Executive Briefings

Global Supply Chain Management Requires Knowing What - and When - to Outsource

Analyst Insight: The worldwide logistics market has experienced a growth rate of approximately 7 percent annually, which is notable given logistics costs average about 12 percent of total revenues globally. Of this total, an average of 46 percent is spent through outsourced relationships, which drove total spend in North America alone to $134bn in 2011. Given this growth and the increasing complexities of global trade, selecting the appropriate services to outsource and structure mutually beneficial relationships with logistics providers is critical. - Aaron Pernat, Senior Manager, and Gary Allen, Executive Director, both in Ernst & Young's Supply Chain Advisory Practice

Logistics outsourcing services
Outsourcing providers have made considerable investments in expanding their portfolio of services and as a result there are more options to outsource supply chain processes than ever. For service providers this has been driven by the need to grow their business, as well as competitive pressure to innovate. Service providers are addressing evolving customer requirements by building future service capabilities, improving data analytics and implementing new technologies.

We classify outsourcing models into three major categories based on the scope of services offered:

Let's start with basic services, which have largely become commoditized and are typically simple transactional services where goods need to be moved from Point A to Point B. Competitors in the market are jointly developing integrated logistics networks to share capacity while reducing supply chain costs.

Value-added services such as labeling, cross-docking and reverse logistics have created a need for ad hoc providers who have implemented dedicated resources to address the customers' specific needs. Also, shippers focusing on emerging markets require assistance from knowledgeable logistics providers who can help establish effective distribution networks, thereby increasing global reach.

Advanced services models perform supply chain orchestration and provide visibility and control over extensive logistics operations and typically multiple external providers. They also involve cross-geography integration of services, such as planning and strategy, consultancy, IT services and customer service.

This evolution in the industry has had a varied effect on shippers managing supply chains. Distributors, wholesalers, third-party logistics and traditional carriers have all broadened their offerings significantly to add services that may be adjacent to their traditional offerings but now overlap with services offered by others. The trend toward offering more value-added and advanced services makes it more challenging for service providers to maintain the same high quality and minimize operational failures. For buyers of these services, the abundance of services and overlapping capabilities among providers adds confusion around outsourcing.

Collaboration and commercialization

It is important to clearly define what processes to keep in-house, what to outsource, which provider(s) to partner with and how to structure the partnership. In order to navigate these waters, shippers should clearly define their supply chain strategy, which includes understanding internal core competencies. These can be areas where considerable investment has already been made in building capabilities that should remain in-house, as well as areas where they are unique and can gain a competitive advantage in developing/investing in internal capabilities. Once these core competencies are determined, other areas of the supply chain are areas that should be strongly considered for outsourcing. This will maximize the value and performance of the overall supply chain, including components that are outsourced. It is also likely that more advanced services will be outsourced beyond traditional basic transactions.
                                    The Outlook

Shippers and outsourcing providers should strive to be creative around shared solutions that maximize collaboration to establish effective partnerships.

Shipper's perspective "” clarity around services outsourced along with being able to answer the questions: what should you outsource and how much should you outsource? How do you manage it?

Provider perspective - the more advanced the services offered, the more complex the deal structure and investment required. Customer operating models need to be aligned based on services offered.



Keywords: supply chain management, logistics services, logistics management, inventory management, logistics & supply chain, 3PL, third party logistics, warehouse management, transportation management

Logistics outsourcing services
Outsourcing providers have made considerable investments in expanding their portfolio of services and as a result there are more options to outsource supply chain processes than ever. For service providers this has been driven by the need to grow their business, as well as competitive pressure to innovate. Service providers are addressing evolving customer requirements by building future service capabilities, improving data analytics and implementing new technologies.

We classify outsourcing models into three major categories based on the scope of services offered:

Let's start with basic services, which have largely become commoditized and are typically simple transactional services where goods need to be moved from Point A to Point B. Competitors in the market are jointly developing integrated logistics networks to share capacity while reducing supply chain costs.

Value-added services such as labeling, cross-docking and reverse logistics have created a need for ad hoc providers who have implemented dedicated resources to address the customers' specific needs. Also, shippers focusing on emerging markets require assistance from knowledgeable logistics providers who can help establish effective distribution networks, thereby increasing global reach.

Advanced services models perform supply chain orchestration and provide visibility and control over extensive logistics operations and typically multiple external providers. They also involve cross-geography integration of services, such as planning and strategy, consultancy, IT services and customer service.

This evolution in the industry has had a varied effect on shippers managing supply chains. Distributors, wholesalers, third-party logistics and traditional carriers have all broadened their offerings significantly to add services that may be adjacent to their traditional offerings but now overlap with services offered by others. The trend toward offering more value-added and advanced services makes it more challenging for service providers to maintain the same high quality and minimize operational failures. For buyers of these services, the abundance of services and overlapping capabilities among providers adds confusion around outsourcing.

Collaboration and commercialization

It is important to clearly define what processes to keep in-house, what to outsource, which provider(s) to partner with and how to structure the partnership. In order to navigate these waters, shippers should clearly define their supply chain strategy, which includes understanding internal core competencies. These can be areas where considerable investment has already been made in building capabilities that should remain in-house, as well as areas where they are unique and can gain a competitive advantage in developing/investing in internal capabilities. Once these core competencies are determined, other areas of the supply chain are areas that should be strongly considered for outsourcing. This will maximize the value and performance of the overall supply chain, including components that are outsourced. It is also likely that more advanced services will be outsourced beyond traditional basic transactions.
                                    The Outlook

Shippers and outsourcing providers should strive to be creative around shared solutions that maximize collaboration to establish effective partnerships.

Shipper's perspective "” clarity around services outsourced along with being able to answer the questions: what should you outsource and how much should you outsource? How do you manage it?

Provider perspective - the more advanced the services offered, the more complex the deal structure and investment required. Customer operating models need to be aligned based on services offered.



Keywords: supply chain management, logistics services, logistics management, inventory management, logistics & supply chain, 3PL, third party logistics, warehouse management, transportation management