In House Logistics or Outsourced to 3PL The Paradigm Shift in Thinking is Needed?

Logistics+ Vol.IX Issue No. 50

Today, most companies that use 3PL do so because they think logistics is not their core business and they don't have its competency and they want to consolidate their activities so they can concentrate on their core business. They also may not have the competency necessary for certain logistics activities, like outbound and inbound warehousing, delivery fulfillment and route planning, or the company may not have the assets to properly conduct these logistics operations.

In today's dynamic business environment, with enhanced technologies and vastly extended supply chains, companies are often confused and resort to 3PL as there are so many logistics options available. But before making any decisions on how to best implement any supply chain management process, companies should evaluate their own cultural alignment, core competencies and business capabilities first.

On the other hand, some companies may not work with single 3PL or multiple 3PL provider due to the following reasons:

•         3PL services are more expensive and they may not necessarily meet the expectation of the company

•         Many companies believe that they can do a better job than 3PLs in terms of cost, quality, and service.

•         Some companies have not yet explored outsourcing options

•         Some companies have concerns with the confidentiality of information and fear that data from their company may be used inappropriately, especially if the 3PL is also serving their competitors in the same warehouse and confidential company data could be acquired by direct competitors by accident or on purpose.

Although many cases, when companies do explore their outsourcing option and find a single suitable 3PL or by multiple 3PL to manage the different area which can present them compelling reasons to choose them, there is still a good chance to the company may decide to outsource with them.

In my experience, some companies only look at the cost of outsourcing and they are quickly convinced that outsourcing will only make operations more expensive. Meanwhile, they fail to see the potential benefits of outsourcing. These companies will invariably choose in-house logistics.

It should be noted here that in order to perform effective in-house logistics, a company must truly have both the competency and resources to invest in three key areas, which are people, technology and infrastructure. If we look only at costs, in-house logistics is often only marginally less expensive than outsourcing, but not always. Here are a few factors that influence companies to outsource:

1.      They want to focus on the company's core business

2.      They do not have the ability to manage consolidated logistics operations, like Hub and Spoke Systems

3.      They do not want to invest in logistics infrastructure, like warehouses, racking systems, trucks and IT systems (WMS, TMS, etc)

4.      They want to avoid the risks associated with logistics operations, like lost goods, late deliveries, high stock discrepancies and excessive/insufficient stock (undesired high inventory or low inventory), among others

5.      They have already learned that 3PL can improve their performance better with clear indicator and added value through more efficient processing, shorter cycle times and lean techniques than in-house logistic could.

Before companies decide whether to use in-house logistics or outsource, there are some things to be considered:

1.      Are the performance levels of logistics activities from the production process until delivery been measured? Has process efficiency been assessed and can cycle times be shortened?

2.      If a warehouse management system has been implemented, are efficiency levels better than before using it?

3.      Has the company measured turns around times (order cycle times) and synced them successfully with delivery dates?

4.      Has the company assessed its overhead and fixed logistics costs?

5.      Has the company thoroughly examined the capability of its ITS?

After the above have been determined the company must then compare the advantages and disadvantages of both in-house logistics and outsourcing.

For some local groups of companies, in-house logistics in clearly the right choice as they already possess assets, like warehouse, truck fleets and human resources, to keep logistics costs efficient and service level high, but some companies do not have a comprehensive SCM system yet, which enables them to integrate all SCM and logistics business processes. Some of these companies even find that in-house logistics can become a profit generator by offering their units serve not only the internal needs of each company, but also offer the possibility of providing services to companies outside the group.

Usually, the distribution division that manages logistics operations does so by using a hub and spoke system for the management of distribution centers, satellite warehouse and others. A major consideration is that if logistics operations are managed by an external 3PL (outsourced), certainly the 3PL will get a percentage of the company's profit, and it would be better if the internal group had its own 3PL so they could keep the profit for the group. Another factor when considering in-house logistics is determining if it will make the company more competitive with processes running at least as efficiently as if they were managed by an external 3PL.

