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LSPs are no strangers to change. The types of functions they provide, and the customers they serve, have transformed considerably in the decades since logistics outsourcing first became a supply-chain management option. “The degree of value-added services that [logistics] companies provide now is much more wide-ranging, broader and deeper,” says David Buckby, economist with Transport Intelligence.
These days, the chief driver of change in the logistics landscape is the emergence of the omnichannel. What once consisted primarily of fulfilling large orders to brick-and-mortar stores has morphed into a broad array of services in support of e-commerce shoppers. And those buyers are growing more demanding by the moment.
“There’s a reason why the topic of the omnichannel continues to be brought up in terms of challenges in today’s supply chain,” says Tom Kretschmer, vice president and general manager of retail and consumer brands at Ryder. “I don’t know that any one firm has figured it out.”
“Retailers are struggling to figure out what sort of omnichannel network you have to have to satisfy customer needs,” says Robert Lieb, professor of supply chain management at Northeastern University. In addition, they’re faced with the dilemma of handling returns, which can account for up to 30 percent of total online sales.
Additional challenges for LSPs and suppliers alike include a marked shift in global sourcing, triggered by rising wages in China and the uncertainties that come with maintaining long supply lines; a new emphasis among suppliers on maintaining visibility across multiple tiers of the chain; a heightened awareness of the need for better risk-management strategies, and the growing complexity of supply chains generally, wherein a single product might be sourced and manufactured in multiple countries.
You might think these myriad complications would drive suppliers into the arms of LSPs — who are, after all, the acknowledged experts in managing and moving product worldwide. And to a great extent that’s true; in fact it helps to explain why outsourcing today is on the rise.
At the same time, LSPs must contend with a number of reservations that suppliers might harbor, justified or not. They break down into four potential barriers to outsourcing: cost, control, commitment and risk.
Concerns Over Cost
The issue of cost is especially critical, because of the very nature of the modern-day omnichannel. Given the razor-like margins of retail, sliced even thinner by the economics of e-commerce delivery, suppliers might wonder if there’s room for an intermediary to thrive.
With a giant like Amazon dominating the e-commerce sector, marked by a willingness to operate a good portion of its business at a loss for extended periods of time, rival e-tailers find themselves under intense margin pressure. “Right now it’s an extremely competitive marketplace, with more and more people getting into it every day,” says Lieb. “That means margins are going to be very thin.”
LSPs have struggled with maintaining profitable operations since the industry’s inception. So is there room within the demanding omnichannel for their services, which must be priced to ensure a fair return?
Kretschmer states that LSPs can actually reduce the cost of omnichannel fulfillment, by bringing multiple clients to bear to create density and shared networks. “I think there will be a relaxation of constraints, to be able to leverage networks,” he says. “It’s going to grow in the future.”
An area of focus for Ryder is the sharing of warehousing and transportation assets. On the facilities side, a multi-client approach allows the LSP to balance seasonal demand with countercyclical products. For transportation, it can lead to the “Uberization” of delivery networks, making better use of available resources.
Margins remain tight, Kretschmer acknowledges, but LSPs can still play a key role in ensuring the cost-competitiveness of their supplier and retailer base.
The services of LSPs today, while under severe pricing pressure, are anything but a commodity. Kretschmer says suppliers are depending on outsourcing partners to present them with opportunities for continuous innovation. Initiatives might include addressing the nature of employee engagement, the definition of standard work, and adoption of strategies for building problem-solving capabilities into the client’s overall culture.
LSPs can also aid suppliers that are selling through Amazon, notes Chris Elliott, senior strategy consultant with Blue Horseshoe Solutions. “Not many manufacturers are going to want to set up operations to support all of those Amazon distribution centers,” he says. “Many are looking to outsourcing providers to hold their inventory and ship it to Amazon when it’s requested.” In the process, a supplier can replicate the scale of Amazon’s network by relying on that of an LSP, without paying a premium for the assets.
For suppliers struggling to compete in this challenging marketplace, control is every bit as important a factor as cost. LSPs allow clients to focus on their core competencies, rather than be saddled with the physical movement of goods. But that mustn’t lead to a loss of control over the larger supply chain. If a delivery fails in any way, it’s the brand that suffers, not the logistics provider.
The solution lies in transparency, coupled with a relationship that’s built around mutual benefit. The supplier might not be asserting direct control over the logistics function, but it needs to know what’s going on at every step of the way.
A successful LSP will keep it informed of any potential problems, allowing the parties to take action to head off glitches in the supply line. The client must also possess detailed intelligence on the LSP’s performance, often in the form of regular report cards. Says Kretschmer: “These vested partnerships are part of how our customers are maintaining control.”
Concerns over control shouldn’t blind companies to the benefits of an outsourcing relationship, according to Lieb. “It’s realistic to understand that they’re in no position to take care of it themselves,” he says. “The scope [of the marketplace] is growing so fast that a lot of companies don’t have the internal bandwidth. They’re in new territory, to a great extent.”
A Need for Commitment
No outsourcing relationship can succeed today without a firm commitment from both sides. The supplier needs to know that the LSP is dedicated to its business. And the LSP must be certain that the deal justifies the substantial resources that it must bring to bear on the customer’s behalf.
Early outsourcing contracts didn’t last much longer than a year — far too short for a complex, modern-day relationship. Even three years, which has become the industry standard in many cases, isn’t long enough to convince the LSP to make the necessary capital improvements to its network, says John Langley, professor of supply chain management at Penn State. But 10 years is probably too long, at least in the current business environment. “There’s some point in between where both parties get confidence in longevity,” he says.
Kretschmer is seeing an increase in the number of five-year outsourcing agreements. “We’re getting smarter about how to create these contracts where there’s mutual commitment on both sides around cost, service, continuous improvement, and pain-and-gain-type relationships,” he said. Hence, the growing popularity of the vested relationship, whereby the parties’ fortunes are tightly linked.
One key to the success of a long-term relationship is the LSP’s responsiveness to change, says Langley. Suppliers need to know that their logistics partners can adjust to inevitable shifts in their sourcing patterns and customer base. That trait becomes especially crucial in the age of the omnichannel, with market leaders seeking constant innovation in their service offerings, including faster fulfillment and a greater range of delivery options.
Finally, there’s the all-important consideration of risk. A string of recent natural disasters around the world, coupled with spates of congestion at major gateways, has forced companies to take a fresh look at their overarching risk-management strategies. (And, in some cases, adopt one for the first time.) Outsourcing partners are a critical part of that equation. Customers must be confident that they can provide alternatives to a disrupted supply network at a moment’s notice.
LSPs help to alleviate risk by acting as a source of supply-chain talent, says Kretschmer. “As companies go to the outsourcing process, they want to understand who’s going to operate their business,” he says. Having the right people in place improves the customer’s ability to measure the capabilities of its LSP partner, and boosts confidence in that entity’s ability to respond to a crisis quickly and effectively.
The increasing complexity of global supply chains bodes well for the continued growth of LSPs, as long as they can address customers’ questions about their level of expertise, skillset and degree of commitment to the relationship. And many today seem satisfied with the answers they’re getting. Among Fortune 500 companies, Lieb has seen the percentage of logistics budgets devoted to outsourcing rise over the years from 35 percent to as high as 80 percent. “There are a lot of companies that have been very pleased with these relationships,” he says.
It seems likely that LSPs will be called upon to perform an even broader range of tasks in the years ahead, especially those that relate to the ever-evolving omnichannel. “There’s a huge opportunity for outsourcing in this space,” says Elliott.
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