Executive Briefings

Meet Outsourcing's Refuseniks

Funny how the first question on a survey can derail the rest of it, depending on the answer. Last November, ARC Advisory Group (www.arcweb.com) did a Web poll of 102 logistics and supply-chain executives, with the goal of exploring their relationships with third-party logistics providers. Question number one was on the order of a throat-clearing: Are you currently working with a 3PL? Twenty-three respondents - nearly one-quarter of the sampling - said no.

ARC analyst Adrian Gonzalez professes not to be totally surprised by the answer. "In some ways," he says, "it kind of confirmed some of the trends we were hearing beforehand." And let's not overlook the small size of the sample. Do 23 negative comments really pose that much of a threat to the burgeoning business of logistics outsourcing?

Potentially, yes. Reasons cited by those recalcitrant executives offer insights into why any company might think twice about turning over its logistics function to an outsider. Of greatest concern is the 17.2 percent who told ARC that they had outsourced in the past, but had brought operations back in-house. That's not supposed to happen; think of the difficulties involved in regaining lost expertise and resources, once you've shifted the burden onto someone else. And who wants to load up a balance sheet with cost that had previously been shed?

Examples seen by Gonzalez have all involved large companies, mostly focusing on the transportation function. That's one of the easier areas to take back, he points out. "Generally, no assets are involved, other than investing in a TMS [transportation management system] and hiring people to manage it." Companies are apt to have a tougher time regaining control over warehousing or distribution operations, which involve more physical assets.

And what's their justification? One obvious answer is that they were burned by a bad 3PL relationship. In fact, the ARC survey contains a separate category of response - "We had a negative experience with outsourcing in the past" - to which 10.3 percent of the sample answered in the affirmative. But there's more to the matter than that. "The justification I've seen in some cases I've come across," says Gonzalez, "is, 'We've run the numbers, and figured we can do it for at least as cheap, but we end up having better control and ownership of the profits." (In fact, 17.2 percent of respondents told ARC that "We can achieve better service, at a lowest cost, than a 3PL." So much for the argument that the combined volumes of a big 3PL can trump any single shipper in terms of negotiating clout.)

Information technology has also been of help in convincing companies to regain a measure of control. Until recently, the best transportation or warehouse-management systems were available from niche vendors who specialized in the relevant process. But enterprise software giants are increasingly moving in with similar apps that blend easily with their own flagship products. A company that has invested huge sums in an enterprise resource planning platform from SAP AG or Oracle Corp., say, might be satisfied with an in-house TMS or WMS bolt-on from the same vendor. Why look beyond for something that might not integrate perfectly with back-office systems?

Finally, there's the possibility that businesses weren't mature enough to handle their own logistics a few years back, when supply chains were getting longer and more complex due to a greater reliance on offshore manufacturing. The company in question might have lacked logistics infrastructure to venture into China or low-cost regions. Sensing that need, some contract manufacturers launched their own logistics units, or acquired 3PLs, to create one-stop outsourcing shops. Now, with service and cost issues under control, a few big manufacturing clients of 3PLs have decided they can better handle the job themselves.

Ironically, the globalization of supply chains might have triggered a return to insourced logistics. Lengthier supply lines mean greater risk. Transit times are longer, too, and suppliers more difficult to monitor for reliability. At the same time, manufacturers and distributors are slashing buffer stocks in order to boost operating margins. With so little room for error, it makes sense that they'd want to have their own people on the ground where product is being made, working directly with carriers and forwarders to keep goods flowing to market. They might also be in a better position to keep their own customers apprised of shipment status, at a time when order visibility is the very key to good customer service.

Some companies don't feel they have the option to outsource. In the ARC survey, 10.3 percent said that "No 3PL in the market is capable of meeting our specialized requirements." An equal share said that "Logistics is a core competency for our company."

Fair enough. But the biggest slice of responses - accounting for nearly half the total - falls into the mysterious category of "Other." Gonzalez translates this to mean any of several possibilities, including "We have yet to investigate," "We haven't reviewed the option," and "We haven't spent the time to investigate 3PL benefits." A bit shocking, though, isn't it, considering all the hype that's accompanied the rise of 3PLs over the past two decades? Where were those companies when many Fortune 100 organizations were freely availing themselves of outsourcing services on a global scale? Don't they read SupplyChainBrain?

Expect Gonzalez and ARC to have a lot more to say on the subject this week, at the firm's World Industry Forum in Orlando from Feb. 8-11 (http://www.arcweb.com/EVENTS/ORLANDO2010-ARC-WORLD-INDUSTRY-FORUM/Pages/Default.aspx) (Look, too, for SupplyChainBrain's cameras - we'll be on site, shooting another day's worth of video interviews with executive thought leaders.) Gonzalez will be presenting the findings of his research into "performance-based outsourcing" - a concept involving close, long-term relationships between logistics providers and their companies. Perhaps that will convince any laggards to take another look at the outsourcing model.

