Logistics Outsourcing
Is it Right for Your Business?
by Hugh D. Kinney, Jr.
a white paper from The Progress Group
© 2013, The Progress Group, LLC
No part of this document may be distributed, reproduced or posted
without the express written permission of The Progress Group, LLC
The Progress Group, LLC | 1200 Abernathy Road, Suite 1700 | Atlanta, Georgia 30328 |770.804.9920 | TheProgressGroup.com
Logistics Outsourcing - Is it Right for Your Business?
By Hugh D. Kinney, Jr., The Progress Group
Making the decision to outsource selected supply chain functions and processes to a Third Party Logistics (3PL)
company can be challenging yet rewarding to the organization. Supply chain functions have grown increasingly
complex with globalization, technology, and competition advancing at a rapid pace. Thoroughly examining the
motivations, expectations, and justifications for outsourcing critical supply chain functionality enables companies
to make effective decisions which generate incremental profitability and shareholder value. Careful consideration
and analysis of cost factors, performance gaps, financial impact, and suitability for outsourcing yields superior
outsourcing strategies and transition plans.
Outsourcing ultimately requires trust. Handing over various aspects of supply chain operations to a partner can be
difficult for organizations that do not typically view their suppliers as cooperative partners. Ralph Waldo Emerson
is credited with saying, “Trust men and they will be true to you; treat them greatly and they will show themselves
great”. Entering a relationship with a 3PL company is like handing over your wallet to a business associate - Do you
trust that your cash, credit cards, and family photos will be intact when you ask for it back? 3PL outsourcing is
exactly like using a bank to handle your financial transaction management – you make deposits, you issue payment
instructions, and you expect a perfect balance. With a 3PL contract – you issue goods to a carrier or receipts into a
warehouse, you issue orders to ship or deliver to specific consignees, and you expect perfect execution and
inventory balances. The difference lies in the physical realities of handling, storing, moving, and controlling physical
products and their associated information over space and time. Trust is required and both parties to the
relationship must do their part to build and maintain that trust in order to manage a successful operation.
Supply chain operations are evolving and advancing every year. For example, warehousing has evolved from the
simple activity devoted primarily to material storage in the 1950’s and 1960’s. Adoption of just-in-time principles in
the 1970’s and 1980’s drove smaller order sizes with increased frequency, lower inventory levels, and a greater
need for order assembly activities occupying the space made available by inventory reductions. Leading companies
reengineered warehouses into distribution centers and began rewarding distribution professionals with career
advancement opportunities instead of perpetuating the perception of warehousing as a career killing profession.
Adoption and growth of customer-driven designs, third-party logistics, postponement, mass customization, supply
chain integration, and global logistics in the 1990’s added a variety of cross-docking and value-added service
activities into supply chain operations. Logistics centers arose from distribution centers which combine customized
labeling and packaging, kitting, international shipment preparation, customer-dedicated processes, and crossdocking with the traditional activities of storage and order assembly. The distinction between manufacturing,
transportation, and warehousing activities is blurred in a logistics center. The margin for error is now near zero.
Supply chain management technologies have also significantly evolved during this time period. Large mainframes
running financial applications supported by manual execution processes dominated the 50’s, 60’s and 70’s. The
advent of the PC, shared networks, and spreadsheets enabled better and faster analysis and the development of
distributed processing systems for planning and execution. The internet’s growth form the late 90’s into the 2000’s
has created an information explosion and wireless and mobile applications provide 24/7 information access to
supply chain managers and customers. As a result, order cycles have steadily declined from months to weeks to
days to hours. The pressures on the supply chain to respond and react continue to grow and the expertise required
to effectively manage supply chain operations continues to increase.
In response to these ever changing demands and increasing complexities, companies turn to outsourcing of supply
chain operations including warehousing, transportation, materials planning, freight forwarding and reverse
logistics. The general motivations for outsourcing these operations fall into three main categories: increase
revenue, improve capabilities, and reduce cost. As illustrated in Figure 1, multiple motivations fall into each
category.
