Warehouse Outsourcing Pros & Cons

Why would a business want to outsource a key part of their supply chain to a 3PL Company?

The fact is, that most business' sell products, not fulfilment and distribution.

Overheads and upfront costs of warehouse space and inhouse logistics may detract from their core business activities.

They see the benefits of utilising the core competencies of a 3PL partner. Viewing outsourcing of the warehousing and third-party logistics as a competitive advantage that:

delivers cost savings
increases the opportunity for efficiency
rapidly adds ‘know-how’ to the conduct of the logistics task

In this article we explore:

the ‘pros’ of moving to a warehouse outsourcing model, vs
the ‘cons’ of handing over a key part of your customer experience to a third-Party Logistics (3PL) provider.

Consider your customers.

"It’s just a warehouse we are outsourcing” you might say, but it’s not.

Do not fall into the trap of thinking you are just handing over the running of a warehouse to a 3PL provider.

You are in fact handing over a key part of your customer experience. The warehouse is a core business operation and should be considered within your supply chain planning process.

Be very clear on what impact that may have on your customers and what you may need to do to alter your supply chain management model to bolster the reliable provision of the service once, it is handed over to a third-party.

Whilst you need to trust the expertise of a fulfilment partner you don’t want to lose control or responsiveness to changing environment.

Peter Drucker (1954) wrote

“it is the customer who determines what the business is, what it produces, and whether it will prosper.”

This is still true today, if not more so in an e-commerce environment.

Understand your warehouse logistics needs

Take the time to understand your needs and clearly distinguish where value is derived for both your organisation and your customer. Be prepared to clearly articulate them to the 3pl provider.

Valuable insights from 3PL users, reveal the following points as key to satisfaction:

Responsiveness to changing needs
Logistics service speed
Logistics service price
Service attitude
Logistics service accuracy
Integrity
Logistics information timeliness
Error processing quality

However, exclusive focus on these points, as an explanation of the 3PL selection process offers us an incomplete picture of the complexity of the decision being made.

Supplier selection is also based on the perceived value created by outsourcing, and the inherent desire to maximize the benefits that they derive from establishing outside supplier relationships.

It appears that customers of 3PL services are increasingly recognising that cost advantages and delivery performance, whilst necessary, are not always sufficient in the modern business world.

Understand the provider market before you step in

An outsourcing brief sent to the top 3pl providers without research or understanding of how their capability matches your needs, means time and money wasted on pursuing a solution that does not fit. Keep in mind that market pricing fluctuates, as providers win and lose contracts. Knowing who has appropriate spare capacity is an opportunity to leverage negotiation to your advantage.

Points to consider:

Strategic Alignment - The outsourcing decision must align with the company’s strategic direction. This is a common sense proposition, but unfortunately not well practiced.
Attention to Detail - When seeking 3pl provider quotations and contracts, there is no room for intuition, or best guesses on order velocities, volumes, pick and pack processes and service requirements. Very detailed specifications must be prepared by the organisation, with full disclosure of all available data before pursuing formal quotes from 3pl providers. There is rarely too much information that can be gathered. But where there is an absence of sensible interpretation of data, this can cause major issues in the outsourcing relationship.
Assess the risks - Think of risk in terms of quality of service, damage to goods, inventory control and losses, materials handling capability, cost containment and variation in supply volumes.

The romance is fun, but the marriage is long term.

In most, if not all outsourcing processes, the knowledgeable salesperson from the 3PL provider capably sells the sizzle of their organisations particular ‘way’ and why it is best for you.

Post contract signing, it is then left to the 3PL’s operational team to juggle the delivery of the promise and achieve their P&L targets. No surprises, P&L achievement becomes the prime focus.

Throughout the process the 3PL’s operational owner should be front and centre in the process and comfortable with the performance KPIs they are signing up to. You buy from the sales guy but work with the delivery guy.

Understanding the full picture is key

Be really clear on you contract assumptions, definitions and volumes and how they intersect with the 3PL price template before you start to implement.

Do not leave these contractual assumptions to be determined during the operational discovery phase. By then you could be too far down the journey to back out of the deal, and consequently, have ‘at best’ set yourself up to be a price taker or ‘at worst’ taken the first step towards contract disputation.

Consider engaging an Outsourcing contract specialist

A specialist in the setup of service delivery contracts should be actively considered as an element of your contracting strategy.

Your experience in setting up outsourcing contracts is likely to be a fraction of that of the larger logistics providers. Nor is it expertise that procurement teams typically hold, given their daily focus on procuring business inputs as opposed to contracting service delivery.

Siecap’s professional view is that the discovery phases outlined above represent the most critical stage of the outsource journey. This phase is often under resources, rushed and at its heart, is based on unrealistic expectations relating to the effort required to get the process right.

Taking a moment to step back, consider and add additional dimensions to the warehouse outsourcing process will assist in mitigating these challenges.

After all, surveys show that less than 50% of organisations rate their 3PL experience as ‘very satisfied’, and while 86% rate it satisfactory, a critical finding, post outsourcing, is that employee morale has been adversely affected in 50% of the cases.

In Conclusion

If you are considering outsourcing or changing your provider Siecap offer all the services required to assist you in the decision making process, from determining your objectives and building the scope of the project, through the contract negotiation stage and project management of the final implementation of your warehousing outsourcing project.