- Robert J. Bowman, SupplyChainBrain

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Funny how the first question on a survey can derail the rest of it, depending on the answer. Last November, ARC Advisory Group (www.arcweb.com) did a Web poll of 102 logistics and supply-chain executives, with the goal of exploring their relationships with third-party logistics providers. Question number one was on the order of a throat-clearing: Are you currently working with a 3PL? Twenty-three respondents - nearly one-quarter of the sampling - said no.

ARC analyst Adrian Gonzalez professes not to be totally surprised by the answer. "In some ways," he says, "it kind of confirmed some of the trends we were hearing beforehand." And let's not overlook the small size of the sample. Do 23 negative comments really pose that much of a threat to the burgeoning business of logistics outsourcing?

Potentially, yes. Reasons cited by those recalcitrant executives offer insights into why any company might think twice about turning over its logistics function to an outsider. Of greatest concern is the 17.2 percent who told ARC that they had outsourced in the past, but had brought operations back in-house. That's not supposed to happen; think of the difficulties involved in regaining lost expertise and resources, once you've shifted the burden onto someone else. And who wants to load up a balance sheet with cost that had previously been shed?

Examples seen by Gonzalez have all involved large companies, mostly focusing on the transportation function. That's one of the easier areas to take back, he points out. "Generally, no assets are involved, other than investing in a TMS [transportation management system] and hiring people to manage it." Companies are apt to have a tougher time regaining control over warehousing or distribution operations, which involve more physical assets.

And what's their justification? One obvious answer is that they were burned by a bad 3PL relationship. In fact, the ARC survey contains a separate category of response - "We had a negative experience with outsourcing in the past" - to which 10.3 percent of the sample answered in the affirmative. But there's more to the matter than that. "The justification I've seen in some cases I've come across," says Gonzalez, "is, 'We've run the numbers, and figured we can do it for at least as cheap, but we end up having better control and ownership of the profits." (In fact, 17.2 percent of respondents told ARC that "We can achieve better service, at a lowest cost, than a 3PL." So much for the argument that the combined volumes of a big 3PL can trump any single shipper in terms of negotiating clout.)

Information technology has also been of help in convincing companies to regain a measure of control. Until recently, the best transportation or warehouse-management systems were available from niche vendors who specialized in the relevant process. But enterprise software giants are increasingly moving in with similar apps that blend easily with their own flagship products. A company that has invested huge sums in an enterprise resource planning platform from SAP AG or Oracle Corp., say, might be satisfied with an in-house TMS or WMS bolt-on from the same vendor. Why look beyond for something that might not integrate perfectly with back-office systems?

Finally, there's the possibility that businesses weren't mature enough to handle their own logistics a few years back, when supply chains were getting longer and more complex due to a greater reliance on offshore manufacturing. The company in question might have lacked logistics infrastructure to venture into China or low-cost regions. Sensing that need, some contract manufacturers launched their own logistics units, or acquired 3PLs, to create one-stop outsourcing shops. Now, with service and cost issues under control, a few big manufacturing clients of 3PLs have decided they can better handle the job themselves.

Ironically, the globalization of supply chains might have triggered a return to insourced logistics. Lengthier supply lines mean greater risk. Transit times are longer, too, and suppliers more difficult to monitor for reliability. At the same time, manufacturers and distributors are slashing buffer stocks in order to boost operating margins. With so little room for error, it makes sense that they'd want to have their own people on the ground where product is being made, working directly with carriers and forwarders to keep goods flowing to market. They might also be in a better position to keep their own customers apprised of shipment status, at a time when order visibility is the very key to good customer service.

Some companies don't feel they have the option to outsource. In the ARC survey, 10.3 percent said that "No 3PL in the market is capable of meeting our specialized requirements." An equal share said that "Logistics is a core competency for our company."

Fair enough. But the biggest slice of responses - accounting for nearly half the total - falls into the mysterious category of "Other." Gonzalez translates this to mean any of several possibilities, including "We have yet to investigate," "We haven't reviewed the option," and "We haven't spent the time to investigate 3PL benefits." A bit shocking, though, isn't it, considering all the hype that's accompanied the rise of 3PLs over the past two decades? Where were those companies when many Fortune 100 organizations were freely availing themselves of outsourcing services on a global scale? Don't they read SupplyChainBrain?

Expect Gonzalez and ARC to have a lot more to say on the subject this week, at the firm's World Industry Forum in Orlando from Feb. 8-11 (http://www.arcweb.com/EVENTS/ORLANDO2010-ARC-WORLD-INDUSTRY-FORUM/Pages/Default.aspx) (Look, too, for SupplyChainBrain's cameras - we'll be on site, shooting another day's worth of video interviews with executive thought leaders.) Gonzalez will be presenting the findings of his research into "performance-based outsourcing" - a concept involving close, long-term relationships between logistics providers and their companies. Perhaps that will convince any laggards to take another look at the outsourcing model.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article