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Figure 1. General Outsourcing Motivations
Increase Revenue
Increase flexibility & responsiveness
Increase speed to market
Improve quality
Decrease customer response time
Gain access to new markets
New value-added services
Improve Capabilities
Focus on core business
Gain access to new technology
Gain access to advanced skills
Provide flexible facility capacity
Create additional capacity
Provide backup capability
Reduce Cost
Reduce operating costs
Reduce capital investment
Transform fixed to variable costs
Meet downsizing requirements
Reduce development costs
Reduce healthcare exposure
While these and other valid and appropriate motivations drive outsourcing decisions, some companies use
inappropriate reasons to justify their decision to outsource. Some companies choose to outsource simply due to
lack of understanding of logistics processes. Lack of necessary skills may be a valid reason for outsourcing but
companies should maintain enough knowledge of their logistics processes in order to effectively manage the
outsourced relationship. Other companies justify their outsourcing decision on the ability to better identify the
true cost of supply chain operations. Companies should first seek to understand their true logistics costs prior to
outsourcing in order to make better decisions and build better relationships. Some companies want to off load the
problems and issues associated with managing logistics operations. They mistakenly believe they can transfer the
inherent problems and shift responsibility to a partner for resolution and not be involved with the detection,
communication and decisions required to effectively resolve and reduce problems and performance issues. The
result of this belief will manifest itself in frustration, anger, blame, and poor logistics performance. Desire to simply
reduce headcount is another inappropriate outsourcing motivation as is the desire to simply reduce the asset base
in order to achieve a short term improvement in the eyes of public investors. These results may be positive factors
in the outsourcing decision but should not be the primary drivers. Outsourcing motivations will ultimately impact
partner relationships and supply chain performance either positively or negatively.
Some companies never consider outsourcing or eliminate the strategic option of outsourcing too early in the
supply chain strategy development cycle due to reasons that can be just as inaccurate or inappropriate as poor
reasons to outsource. In-sourcing rationale may include an unconfirmed perception that cost will increase if an
operation is outsourced. In many cases, this view is expressed by companies that do not know their true cost of
supply chain operations. Another popular perception is that customer complaints will automatically increase due
to decreases in overall service levels if an operation is outsourced. The belief is that the partner will not care about
the business as much as internal employees do. This perception is based on the assumption that 3PL providers only
care about their revenue which will not be the case if requirements are properly defined and contracts properly
structured. Some companies have a strong perception that only they know their business well enough to
effectively serve their customers and no other company can do it as well because their operation is unique. Their
products and market offer may be truly unique but a qualified and experienced 3PL partner may actually have
superior processes for order processing, storage, fulfillment, EDI, packing, labeling, and shipping which could
actually better serve their customers. Another favorite rationale for in-sourcing is “we will lose control”. In reality,
a well-structured 3PL agreement may yield increased control as 3PLs are operating under a customer centric, cost
focused relationship in which all transactions are recorded, monitored and reported on a daily, weekly and
monthly basis. The level of control an outsourcer has can actually be higher than an internally managed operation.
When selecting a strategy of outsourcing, a company must objectively evaluate its operations relative to
outsourcing options. An outsourcing evaluation team should include members from the supply chain organization,
finance or accounting, and sales. The evaluation and decision should consider cost analysis, performance gap
analysis, financial opportunities, and suitability of operations for outsourcing. Cost analysis should include all of the
operating costs associated with operations, including those costs that will be transferred to a service partner and
those that will remain with the company. The performance gap analysis should include an objective assessment of
company performance, strengths, and weaknesses supported by metrics and benchmarking comparisons if
necessary. Outside expertise can be very useful for performance gap analysis in order to obtain objective results.
Financial opportunities assessment includes reviews of fixed to variable cost conversions, potential cost of
technology upgrades, matching cost to volumes fluctuations and benefits to the balance sheet or corporate capital
structure. Suitability analysis refers to objectively evaluating process details in light of the performance gaps to
determine the most likely candidates for enhancement through outsourcing.
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Cost analysis is critical prior to engaging in an outsourcing process for logistics or supply chain operations.
Companies should compare costs for each facility in each region and examine differences in costs, volume profiles,
and cost per unit for both internal benchmarking and for comparison to outsourced alternatives. The cost of
customer service including order processing, inquiry response, issue resolution, and electronic communications
should be defined and documented. The costs may span multiple departments but are required in order to serve
the customer and manage customer relationships. Cost of the inventory investment by location should be included
in the analysis along with inventory related costs such as damages, lost, and obsolete inventory by location. Supply
costs including procurement and inbound transportation may be impacted by outsourcing. Outbound
transportation should be examined by location and mode as multiple opportunities may exist to reduce
transportation costs. Warehousing costs for space, labor, and technology relative to activity profiles may expose
additional cost savings opportunities.
Identifying and understanding all of the operational costs are important tasks to complete as an input for making
the decision to outsource logistics operations. Recognizing regional differences and understanding the business or
facility drivers that influence cost performance is important to developing functional requirements and evaluating
future vendor proposals. Once all of the costs and identified and documented, the team should project which costs
will be transferred to potential service providers and which will be retained after outsourcing for evaluation and
planning purposes. Some providers may propose different levels of service or optional services that can transfer or
defer different cost components. Cost analysis is an important component of the total outsourcing analysis and
justification process.
