Executive Briefings

Outsourced Logistics: Lessons from the Best in Class

Analyst Insight: The pressure of increased supply chain complexity, a byproduct of more trading partners and global geographies, is the top factor driving best-in-class companies (cited by 59 percent) to further increase their outsourcing to logistics service providers as one key solution to managing increasing supply chain costs. This direction is compelling when performance considerations for the best-in-class companies (top 20 percent) compared to average (50 percent) and laggard (30 percent) are taken into consideration. - Bob Heaney, lead research analyst, supply chain execution, and Bryan Ball, supply chain management vice president and principal analyst, both of Aberdeen.

The following metrics were used to define best-in-class companies in our report (Outsourced Logistics vs. In-house: Comparisons and Strategies, October 2011) involving 123 supply chain logistics executives.

• Year-over-year actual decrease in freight spends of 2.7% compared to an increase of 4.1% for average and 4.4% for laggards.

• Year-over-year actual decrease of 1% in warehousing costs compared to an increase of 2.3% for average and 4.5% for laggards.

• 97.1% on-time delivery for outbound shipments compared to 95.2% for average and 85.9% for laggards.

Top Business Pressures for Driving Outsourcing Behavior

If you consider the pressures facing today's logistics executives with respect to managing their supply chains, it's not surprising that up to 59 percent (the leaders from the best-in-class)  have begun to investigate process outsourcing as an option to managing the growing complexity and increasing overseas volume due to business globalization. The global challenge can be characterized from the data as follows:

• 85 percent have import and / or export trade volumes

• Only 22 percent have the capability to include customs / duties in landed cost calculations

• Only 30 percent overall have a formal global trade management program

It's clear that companies that have not been proactive in enhancing their processes under growing globalization have found themselves in the situation of being forced to make a change.

Supply Chain Process/Performance Gaps for leading Companies

Currently, 30 percent of the companies have ongoing relationships with five or more LSPs. Survey results show that the firms earning best-in-class status are incorporating logistics service providers as integral to their strategy and to delivering these capability gaps for competitive positioning. Best-in-class companies are (compared to others):

• 2.14 times as likely to outsource direct-to-store delivery to LSP

• 1.48 times as likely to use in-house mode selection for international orders

• to have two times as much business growth increase in international business

• 1.4 times as likely to have an LSP that could offer services in all necessary geographic regions

Best-in-Class Strategies Driving Outsourcing Focus

Many of today's best-in-class companies have taken a strategic approach to outsourcing to LSPs and are first, and foremost, concerned with the total cost of ownership (67 percent). However, cost only becomes important if the LSP you're dealing with can handle the specific requirements of your business. Anywhere from 35 percent to 45 percent of companies indicated that "geographic reasons" were the main driver for outsourcing strategies, with up to 46 percent indicating that new channel /customer requirements were their key drivers. The majority (more than 52 percent) have managed to make domestic transportation and warehousing central to their supply chain competency and have created an internal core competency and competitive advantage in these traditional areas. As previously indicated, it is the rapid growth in international business and the subsequent issues resulting from doing business across different countries that have forced many organizations to partner in more expansive and collaborative ways with strategic partners in order to maintain growth while managing costs. As an example, in dealing with transportation and logistics, many companies have begun to outsource tactical and transactional activities such as load planning and consolidation, tender-track-pay, and capacity planning; but have chosen to maintain internal operations around strategic activities such as procurement and contracting, carrier strategy, and bid execution. The best-in-class lead the outsourcing movement as shown in the following assessment.

                                        The Outlook

Taking the lead from the Best-in-class approach to LSP outsourcing vs. in-house, required actions companies must take are:

• Develop future outsourcing strategy road map / vision for the growth considering geographic and customer / logistics trade-offs, inclusive of cost and service benefits under in-house or outsourced alignment.

• Leverage core competencies and create a balance of in-house and outsourced activities.

• Integrate collaboratively with internal and external partners and LSPs on enabling collaborative technologies, and link planning and execution across today's multi-party, complex supply chain.

The following metrics were used to define best-in-class companies in our report (Outsourced Logistics vs. In-house: Comparisons and Strategies, October 2011) involving 123 supply chain logistics executives.

• Year-over-year actual decrease in freight spends of 2.7% compared to an increase of 4.1% for average and 4.4% for laggards.

• Year-over-year actual decrease of 1% in warehousing costs compared to an increase of 2.3% for average and 4.5% for laggards.

• 97.1% on-time delivery for outbound shipments compared to 95.2% for average and 85.9% for laggards.

Top Business Pressures for Driving Outsourcing Behavior

If you consider the pressures facing today's logistics executives with respect to managing their supply chains, it's not surprising that up to 59 percent (the leaders from the best-in-class)  have begun to investigate process outsourcing as an option to managing the growing complexity and increasing overseas volume due to business globalization. The global challenge can be characterized from the data as follows:

• 85 percent have import and / or export trade volumes

• Only 22 percent have the capability to include customs / duties in landed cost calculations

• Only 30 percent overall have a formal global trade management program

It's clear that companies that have not been proactive in enhancing their processes under growing globalization have found themselves in the situation of being forced to make a change.

Supply Chain Process/Performance Gaps for leading Companies

Currently, 30 percent of the companies have ongoing relationships with five or more LSPs. Survey results show that the firms earning best-in-class status are incorporating logistics service providers as integral to their strategy and to delivering these capability gaps for competitive positioning. Best-in-class companies are (compared to others):

• 2.14 times as likely to outsource direct-to-store delivery to LSP

• 1.48 times as likely to use in-house mode selection for international orders

• to have two times as much business growth increase in international business

• 1.4 times as likely to have an LSP that could offer services in all necessary geographic regions

Best-in-Class Strategies Driving Outsourcing Focus

Many of today's best-in-class companies have taken a strategic approach to outsourcing to LSPs and are first, and foremost, concerned with the total cost of ownership (67 percent). However, cost only becomes important if the LSP you're dealing with can handle the specific requirements of your business. Anywhere from 35 percent to 45 percent of companies indicated that "geographic reasons" were the main driver for outsourcing strategies, with up to 46 percent indicating that new channel /customer requirements were their key drivers. The majority (more than 52 percent) have managed to make domestic transportation and warehousing central to their supply chain competency and have created an internal core competency and competitive advantage in these traditional areas. As previously indicated, it is the rapid growth in international business and the subsequent issues resulting from doing business across different countries that have forced many organizations to partner in more expansive and collaborative ways with strategic partners in order to maintain growth while managing costs. As an example, in dealing with transportation and logistics, many companies have begun to outsource tactical and transactional activities such as load planning and consolidation, tender-track-pay, and capacity planning; but have chosen to maintain internal operations around strategic activities such as procurement and contracting, carrier strategy, and bid execution. The best-in-class lead the outsourcing movement as shown in the following assessment.

                                        The Outlook

Taking the lead from the Best-in-class approach to LSP outsourcing vs. in-house, required actions companies must take are:

• Develop future outsourcing strategy road map / vision for the growth considering geographic and customer / logistics trade-offs, inclusive of cost and service benefits under in-house or outsourced alignment.

• Leverage core competencies and create a balance of in-house and outsourced activities.

• Integrate collaboratively with internal and external partners and LSPs on enabling collaborative technologies, and link planning and execution across today's multi-party, complex supply chain.