What is Logistics Outsourcing
Procurement and logistics outsourcing is when a business uses an external provider to perform logistics activities on its behalf. Companies that carry out logistics activity for their clients are known as third-party logistics (3PL) providers or logistics service providers (LSP). Logistics activities that are most commonly outsourced include the warehousing and transport of goods.
Outsourcing allows businesses to focus on their core skills, whether that be sales, branding or product design, whilst competent logistics professionals carry out the roles that are not core to the business. However, once a function is outsourced, a business has less influence about how to deliver those functions.
It is critical when outsourcing logistics processes to select the right partner to deliver as they essentially act as an extension of the business. Sometimes businesses take their logistics functions back in-house, a process known as ‘insourcing’. In such cases, they need to replicate the capabilities provided by the LSP which may include taking on a new warehouse, taking on staff, investing in Material Handling Equipment (MHE), deploying a WMS etc.
Advantages & Disadvantages of Outsourcing Logistics
Outsourcing logistics functions can unlock a range of benefits in a business but it does come at a cost and so it is important to consider both the advantages and disadvantages when taking such an important decision.
Advantages | Disadvantages |
|---|---|
Access to specialist expertise and software that may not exist within the organisation | Can be more expensive than running in-house, depending on internal capability as paying 3PL profit margin |
Free up capital within the business (i.e. property, systems etc.) to allocate to core focus of the business | A lack of control and flexibility to make changes within the operation |
Capability to expand into the 3PL network as the business grows rather than invest own property | A lack of long-term investment due to short-term contracts can stifle productivity |
Pooling of resources in shared user environments can reduces the costs of operation | Duplication of resource in some cases to manage the 3PLs operations and finances |
The question of whether to outsource or retain logistics functions in-house depends on the individual business circumstances. The key considerations are the appetite for control of customer interactions, the logistics capability within the operation, the size of an operation, the scale of growth, the complexity of processes and the appetite for investment.
How BoxLogic Can Help
BoxLogic can guide your team throughout your outsourcing journey from supporting the strategic decision to outsource or retain in-house through to the vendor selection stages and project management.
Project Stage | How Can BoxLogic Help |
|---|---|
Outsourcing vs Insourcing Strategy | A strategic study to assess the pros and cons of outsourcing to a 3PL or insourcing from a 3PL for your specific business. This will consider a wide range of financial, performance and operational considerations. |
Vendor Shortlisting | Expert guidance of the types of 3PLs to consider as part of your own outsourcing process based on our deep knowledge of which types of logistics services providers are work well for each type of business or sector. |
Request-for-Information Process | Support of the RFI process, taking a long list of potential vendors and asks for specific information to assess their suitability to take part in a full tender process. This can be limited to producing the documentation or can extend to the management of the process. |
Request-for-Quotation Process | Support of the RFQ process, taking the shortlisted vendors and asking for a full commercial proposal for a given scope of works. This can be limited to producing the documentation or can extend to the management of the process. |
Vendor Proposal Evaluation | Evaluation of the 3PL vendors proposals against an agreed set of criteria. This entails support to select a preferred partner fully understanding the assumptions within each proposal and re-aligning if required as well as assessing the viability of each vendors solution and capability to deliver. |
Contracting | Guidance to negotiate terms with the preferred 3PL and agree a contract that is reasonable and fair to both parties. It is important that the contract clearly sets out the expectations of the relationship over the contract length. |
Transition Project Management | Experienced support to deliver a successful transition to an outsourced model. Whether our input is light touch, steering of the project or hands-on project management, we work to mitigate risk and improve the likelihood of successful delivery. |
Our Process
BoxLogic can provide wide-ranging support depending on the level of expertise and ownership that internal procurement and logistics teams want to take in the process. An end-to-end project approach is outlined below but we can support in specific areas if required.
We develop a strong working understanding of your logistics operations through site tours, facilitating a kick-off workshop and interviewing key stakeholders to enhance our understanding and build a picture of the project requirements.
