13 March 2019
10 reasons to outsource your logistics
In order to ensure competitiveness, some companies opt for a logistics outsourcing strategy. Listed below are reasons for which companies choose to implement such a strategy.
“These days, it is often said that being part of a supply chain and an effective and efficient distribution network allows companies to be competitive and that it is an important element of their competitiveness (Christopher, 1999).”
- Cost control :
Outsourcing is advantageous from a cost control perspective. The logistics service provider has to comply with the amounts stated in the proposal and contract. When internalizing, companies must pay fixed annual costs for equipment that may only be used sporadically, e.g. a fleet of trucks. It is therefore important to accurately evaluate the opportunity cost of such a strategy so that the company can ensure that outsourcing is cost-effective.
- Access to capital :
The logistics service provider can invest in infrastructure, equipment, or other elements required to complete the project for the customer. The construction of a factory or warehouse is more accessible to logistics service providers who are known in their field and have easier access to capital.
- Focus on core business:
“[…] companies would be well advised to outsource services and functions in which they deem themselves insufficiently competitive (Chevalier, 2001).” One example that illustrates this quote well comes from the food industry. Consumer lead increasingly hectic lives; as a result, they prefer not having to go out to get food. In this context, many restaurants have decided to outsource delivery service through Uber Eats, which handles orders, delivery, and payment logistics. In doing things this way, restaurants can focus on their core skills, such as kitchen management, food safety and sanitation, and the development of new products to meet current trends, e.g. vegetarianism.
- Access to expertise:
Outsourcing offers access to a significant pool of skills and know-how, such as highly specialized methods, e.g. packaging, chemical handling, rail transshipping, etc. Such skills and know-how can also be related to management systems or state-of-the-art information technology systems that require implementation, training, maintenance, etc. This is particularly the case with the appearance of automation and artificial intelligence. In some cases, companies simply do not have this expertise in-house.
- Company drive to develop:
To be competitive, companies must develop expansion or improvement strategies. The proliferation of personalized products and services underscores this fact. Outsourcing can play a key role in the development of companies, whether through growth or geographic expansion. Here are a few examples:
– Geographic expansion: service providers often offer wide geographic coverage.
– Development of sales and revenue: outsourcing makes it possible to secure capacity quickly.
– Development of new products: support in regulated areas, such as health and safety, product size (for non-standard handling), and specific permits or certificates required for product handling.
– New clientele: helps attract new clients whose requirements differ from those offered by the company. Lieb (2010) “gives the example of companies’ desire to improve their environmental/eco-friendliness: the cost of owning green vehicles may be very expensive for a company, but less so for a provider that shares the cost with other customers.”
– Develop a new business model: e-commerce, reverse logistics, etc.
- Almost unlimited flexibility
Logistics service providers are in a better position to manage peak periods or offer just-in-time services since they have access to larger warehousing space, more specialized handling equipment, and a significant number of specialized employees.“Providers can handle capacity overruns much more easily than classic companies (Bragg, 2006), to help offset fluctuations in demand. This flexibility stems from the fact that providers often handle several customers at once. This enables them to assign personnel and equipment resources based on the fluctuation in demand for each customer (Roques, 2003).”
- Certifications :
C-TPAT, ISO, TMD: the list of compulsory or customer-required certifications can quickly grow. Service providers generally hold these types of certification for their fields of expertise and are familiar with the requirements and related audits.
- High performance and productivity levels
Expertise and the fact that logistics are the service provider’s core skillset are beneficial to companies’ performance and productivity. “Outsourcers show higher performance since the productivity of their personnel is better and they are the most competent in their field. Key performance indicators will speak for themselves in such cases (Lynch, 2000).”
- Competitiveness :
In an economy with increasing competitive pressure, companies must perform at a high level at every stage of the sales process: manufacturing, shipping, delivery, and even exchanges. “The flexibility, specialization, and know-how of logistics service providers will help companies get better service at lower cost and with lower risk (Lieb, 2010).”
- Brand image :
Outsourcing can help improve the quality of service provided to company customers. It can also “[…] reduce delivery leadtimes and even lead to just-in-time (Aktas, 2011). Company image is thus enhanced thanks to service providers.”
Even though outsourcing offers significant advantages, every company has its own business model and should analyze its internal and external environments to find the strategy that best supports its organizational objectives.
*Post inspired by Delphine Adam’s thesis, La décision d’impartition des activités logistiques dans les entreprises au Québec. This blog post does not reflect the opinions of the author, but certain elements of her thesis.