The logistics performance gap analysis is used to compare logistics key performance indicators with world-class
indicators. The gaps enable assessment of strengths and weaknesses; identification of complementary logistics
benchmarking partners; and development of cost-benefit justification of a world-class logistics initiative. Many
companies must collect and summarize their operational performance data in order to develop many key
performance indicators if they are not currently reporting them. Evaluating process attributes and their key cost
and service metrics is required for the gap analysis. The team should assess each of the primary functions included
in the cost analysis for performance gaps. In addition, the team should include the cost and gaps of the technology
infrastructure in the analysis. Adequate technology support may be expensive to develop internally or may be
already implemented with an opportunity to transfer transaction execution to a 3PL using internal systems. An
example of a gap analysis summary is shown in Figure 2.
Once the gaps are identified, the team should use them to better know the strengths and understand the
weaknesses of the organization. The gap analysis enables the company to seek partners with strengths that can
compensate for or complement the
weaknesses or capability gaps which the
company should strive to fill. A decision to
outsource operations will then yield an
evaluation requirement to leverage the
expertise of potential partners to fill the
most significant gaps in performance
capability. Remember, that filling the gaps
will take some time even for highly
qualified partners as the company must
adapt and develop internal processes to
capitalize on the improved capabilities.
Figure 2
Performance Gap Analysis
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The team must evaluate financial opportunities relative to current cost factors, capital investment requirements
for closing performance gaps, financial structure and objectives, volume variability and company risk tolerance.
The analysis should consider current unit costs and the mix of fixed and variable costs and potential to convert
fixed to variable cost. If gaps exist in technology capability, the team should estimate the capital investment
required to adequately fill the technology gap and the time required for implementation. If the volume fluctuates
significantly, conversion to variable cost will enable the company to more closely match period costs to volume
resulting in a more stable cost per unit per period. Elimination of facility leases or sales of distribution facilities or
fleet operations can have positive balance sheet impacts which can contribute extra savings or benefits to the
outsourcing justification.
Outsourcing suitability analysis is summarized in figure 3 and involves an assessment of candidate functions, their
major processes, and the company’s capabilities against a set of evaluation attributes that stratify elements such
as criticality, competence, customer impact, complexity, and improvement capacity. Suitability analysis begins with
developing matrices of the major outsourcing candidate functions such as warehousing, transportation
management, order processing, freight audit & payment, specialized packaging & assembly, and returns & reverse
logistics. Next identify the major processes within these functions that are required for successful execution. For
example, major warehousing processes could include pre-receiving, inbound unloading, inbound inspection,
putaway, order picking (various order types), outbound inspection, packing, outbound audit, manifesting, and
shipping. The team should then develop a list of evaluation criteria that should include elements such as:
complexity, customer receptivity, competitive differentiator, customer interaction level, product knowledge
requirements, exception incidence rates, current performance gaps, and 3PL ability to assume quickly and
improve. Team members should individually score the attributes for each major process. Once the scores are
accumulated and summarized, the team should meet to review and reconcile the scores to create the list of the
most easily and effectively outsourced processes and functions. During this meeting, the team should also identify
the barriers and risks associated with the outsourcing decisions. Subsequent meetings are conducted to develop
plans for overcoming the obstacles and mitigating risk in order to create the master outsourcing plan.
Figure 3
Outsourcing Suitability Analysis
World-class logistics organizations partner with strategic providers of various logistics services including
transportation management, transportation services, freight forwarding, customs brokerage, warehousing,
logistics information systems, benchmarking, logistics consulting, and logistics professional education. The
outsourcing decision for any one of these logistics services must be examined frequently (as the business and
logistics environment is changing perpetually) and carefully (since it is typically more difficult to re-insource an
activity). Outsourcing decisions should consider the following decision criteria to justify outsourcing a logistics
activity. Consider logistics outsourcing if:
 Proven 3PL providers support your industry or support businesses with similar operational attributes AND
 Economies of scope and scale are available for a 3PL AND
 3PLs potentially have a significant cost (-20%) and service advantage AND
 Outsourcing will fill operational performance gaps AND
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

Outsourcing will not directly impact customer communications and relationships AND
The 3PLs have a better warehouse management system or can effectively operate using your existing
WMS
Once the decision to outsource is made, the team will begin the implementation process by creating the
outsourcing plan and preliminary budgets and schedules.
About The Progress Group
The Progress Group is an independent management consulting firm delivering strategy to
implementation services in logistics/supply chain, operations design, performance management and
program management. Our clients benefit from our depth in experience, thought leadership, analyticsbased thinking and always objective client advocate viewpoint. Founded in 1991 by industry leaders, we
partner with our clients to enhance competitive position and improve performance. The Progress Group
is headquartered in Atlanta, GA. For more information, visit www.TheProgressGroup.com.
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