It is often thought that keeping your order fulfillment and warehousing in-house has a several advantages. Having complete control over your products and how they are shipped is one advantage. For companies that want to see, touch and feel their products & processes, this is a good choice.

However, keeping order fulfillment and warehousing activities in-house can be very expensive if it is only managed by one business unit and this is because warehouse and delivery activities can not be consolidated this way. Beside that, the cost of maintaining, staffing and equipping a fully functional warehouse is quite high and requires capital that may be better deployed elsewhere, such as in inventory purchasing or marketing. Much of these costs are also fixed which can be good during times when order volumes are high but in off-peak times it means higher per order cost.

On the other hand, in-house logistics can also be costly if it uses an internal 3PL to serve other business units, for example, if more than two companies with a variety of SKUs work under the auspices of a group company. In this case, deep analyze and comprehensive studies must be done to check the as is conditions of logistics costs and the flow of goods, flow of information, flow of cash and cash to cash cycle time. The processes of supply chain management (SCM) should be studied carefully, for example, the "as is" condition of direct deliveries from the manufacturer to the distribution warehouse and the "to be" condition of direct deliveries from the manufacturer to one main distribution center (MDC) which consolidates inside MDC by combining shipments and sending them to distribution warehouses, distributors, wholesalers, agents and outlet of general trade (GT) and modern trade (MT).

The main thing that must be understood is that what customers really want is the right products to be delivered as soon as possible, at the right time, at the right quantity, at the right price and at the right cost. For any shipper, whether in-house or outsourced, they must deliver to the right place (or the right store) by "delivery in full, on time, damage, and error free" (DIFOTDEF).

On the other side, outsourcing your logistics need to a third party can have advantages, with the predominant advantages being the variable cost structure offered by a 3PL.

Most 3PLs offer a variable pricing structure based on a cost per order or cost per unit shipped. Storage costs are generally based on the number of units in inventory during each month. Having the ability to keep costs variable and only pay for space and services you use is a significant advantage. If your company is growing or has seasonal peaks, having the ability to utilize more space during busy times and less space during slower times provides tremendous cost savings.

Using a 3PL also allows you to focus on your company's core competencies, as already mentioned above. Most retail companies are great at selling their products, but if warehousing, order fulfillment and distribution are not your company's core competencies, then an outsourced approach may be the answer.

After finishing the contract period, some companies that have outsourced their logistics operation to a 3PL continue to outsource, while others may try with a different 3PL because of diminishing service levels. Some companies may even decide to try conducting in-house logistics in the hopes of achieving better service at a lower cost than using 3PL. also, some companies have negative experiences with 3PL and that compels them to try in-house logistics.

There is one big group of local company that have made efforts to develop in-house logistics without trying the option of outsourcing to a 3PL and they have been running more than 10 years. The result prove that the activities of in-house logistics can be maintained and developed but still remain cost effective, although it has not been able to become a profit center yet. Still, the group seems to enjoy added value from in-house logistics as inventory is total in its control and combined shipments keep costs low. In the past, before the development of in-house logistics, they were often problems with poor service levels, poor cycle times, high and unbalanced inventories both in manufacturing and distribution. Today, in-house logistics is as feasible as ever and there are many success stories to prove that problems can be handled and the focus can still remain on core business activities like sales and distribution for the distribution division also for the production and product development for the manufacturing division.

The decision the use in-house logistics or outsource to external 3PL requires meticulous measurements of the performance of logistics operation as they exist today. One must measure the percentage logistics and costs make up compared to the total revenue of the company, the readiness of infrastructure (IT, warehouse building and transportation), human resources abilities and their competency to conduct in-house logistics. The decision must also be in accordance with the vision and mission of the company, its business strategy, its supply chain strategy and its value proposition to the company or group companies.