Volume 8, Issue 5 - May 2007

Outsourcing Delivery

Important Steps to Consider 
by Rich Augustine

So you’re thinking about outsourcing the delivery of your product.

First, it’s important to remember that outsourcing itself is not the strategy but rather the vehicle for achieving this objective.

The major failures in outsourcing relationships occur when a firm outsources an activity its personnel doesn’t understand, and the provider promises to meet the requirements that have not been fully defined, understood and communicated.

Some third-party logistic providers specialize in certain industries such as doors and windows. The advantages to dealing with, for example, a transportation specialist are obvious: the knowledge and expertise they have in specific industries lend itself the economies, efficiencies and innovation to your operations. In some cases synergies and cost reducing services such as consolidation can be achieved only through using a specialist. 

Outsourcing Advantages
There are several other advantages of outsourcing the delivery of your product: 
• It removes you from the operational and regulatory complexities of operating a transportation business that threatens to take too much time away from the real tasks of manufacturing;
• It shields you from the significant potential liability inherent in operating a transportation business in today’s environment;
• It gives you the added advantage of growing your business without adding excess capital and employees, especially during the peak times of the year; and
• It provides you access to a team of transportation experts who can plan, develop and implement a comprehensive delivery system to meet your needs. 

As with any other significant undertaking, it is absolutely critical that the outsourcing project has senior management support. Before all or part of the logistics function is being turned over to a third party for consideration, one of the first tasks that management should perform is to determine what your company is attempting to accomplish through outsourcing. Objectives must be set, and many questions must be answered. It’s suggested that you should go beyond “What will it cost”? On the other hand as important as costs are, there are other determining factors that should be considered. Such as: 
• Are there risks in outsourcing and are they acceptable?
• What is the competition doing and is it working for them?
• Has your customer expectations and delivery requirements been identified?
• Will there be any delivery controls you will lose, and if so, are they acceptable?
• What results should you expect and how soon should you expect them from your logistics provider? 

For some companies, assessing current operations and detailed costs may be the most difficult part of the outsourcing process. However, in order to make an intelligent decision it will be necessary to conduct an audit to access current operations.

While logistics outsourcing can provide substantial benefits in costs, expertise, systems and other areas, it is critical to follow best practices approaches to identifying, selecting and managing third-party relationships. Lack of adequate internal preparation is common and can be potentially fatal. Without a solid understanding of your current situation and specific objectives, it is impossible for the logistics provider to propose solutions, and for you to assess whether they truly provide value for your company.

Know your Current Costs and Performance Levels
Sooner or later you are going to need to document the effects of outsourcing logistics: Have costs actually gone down? Is performance equivalent to or better than what you had before? Are you getting your money’s worth? The only way you can know the answers is to have a baseline of cost and performance today—the “before” in the “before and after” comparison. This may seem obvious to some, but I have found that many companies do not have a good handle on their cost and performance levels. Your product, customer or shipment routing takes more than just a truckload rate in dollars and cents per mile. It’s how much product was on the truck, how often it was late for pickup and for delivery, how frequently did damage occur, whether the carrier billed you correctly, how fast the order was processed, how frequently backorders were involved, how much internal staff time was involved in fulfilling the customer requirements and all the rest.

Your carrier will want this information so they can evaluate what benefits they expect to provide and what goals they’re expected to hit as well as whether or to what extent they will share in gains or losses as part of a performance-based contract with you.

Build the Right Project Team 
Logistics outsourcing affects a wide range of activities in your company: manufacturing, purchasing, sales, customer service, human resources, perhaps warehousing, shipping and related functions, just to name a few. It’s important to get these areas involved from the beginning in establishing the requirements and objectives, and in helping to assess the candidates later on in the process. To get the benefits of outsourcing, all of these groups have to live with the results of the selection process, so it’s clearly better to get them involved early and often rather than simply announce an outcome that they may resist and thus doom them to failure. There are two steps that work best in making the project a success. First, appoint a dedicated project manager who “owns” the project and has clear responsibility for executing the identification and selection process and directing the activities of the team. Second, have clear and visible top management commitment in setting the tone, making the resources available and breaking through the inevitable logjams that occur. Not only do these two factors help the project proceed more smoothly within your company, they can improve the attention and responsiveness of the carriers you are considering dramatically. 

Management must have a clear picture of current logistics operations, their capabilities, limitations and costs, as well as future needs. It is important to remember that all costs must be captured: fixed and variable and direct and indirect. It is quite possible that some expenditures, such as those for order processing or management’s time, may be difficult to quantify, but they cannot be ignored if valid comparisons are made.

The activities described above are simply the first steps in outsourcing logistics. But they present the critical foundation that will allow you to proceed effectively and efficiently. 

Rich Augustine is the president of Dedicated Distribution Systems based in Indiana, Pa. 


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