We analyse representative data sets to understand current operational flows. These are overlaid with growth projections to create a ‘planning base’. This information is to be used as part of the tender documentation in the RFI and RFQ stage.
BoxLogic use the findings of the planning base and our understanding of the business to model the financial impacts and assess the qualitative benefits for the business of outsourcing logistics processes.
A longlist of 3PLs is agreed with the client and an RFI is issued to outline 3PLs of the project requirements. After reviewing the RFI submissions, each vendor’s suitability is assessed against the client’s requirements and a shortlist of vendors is agreed to progress to the RFQ stage.
A full RFQ document and data pack is compiled, detailing the project requirements, and is issued to a shortlist of 3PLs. We can support the vendors to produce informed proposals by supporting site visits and coordinating the Q&A process.
3PL bids are evaluated based on a range of financial and non-financial criteria that includes proposal documents, vendor presentations, reference site visits and other discussions. 3PL assumptions are assessed updated, if required, to ensure that a well-informed decision can be reached of the preferred partner.
We support further commercial negotiations in the build up to the contractual signature with the preferred 3PL. Contractual terms are reviewed and amendments suggested to protect the client’s interests for the duration of the contract.
Project management resource is provided either at a project steering or at hands-on project management delivery level. The support can vary based on the size of the project and speed of implementation but the objective is to use our experience of similar projects to establish a plan for the client and work closely with the 3PL and client teams to deliver a smooth implementation.
Case Study
Find out how we helped Snug Sofa to select a 3PL when outsourcing its warehousing and fulfilment function.
Challenge
Snug was experiencing rapid growth and had outgrown its in-house warehousing facilities in Enfield, UK. The management team had already decided that outsourcing the warehouse function was essential to scale the business.
Project Approach
- Familiarised our project team with the operation, analysing recent throughput data to define the operational flows and overlaying them with growth projections to form a planning baseline which was agreed with the Snug team
- BoxLogic compiled a Request-for-Information (RFI) pack which was issued to a long-list of 3PLs using our extensive experience in the market. This looked to identify which 3PLs were best placed to support Snug through their professional responses, space availability, financial standing and sector experience. Several 3PLs were shortlisted for the next stage.
- A comprehensive Request-for-Quotation (RFQ) pack was developed to provide the 3PLs with a full understanding of the project opportunity. This included a document detailing Snug’s requirements, a pro-forma to compare responses and a data pack to help the 3PLs develop their proposals. Snug opted to manage the rest of the process, although our team were on hand to advise, as required.
Results
BoxLogic provided Snug Sofa with the relevant materials to lead a professional and detailed tender process to select a 3PL as it sought to build the platform to scale its business. The process led to the section of a leading UK 3PL with an extended scope to include two-man delivery services.
You can read more about our case study, including the testimonial of our client at Snug Sofa.
Relevant BoxLogic Case Studies
Why Work With BoxLogic
Our team of skilled logistics consultants are well placed to help you on your outsourcing and 3PL tendering project for several reasons.
- The BoxLogic consulting team has a strong track record of delivering outsourcing projects with a robust approach to partner selection
- Our independence is of the utmost importance to us, so we only recommend solutions or partner that work for our clients
- All BoxLogic recommendations are underpinned with rigorous analysis and modelling to give confidence in our work
- Expert warehouse and distribution network design background allow our consultants to assess the cost impacts of proposed solutions
- Capability to support our clients on the end-to-end outsourcing process from strategy to selection and implementation
GET IN TOUCH TODAY
Complete the form and one of our skilled consulting team will be in touch to discuss your warehouse and logistics project today.
Alternatively, give us a call or send an email.
- +44 (0) 118 309 4030
- enquiries@box-logic.co.uk
Frequently Asked Questions
Logistics outsourcing is when a business uses an external provider to perform logistics activities on its behalf. Companies that carry out logistics activity for their clients are known as third-party logistics (3PL) providers or logistics service providers (LSP). Logistics activities that are most commonly outsourced include the warehousing and transport of goods.
