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Navigating the World of Outsourcing

Outsourcing is being driven by a myriad of forces. A recent industry survey of 381 American shippers by eyefortransport revealed that 69 percent currently outsource their logistics operations to 3PLs. The most popular functions to outsource are the conventional services. But companies are also starting to outsource more value-added and customer-facing services like reverse logistics and customer support. In other words, 3PLs can be found from one end of the supply chain to the other.

by Bob Stoffel

British chemist John Walker became an inventor by accident. He was mixing up chemicals for percussion caps - a component of ammunition - when some drops of the mixture accidentally fell onto Walker's workshop floor. Walker's shoes rubbed on the mixture, and it caught fire. Intrigued, he experimented by treating cardboard sticks with the chemical mixture and rubbing them against a strip of sandpaper. The result was the world's first friction match. Known at the time as a lucifer, Walker's invention demonstrated what could happen when a little friction is applied.

For operators and managers of supply chains, a little friction isn't a good thing. Modern supply chains depend on the harmonious flow of goods, information and funds. Whatever impedes this flow - factors like port congestion, customs delays, loss of visibility - creates friction. Such friction can lead to higher costs, more inventory, longer lead times and dissatisfied customers.

Global and Just-in-Time

Two business mega-trends, globalization and just-in-time fulfillment, have further complicated the management of free-flowing supply chains. Although some resist it, globalization is accelerating. Some $8.9 trillion in merchandise was traded around the world in 2004. That's well over double the $3.5 trillion in merchandise trade in 1990. Today, global trade accounts for approximately one quarter of our nation's gross domestic product (GDP), up from 13 percent in 1970. Supply chains are stretching farther across borders as more companies source and market globally. Just-in-time (JIT) fulfillment is being adopted with equal fervor. For years, manufacturers found that carrying a large inventory of parts and components was inefficient - and devoured cash, space and resources. In recent years, this lean inventory philosophy has spread from manufacturers at one end of the supply chain to customers like retailers and service companies at the other end. As downstream customers take charge of their supply chains, the need to deliver the right products to the right customers at the right time - just in time - has intensified.

JIT-driven enhancements in supply chain processes have yielded some astonishing business results. In the ten years between 1992 and 2002, American companies reduced their collective inventories by $4.6-trillion. Order-to-cash cycle times improved by 10 percent.

Globalization and JIT fulfillment is transforming global logistics. Shipments are getting smaller and more frequent, meaning that delivery services need to be more time-sensitive and time-definite. Shipments are also traveling greater distances and crossing more borders, so planning is more involved, lead times longer and customs compliance more complex. What's more, there are also more supply-chain parties to manage and more handoffs to finesse in cross-border transactions.

Even transport modal choice is becoming more complex. Shipping decisions are now made on the basis of time and cost rather than on shipping mode. Air, truck, ship or rail: it doesn't really matter to the customer, as long as shipments get there quickly, affordably and predictably. In fact, a study by the Colography group reveals that 40 percent of U.S. businesses are active shippers in three or more modes of expedited transport. Intermodal logistics adds another layer of complexity to an already challenging logistics environment - another layer of friction.

Outsourcing Catches Fire

Any wonder, then, that all these sources of friction in the supply chain have helped ignite demand for third-party logistics (3PL) outsourcing? Clearly, more and more firms are turning to outside experts to help manage the complexities of their global JIT supply chains. In fact, firms around the world are spending an estimated $270 billion each year on 3PL outsourcing. And the category is expected to expand by an average of 6.9 percent annually through 2009. A recent industry survey of 381 American shippers by eyefortransport revealed that 69 percent currently outsource their logistics operations to 3PLs.

Which functions are companies outsourcing, according to the survey? Most popular are the conventional services: Forty-six percent outsource transportation, and 34 percent warehousing. But companies are also starting to outsource more value-added and customer-facing services like reverse logistics (18 percent), customer support (11 percent) and information systems (10 percent). In other words, 3PLs can be found from one end of the supply chain to the other, supporting a range of tactical and strategic functions for their clients.

Still, choosing a suitable 3PL partner or group of partners is a mission not to be taken lightly. After all, how well your 3PL partners perform will have a direct impact on your firm's financial performance - not to mention your customers' level of satisfaction. The decision also has long-term implications. Once you have chosen your partners and integrated them into your supply chain, it can take months and even years to disentangle if things go awry.

Admittedly, the evaluation process isn't easy - there is a bewildering array of logistics providers to consider. Although the 3PL market has seen considerable consolidation in recent years, the market is still relatively fractured, with a handful of global providers and thousands of "specialized" players. Even among the largest integrated providers, no single company has a dominant global market share or heavy presence in every part of the world.

Whether you choose a single integrated 3PL provider to manage your global supply chain or opt to stitch together a number of specialized players, finding the right match for your company and your overall business strategy is probably the most important logistics decision you'll make. Following is a checklist of factors to consider when you're choosing your 3PL partners:

3PL Checklist

Make sure your 3PL provider is experienced in disruption planning. Check to see that it has the advanced in transit visibility systems - as well as arrangements with multi-modal transportation providers - to accommodate emergency rerouting of shipments. For unusual spikes in demand, your 3PL partner should also have the extra capacity to accommodate fluctuations. Flexibility in a world of supply chain friction and unexpected disruptions is invaluable.

Friction is good for making fires - but bad for making your supply chain flow. Choose a 3PL partner that can help your company smooth the path for global sourcing and selling.