The thought of outsourcing can be a concern for any business. Companies and their CEOs have often achieved success through meticulous attention to detail and extensive control over every aspect of business operations. Many companies take the “if it ain’t broke, don’t fix it” approach, assuming their internal operations are “good enough,” and improving them is not worth the perceived risk of outsourcing.

Outsourcing, defined by Rob Handfield of North Carolina State University as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources,” often has the connotation of a loss of control, transparency, and security for CEOs and operations managers. Unfortunately, this reputation has been perpetuated by poor outsourcing providers and bad 3PL contracts. Find the right partnership with the right 3PL, however, and you can be free to outsource without fear.

The criteria that should be used when considering if outsourcing is right for your company includes:

1.         Is the task highly complex?

2.         Is there a risk to the business while performing the task in house?

3.         Does the task require more than the available resources?

4.         Does the task require highly specialized training or tools?

5.         Is the task outside of your core competencies? 

6.         Could outsourcing cut costs and improve service levels?



More and more companies are asking these questions, and drawing the same conclusions: it’s time to outsource. According to a study by Georgia Tech University and Capgemini LLC, transportation and warehousing continue to be the functions that are most commonly and successfully executed through outsourcing. Other frequently outsourced functions include customs clearing and brokerage, forwarding, shipment consolidation, reverse logistics, cross docking, and many others. The trend towards outsourcing is steadily increasing, as the study reports that fifty percent of businesses that currently do not outsource logistics plan on outsourcing at least some of their operations in the future.

There are several factors that allow companies to outsource without fear. Creating strong personal relationships on an operational level, and having carefully drafted and signed contracts, have been cited as two of the most important elements in a successful outsourcing plan. A 3PL-client contract should include detailed descriptions of services, performance tracking criteria, clearly measured improvements in service levels, peer-to-peer relationships that provide guidance and sponsorship, and clearly measured cost reductions. With the right 3PL partner, an outsourcing plan can have significant results: companies who outsource reported an average reduction of 18 percent in fixed logistics assets, a savings of 13 percent on logistics cost, and a reduction in the average order cycle length of almost four full days.

Once the decision to outsource has been made, a company must find the right 3PL that reflects its culture and values, and is able to enter into a productive relationship. First, a company should choose whether its needs are best suited by an asset-based or non-asset based 3PL. An asset-based 3PL is a logistics provider that owns many or all of the assets necessary to run its clients’ supply chains. This allows the provider to leverage internal strengths and infrastructures to provide direct, immediate solutions; however, an asset-based 3PL may be internally focused rather than customer focused, can have internal biases, or may falsely overemphasize its flexibility. Also, a customer will often pay for all or part of the assets, resources, and tools owned by an asset-based 3PL.

A non-asset based logistics provider, on the other hand, is one that does not own the assets to manage the supply chain. This allows non-asset based 3PLs to avoid being limited to one infrastructure of assets, allowing for more creative alternatives. They also possess greater objectivity and typically deliver better ROI, since more capital is available, and since they do not need to realize value from an inventory of assets, their focus is entirely on their clients’ needs. However, with more pieces to manage, it is imperative that a non-asset based 3PL have the experience necessary to negotiate effective contracts and realize sources of improvement in every aspect of the supply chain.

Other important factors to keep in mind when selecting a 3PL include commitment to quality, price, references and reputation, flexibility of contract terms, resources, value-added capability, culture, location, and existing relationships. There are several ways to determine if a 3PL is right for your company. One effective method is to send out both formal and informal/blind RFIs (Requests for Information). From responses to the RFI, you can then request RFPs (Requests for Proposals) from vendors whose RFIs met your established goals and criteria. After evaluating all RFP responses, you should perform as many site visits as possible and begin conducting negotiations with multiple vendors. When the best suited vendor is found, the contract or partnership can be awarded, and both sides should commit resources to the success of the relationship.

Despite a company’s best efforts, not all 3PL relationships are the right fit, and it is important to be aware of the warning signs. Statement’s like: “the 3PL is on its own” show an absence of trust and respect, and a lack of communication, that can cause a 3PL-client relationship to fail if not addressed. An absence of Cost-Out and Continuous improvement, one or both parties constantly referring to the contract, or no time spent evaluating productivity and success, are also indications that a 3PL relationship has gone sour. When this is the case, the relationship must be seriously evaluated and reworked, or a new 3PL that is more in line with the culture, goals, and expectations must be selected.

Outsourcing is often perceived as complex and error-prone, and indeed it can be if a strong, respectful 3PL relationship is not established. Such a relationship will only be as good as each side makes it, and it should be treated like an equal partnership. A good 3PL relationship should create a performance-based culture and workforce that conveys high expectations and implements incentives that drive behaviors. By investing in continuous improvement in time and capital, maintaining the lines of communication through a quarterly meeting rhythm (not just when there are problems), thinking right to left by always keeping the end state in mind, and remembering that every business has an Achilles’ heel that just needs to be found, a company can feel in control, safe, and secure with its decision to outsource. wt



Ron Cain is the President and CEO of TMSi Logistics, www.tmsilog.com, with locations in New Hampshire and Florida. He can be reached at (603) 373-7233 or at ronc@tmsilog.com.