Outsourcing of Operational Logistics – Episode 2: Does Outsourcing Make Sense for My Company?
Episode 2: Does Outsourcing Make Sense for My Company?
The question cannot be answered across the board. Launching an outsourcing project simply because it is currently fashionable in your environment is not a sufficient reason. The decision to subcontract services is usually far-reaching and often difficult to reverse. It is therefore worthwhile to examine the topic very critically. You will not find the answer to the above question in this blog post either, but you will find an overview of what needs to be weighed up. Within the scope of the blog I can offer only a sample overview of a few aspects that must be expanded specifically for every project. See it as an impetus for your own thoughts.
A plan is needed!
The outsourcing decision should follow a previously defined process. It certainly makes sense to set up the topic as a project right from the start. What do you need to know for the decision, who can obtain the necessary information and how much time and effort are required? Who should be involved in the current phase of deliberations? Who can make a valuable contribution? You see, even these first considerations cannot be answered in passing during a coffee break. So the analysis of whether outsourcing makes sense for your company is already linked to work, effort and cost.
What benefit does outsourcing bring me?
There are many good reasons that speak in favour of subcontracting logistics services—but no fewer good ones that speak against it.
Let us start with a few possible advantages. High on the wish list is often the conversion of previously fixed costs into variable ones. Especially in the case of large seasonal fluctuations in warehouse or transport demand, a logistics provider can balance the variability of individual clients by pooling the flows of many customers with different seasonal patterns. The outsourcing of logistics tasks is also often justified by the aim of freeing up valuable internal resources for other tasks. Expanding production capacity in urban areas is often possible only by repurposing one’s own storage space because of limited site availability. In such a situation outsourcing is a valid alternative to new investment in proprietary warehouse capacity and helps keep tied-up capital low. Speaking of tied-up capital: in-house facilities such as warehouses are often not scalable. Investment therefore has to be planned quite far ahead and precisely in order to provide sufficient capacity on the one hand and avoid unnecessary overcapacity on the other. Subcontracting logistics services to providers allows the client to concentrate on its own core competencies while simultaneously gaining access to the provider’s logistics know-how and expertise built up over many years and across various sectors. Done properly, outsourcing can therefore also be a chance to implement modern logistics processes through partnership with a service provider.
All great, isn’t it?
Sounds too good to be true? Correct. There is an equally long list of reasons why logistics outsourcing should be treated with caution. The most obvious risk is certainly non-performance or poor performance. In your own company those responsible can intervene quickly and sustainably; you do not have that direct leverage over an external provider. The alleged lack of performance may also be a subjective assessment of the client, while the provider may believe it is delivering in accordance with the contract. That certainly happens when the agreement lacks depth (see Part 1 of my blog series). If the conflict already lies in not seeing the same problem, things become very difficult. Even otherwise, however, prompt rectification is essential. Nowadays there are only a few products for which the market tolerates weaknesses in logistics and does not turn to competitors. Sustained logistics problems can therefore very quickly become a question of survival for the manufacturing or trading company. A well-designed outsourcing project, thorough partner selection, depth in the agreement and the implementation of the right operative key figures are a good way to minimise this risk. In any case subcontracting logistics tasks places you in a strong relationship of dependence on the provider.
Let us move away from the extreme case; there are also other aspects that may argue against outsourcing. Knowledge that is not used is sooner or later lost to a company. The employees previously responsible move to other areas, leave the company for lack of need for their expertise, or move to the provider with the task (transfer of undertakings, more on that in a few lines). Sooner or later the knowledge is no longer available internally. And precisely that is the most serious point why outsourcing is so hard to reverse. Before logistics tasks can be brought back in-house you must make sure that the corresponding competence is (again) available. I see the risk in an insourcing project as significantly greater than in outsourcing. You should be aware of that before deciding to outsource.
I mentioned the transfer of undertakings above. I have already dealt with it but am no expert on the subject. The European legal framework has existed for over forty years, yet new court rulings on this field appear again and again. It can therefore become quite complex and requires specialist knowledge. If transfer of undertakings might even possibly be an issue, involve experts already in the evaluation phase of outsourcing who can provide you with details of the costs, deadlines, opportunities and potential risks for your company.
An obstacle can also be the necessity of sharing information with the provider. Are there logistics-relevant trade secrets that distinguish me from my competitors? What risks are associated with having to share this information with people outside my company? What happens if this information reaches circles for which it was not intended?
Are there legal obligations that a provider may be unable to fulfil or whose transfer could pose a problem? This can be a particular issue in security-relevant sectors, for example defence or critical infrastructure.
Changes on demand (as often practised internally) are not readily possible with an established logistics provider. Well-structured providers assess change requests under their change-management methodology with regard to feasibility and impact and then decide jointly with the client whether the change will be implemented. In my view that is not a disadvantage, but for many companies that have so far organised logistics themselves it is not always an easy adjustment to accept. For the client it is often a change toward “more structure”, for providers, who deliver their service in parallel for many customers, a necessity. In essence it is a change in the contractually regulated service.
And now?
It is perfectly normal that you will find many arguments both for and against subcontracting your logistics tasks. Weighting them correctly is essential for the right decision. Above all, when it comes to arguments against outsourcing, one must critically ask whether and how the corresponding risk can be reduced to an acceptable level. If that does not succeed and obstacles remain that are identified as knockout criteria against outsourcing, file the topic away and check, say every two years, whether there are decision-relevant changes. For the time being it probably makes no sense to invest further human and financial resources in ongoing evaluation.
If, at the end of the assessment, you see advantages in outsourcing—go ahead! How you do that will be covered in the next part of the series. In advance: the decision to outsource is not yet final. So far you have only checked whether it is a valid option. We can decide definitively only when the external parameters (providers, scope of services, costs, …) are also known.
Conclusion: A far-reaching decision
Whether subcontracting logistics services makes sense depends on many parameters. Not every topic is relevant for every company; weighting differs greatly depending on the current situation and the further strategy of the respective enterprise. As so often, the rule here is: the more you invest in the topic, the better the basis for your decision will be.
It may well make sense to seek support from a logistics expert at this early stage. An external consultant brings not only the know-how of how to set up such a process in detail and experience with comparable projects, but also an objective view of the situation—unaffected by personal relationships and company history.
How does the series continue?
The initial decision has been made. Logistics outsourcing is a valid option. Next week everything will revolve around the tender. You will find the next part here on Wednesday morning.
I very much look forward to your feedback on the series and will gladly answer your questions. My contact details can be found here. here.
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The complete blog series on outsourcing logistics services
Folge 1 | Folge 2 | Folge 3 | Folge 4 | Folge 5 | Folge 6
Veröffentlicht am 20. Januar 2021
Titelbild: iStock.com/AndreyPopov