Outsourcing logistics activities has the potential to unlock a range of benefits. These include accessing specialist expertise, tools and software that may not exist within the outsourcing business. Outsourcing frees up capital to focus on areas core to the business as property, equipment and systems no longer require investment. 3PLs can also facilitate business growth as they can more easily expand their infrastructure. Smaller businesses also benefit from the pooling of resource that shared-user 3PL environments offer.
Logistics outsourcing is not right for every business however and there are potential downsides. It can be more expensive to outsource as you pay the 3PLs profit margin. Furthermore, an outsourced operation is harder to control and can suffer from a lack of long-term investment within the frameworks of 3PL contracts. It can also lead to a duplication of resources once the management of the 3PL’s performance is considered.
Operations tend to get taken back inhouse when a business decides that it is looking for more control of the fulfilment process. It might have reached a size where the business growth has stabilised to be more manageable and the efficiencies of a shared-user operation outweighed by the lack of control and long-term investment. This is particularly true when operations are looking to be automated.
Hybrid models do exist, whereby a 3PL might run the operation but the site, software and equipment is owned and managed by the client. This type of model can provide a better balance for larger businesses that are willing to invest but still require the expertise of a 3PL in running the operation.
Warehousing and transport services are the most common examples of outsourcing to a 3PL. In many cases, the 3PL will manage the whole of the warehouse or transport operation but in some instances, specific services might be outsourced. The handling of returns is a particular pain point for many online retailers. In some cases, retailers pay a 3PL to manage this part of the process and make use of the expertise and tools gained from working with a wide range of businesses.
3PLs are innovative businesses and many look to expand their services with a client. This can take them away from simply performing warehouse and transport activities into completely new areas.
Outsourced operations are underpinned by contractual agreements between the customer and 3PL. Contract define a range of areas from performance levels to commercial terms, exit clauses and more. There are two types of contract: open book and closed book. The type of contract essentially determines where the risk sits between the two parties.
Open book contracts are where the 3PL performs the required tasks at cost plus a margin which acts as its profit. These are the standard for most operations and whilst they foster a partnership, the incentives are not always aligned. A cost plus 10% means that the 3PL charges the cost of an operation plus 10% as profit. Unless there are alternative incentives within the contract, the more cost an operation incurs, the more profitable it is for the 3PL. This is the low risk approach for 3PLs.
A closed book contract is when a 3PL provides a fixed cost tariff for each activity and charges the client for each time a particular task is completed. For example, every time an online order is picked, the 3PL charges a £2.50. This represents more risk for the LSP and therefore it is less commonly offered unless the logistics operator has very strong control over the processes. This is the case for a new breed of LSPs, known as Fulfilment 3PLs, where they focus on the fulfilment of ecommerce orders for their clients and offer very standardised processes with minimal variation.
Outsourcing logistics functions is a major decision for any business and its critical to partner a 3PL that can be trusted to deliver for you and your clients. A comprehensive tender process is the best way to judge the capability of your potential partners.
Commercials are a significant factor, but they should not be the only consideration. The tender process should assess the vendors in the broadest terms and at every possible stage. These include the quality of any written communication; the attentiveness of the sales team and the standard of any reference site visits. Reference client interviews can be important in understanding the cultural fit. The quality of the team in the proposed operation is usually more valuable than the quality of the sales team so its important to meet them too.
A balanced scorecard should be used to assess the vendors, taking into account financial and non-financial aspects and scoring them against an agreed set of criteria from the outset of the process.
A key consideration that BoxLogic finds time and time again is to right-size your target 3PLs. The biggest 3PLs are fantastic at delivering for large clients but you might not get the attention you deserve if you have a smaller operation. Likewise, a small 3PL presents problems to a large business. Whilst you’d get attention, they might lack the scale to deliver complexity at scale.
Combining a detailed tender process with experienced resource provides the best foundation for deciding the right 3PL for your business.
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