A Guide to the What, When, and Why of Logistics Outsourcing
Today, we're taking a look at the practice of outsourcing in logistics. This is a fairly complex topic that I'll attempt to simplify as much as possible. Predominantly, this post will answer the questions of what, why, when, and how. More specifically:
- What is logistics outsourcing?
- Why do companies outsource logistics?
- When does logistics outsourcing make sense?
- How does logistics outsourcing work?
First up, let's answer the "what."
What Exactly Is Logistics Outsourcing?
There are a lot of levels to answering this, which I'll cover in more detail later in this post. Mostly, what you need to know here is that for many, many years, people did things only one way. Production companies would operate with their own transportation and logistics departments in house. Over the years, however, it started to become more common for these companies to seek out a 3PL (third-party logistics provider).
Now, outsourcing to 3PLs is fairly standard practice across many businesses. 3PLs offer to take up any number of the logistics operations from your company. Here are just a few core services a 3PL may provide:
- Administrative management
There are many more specific services offered, but these are the basics.
Next, let's find out why companies might do this.
Why Outsource Logistics?
You'll find many reasons to outsource logistics for your company. Typically, the primary motivation companies have for considering it is simply cost. Naturally, businesses are always looking to save money and maximize profit. That said, there more reasons to outsource.
I'll take a closer look below at the various benefits of outsourcing logistics.
Obviously, logistics is an expensive venture. Therefore, it's likely your company will want to mitigate those costs. By hiring a 3PL, you're potentially eliminating numerous costs. For example, a 3PL will have its own equipment and labor force. You can shave employee and maintenance costs through these two areas alone.
Obviously, technology is evolving rapidly, even in logistics. A 3PL that specializes in logistics will be at the forefront of those evolving technologies. With logistics being their only focus, they need technology to be effective.
This technology could come in many forms. Here are just a few examples:
Conversely, your company needs to focus on what it does best. Production and customer relationships often take precedence. And because you need to focus on those areas, your ability to also stay on the cutting edge of logistics technology is compromised.
So how can a 3PL help you with your customer relationships?
Realistically, when you hire a 3PL, you're looking at a long-term solution for your company. Often, they'll adopt your branding when dealing with customers. This may include your logo, your uniforms, and so on. A 3PL that's performing at a high level while representing your brand will positively affect your customer relationships.
Contrast this with hiring just a transportation broker. Brokers will represent only themselves. Accordingly, their focus is solely on getting freight from Point A to Point B.
Conversely, a 3PL stands to benefit from a positive relationship with the customer.
3PLs are designed to adapt to the ebb and flow of customer demand. For example, let's say the demand for your product has increased significantly. A 3PL has the right equipment and infrastructure to handle the demand. However, if you're handling this yourself, you open up opportunities for sunk costs.
For instance, you might buy additional equipment to meet the increased demand. However, if that demand is temporary or seasonal, you're saddled with an empty cost. You'll be paying for equipment you won't be using. Often, that's a fast ticket to profit loss.
Now, let's transition into discussing when your company may want to consider outsourcing.
When Does Outsourcing Make Sense for You?
This is a complicated question to answer. Frankly, whatever I state here is merely pointing out opportunities. It's incredibly important to know that outsourcing does not work for everyone.
That aside, if outsourcing might make sense for you, how do you identify it? One of the easiest measures is as simple as company growth. In the early days as a young startup company, it may be easier to handle everything in house. The demands of your time and your employees' time are far more focused.
As your company grows, you want to remain focused on what you're best at: namely, whatever it is you're producing. This is when it often becomes difficult to stay ahead of the curve in logistics.
Essentially, this dilemma can be summarized like this: When the needs of your business outgrow your capabilities, it may be a good time to outsource.
Once you've made the decision, how does it work? Let's tackle that next.
How Does Logistics Outsourcing Work?
Once you've made the decision to outsource to a 3PL, what comes next? First, you need to know that there are many, many, many 3PL options.
So first and foremost, do your diligence. You want to research the 3PL companies available to you. Many offer a range of services. Come into the process with a checklist of exactly what services you want help with. Finding the right long-term partner for you is paramount. If you know exactly what you're looking for, you make this much easier on yourself.
Secondly, you want to know that your goals align. Find out what the 3PL's long-term goals and vision are. You want to make sure these align very closely with your own. The reason for this plays into what I mentioned previously. For a 3PL to be an effective solution for you, it needs to be a long-term arrangement.
It often takes months for the cost savings to really take hold from outsourcing. If you only hire 3PLs for short-term work, you'll almost never see the benefits.
From there, it's about working together for integration. This includes technology, equipment, and employees.
It's Still Your Responsibility
I quickly want to detour here to point out that outsourcing logistics to a 3PL doesn't absolve you of responsibility. Ultimately, you're still in charge of your business. You and the 3PL should be working in tandem. You should be trusting the 3PL to do their work correctly, but they're still representing your company.
At the end of the day, if something goes poorly, your company will take the heat—not the 3PL. You're responsible to your customers. You're responsible for their satisfaction.
Logistics outsourcing can be a vital tool for your business. When your business grows, it's challenging to accurately meet all needs to your customers' satisfaction. However, outsourcing your logistics needs can be the exact solution you need. That way, you're able to maintain focus on what you do best. You can run and operate your business in a way to focus on revenue and profit. Meanwhile, your chosen 3PL can make sure your logistics division runs smoothly and effectively.
That said, you need to make sure outsourcing is the right fit for you. It's a full-blown commitment. You need to make sure your company ideals align with those of your chosen 3PL. Furthermore, it needs to be truly the right move for you to outsource. This guide should have helped give you an opportunity to learn a little more about whether outsourcing is right for you.
This post was written by Matthew Zandstra. Matt has been working in transportation and logistics dispatch for the past six years, both as a broker and direct to drivers. He’s familiar with various facets of relationships, technical systems, pricing mechanics, and commodities.