcing study. Others used 3PLs for tactical purposes— about 20% each for entering new markets or new product introduction. Ten years later. The study was about evenly split among four major regions of the Outsourced Logistics | June 2008 hen Penton Media. and that recognition helps elevate the outsourcing decision to a more strategic level. John Langley Jr. (Many of those roles resurfaced at the logistics service providers contracted to perform the former in-house function. Outsourcing was being bashed in the general media in association with manufacturing job losses and production moved offshore.) A slightly larger number of respondents to the 1998 survey said they bought third party logistics (3PL) services to replace in-house functions.e of W ourcing tional manufacturing companies. That was then. but the boardroom understanding of the role of logistics in supply chains has improved. True. logistics outsourcing is a critical enabler for strategic sourcing and global marketing strategies that provide companies with the agility to adjust to rapidly changing market conditions. What we elected to call contract logistics in 1998 often spelled the elimination of mid-level positions at tradi- | 23 . Dr. parent of Outsourced Logistics.

says Armstong. the process can provide better utilization and control of inventory as well as strengthening inventory position for a greater mass of customers. and provided a measurable return on investment for users. US spending for outsourced DaimlerChrysler and Ford Motor each use 31 or more 3PLs.world. forecast deviations and poor service levels at multiple smaller DC’s. This increases the mutual efficiencies and overall value of the relationship. he notes. In addition to efficiencies of higher volume throughput. but how much of a driver it is depends on the organization and market conditions. Lilja continues. With US outsourced logistics spending up nearly 8% over 2006. driven by companies outsourcing to concentrate on core competencies. vice president of Weber Distribution. Clearly. since about 2003. Respondents said 3PLs had a positive impact on customer service. “Outsourcing logistics operations is at least as valuable a tool in a down or uncertain economy as in a rising one. The user’s business becomes more carrier friendly as there is more volume out 24 | June 2008 | Outsourced Logistics . Among the benefits of consolidating smaller warehouses into larger more centralized distribution centers. Users often cite opportunities to improve their technology base or push process improvements through outsourcing. says Armstrong. says Armstrong. Since 1995. there is still plenty of opportunity in the area of warehousing. Companies with lower demand may reduce asset-based infrastructure and build a logistics spend that more Companies are cutting costs by rationalizing and consolidating multiple locations into single—often outsourced —distribution center (DC) operation. says Armstrong. more focused operations as a user becomes a key partner for the 3PL. while many organizations may base part of their decision to outsource on a tactical need for “hands and feet.” Armstrong points out. Outsourcing has penetrated all segments of the economy. distribution and facilities. The most frequently outsourced functions are domestic transportation. indicated 3PLs play a critical role in providing new and innovative ways to improve logistics effectiveness. and either close the facility or avoid the required capital expenditure that could be difficult to approve in uncertain times. says Armstrong. the adoption curve—on a global scale—is on the rise for logistics outsourcing. he says. But more recently. users often gain purchasing leverage through a 3PL. says Richard Armstrong.) The automotive sector. Revenue growth for 3PLs was highest in non-asset transportation management. This is supported by the results Langley highlights from the global 3PL study. The global Fortune 500 3PL market is $162 billion. the need for sophisticated supply chain information technology solutions and globalization. a positive impact on business process efficiency. cost always plays in the decision.” “Transportation is still 70 to 80% of the solution. SAP and the Georgia Institute of logstics services should top $150 billion. adds Armstrong.” That said. says Lilja. North America (29%). Armstrong Associates Inc. international transportation and warehousing (with some regional variation in the order). Armstrong projects a further 7% growth in 2008. Recessions tend to cause people to outsource more. Technology. Lilja agrees that adhering to common operations practices across distribution centers provides benefits—among them. third party logistics service provider revenues in the US grew to $122 billion in 2007. Major companies like General Motors.” the study. reaching an estimated $131 billion. says Armstrong. This consolidation also can Improve service through more efficient replenishment to the forward DC’s by enabling inventory planning to position inventory based on forecast demand with less volatility due to customer sourcing. According to Bob Lilja. And some of the fastest growth areas for outsourcing are in value-added warehousing and distribution.. closely matches activity levels.” Among the areas where manufacturing companies have benefited from outsourcing logistics operations. Lilja points to the fact that facilities that are underutilized may choose to outsource the warehouse and shipping process. Despite an ongoing freight recession. And. Asia Pacific (23%) and Latin America (21%). spent an estimated $39. What’s driving all of this growth? Clearly. “the real pace setter has been international transportation management. jointly sponsored by Cap Gemini.1 billion with 3PLs. reaching an estimated $131 billion. “And you know so often the guys who are on the buyer’s side of the fence get so enamored of how the warehouse works and saving 2% in the warehouse that they forget that the big money is in how you manage transportation. (That’s out of a $487 billion world 3PL revenue estimate. Europe (27%). Spending on outsourced logistics has been growing at roughly three times the growth of the US gross domestic product and continues. Armstrong projects a further 7% growth in 2008. With US outsourced logistics spending up nearly 8% over 2006. compound annual growth rates in valueadded warehousing have been a little over 18%. DHL. By 2010. Wal-Mart.

reported Langley in the annual State of Logistics Outsourcing survey. 76% reporting successful outsourcing. Further.” He continues. North American respondents were satisfied (87%) and 45% of non-users said they planned to outsource logistics. the 3PL. where 88% agreed outsourcing was successful. and all trading partners will work together to optimize processes across the extended supply chain. and thus the user can become a more important player for key transportation companies in the area. For Europeans. were only slightly less satisfied.” Users and their 3PLs will need to work towards common goals. acknowledges Langley in the report. They don’t focus on driving another penny out of a rate. The highest satisfaction was in Asia. “The 3PL and the customer [user] must leverage each other on a strategic and operational basis so that when working together. Aligning organizations to achieve common goals. they perform better than they would separately. Latin Americans. they were among the strongest adopters with 53% saying they had plans to outsource logistics.” Leading companies embracing collaboration in outsourced logistics relationships will exhibit organizational and strategic alignment from the executive down to the operational level. And that’s why logistics outsourcing has moved from the backroom to the boardroom. Outsourced Logistics | June 2008 | 25 . A strong majority of companies feel their outsourcing has been successful. “with ever-growing trade volumes and increasing logistics costs. but the best managers are proving that global collaboration is now the key to improved efficiency. But. 86% said outsourcing was successful and 42% of non-users planned to adopt logistics outsourcing.transactional-level functions. focusing on continuous process improvement. Other regions exhibited similar results. Relationships continue to be vitally important to logistics success.of each DC. 31% of non-users said their future plans included outsourcing. sharing key performance indicators (KPIs). sharing economic and business risks and benefits and creating a trans- parency between user and supplier are not tactical. managing those activities will remain a daunting task. The user. the 2007 report concludes. what Langley describes as more than “vauge expressions of partnership and aligned interest. That said. arguably the later adopters of outsourcing. explains Lilja.

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