Lesson 2

Logistics Outsourcing
Learning Objectives:
• Define the meaning of Outsourcing
• Know the different examples of outsourcing
• Learn the benefits and the criticism of outsourcing
• Identify the different logistic provider: their pros and cons
• Define the meaning of Logistics outsourcing
• Know the reasons for Outsource logistics operations
What is Outsourcing?
Outsourcing is the business practice of hiring a party outside a
company to perform services and create goods that traditionally were
performed in-house by the company’s own employees and staff.
- was first recognized as a business strategy in 1989 and became an
integral part of business economics throughout 1990’s.
- can help business reduce labor costs significantly.
- biggest advantages are time and cost savings.
- outsourcing non-core activities can improve efficiency and
productivity because another entity performs these smaller tasks better
than the firm itself.
Examples of Outsourcing
 Manufacturing – A manufacturing partner will handle the assembly of some
parts or the whole of your product. Typically, a manufacturing facility that was
created to handle these processes will be able to build these products at a lower
cost.
 Managed Services - Third parties host these applications, which can be
accessed over the Internet. They offer users access to a variety of online
tools such as email, storage space, and web hosting. Managed services
refer to outsourced IT management.
 Accounting - An outside accounting resource can help you with evaluating your
finances, creating and managing your budget, payroll, and other account and
finance-related activities. These firms will also usually produce thorough financial
reports that can help you make sense of your books and prepare for tax season.
 Marketing and Advertising - The marketing firm can help you with
advertising and promoting your business, developing brand value, social media
promotion, online advertising, and marketing your business, products, or
services.
 Shipping and logistics - A shipping and logistics partner will handle
tasks like handling, managing, and shipping your product to a
customer. They’ll also make sure the products arrive safely and on
time, taking care to update and manage inventory so you don’t
oversell.
Human Resources - Human resources will perform personnel-focused tasks
like hiring and recruiting, payroll, onboarding, and managing team members.
With an outsourced agency, you can pour more time and energy into these
processes to make sure the best employees are being brought in and the team
remains happy.
Benefits of Outsourcing:
• Keeping focus on major business function
• Reducing production and labor costs
• Improving quality and enhancing growth
• Increasing efficiency of business operations
• Generating high-quality business leads
Criticism of Outsourcing
• Signing contracts with other companies
• Security threats
• Lack of communication that leads to delayed project completion
Logistics provider
 First-Party Logistics (1PL)
is any company that transport cargo, freight, goods, or merchandise, and
can refer to both the cargo sender or the cargo receiver.
1PL example: Australian red meat supplier Samex
Pros of 1PL:
• Complete control of the logistics and fulfillment process.
• Control of quality processes.
• Control over packaging and transportation
Cons of 1PL:
• The business must own and be responsible for every facet of the logistics process.
• High-quality fulfillment is expensive and requires additional infrastructure, staff,
equipment, etc.

 Second-Party Logistics (2PL)

- handles the transportation component of the supply chain and is
responsible for getting a company’s goods from A to B.
- 2PLs lease or charter their own transportation - such as ships, trucks, or
planes to companies and they can also be contracted to transport freight.
2PL example: World Cargo Transport Inc. (Woodridge, New Jersey)
Pros of 2PL:
• Flexibility in terms of what components of the supply chain are outsourced
• Different modes of transportation available
Cons of 2PL:
• Typically not a full-service logistics solution

 Third-Party Logistics (3PL)

- provides outsourced logistics services to companies. These services can
make up part or sometimes all their supply chain management functions including:
• Inventory storage and management
• Picking and packing
• Freight forwarding
• Shipping/distribution
• Customs brokerage
• Contract management
• IT solutions
• Cross docking
3PL examples: UPS, Amazon
Pros of 3PL:
• Finding the right 3PL can save you time and money, through economies scale
• It works well with both local and international distribution, and you can get
speedier delivery by benefiting from their multiple storage locations.
• It works well for a fast growing business with large order volumes.
• You can still opt to control customer service and returns
Cons of 3PL
• You have less control over your inventory and the customer experience
• Finding the right provider who you can trust and rely on can be time consuming
• 3PL can be an expensive cost, especially when you only have small quantities of
orders
• 3PL providers won’t handle perishable, hazardous, or flammable goods.
 Fourth-Party Logistics(4PL)
- takes third-party logistics a step further by managing resources, technology
infrastructure, and even manage external 3PLs to design, build and provide supply
chain solutions for businesses.
4PL services typically encompasses 3PL services as well as:
• Logistics strategy
• Analytics including transportation spend, analysis, capacity utilization, and carrier
performance
• Freight sourcing strategies,
• Network analysis and design,
• Consultancy,
• Business planning,
• Change management
• Project management
• Control tower and network management services, coordinating a wide supplier
base across many modes and geographies
• Inventory planning and management
• Inbound, outbound and reverse logistics management
4PL examples: Deloitte provides 4PL services that go above and beyond traditional
3PLs by offering strategic business insights and consultative services in addition to
logistics execution.
Pros of 4PL:
• Outsource the entire logistics segment of a business
• Take advantage of strategic advice in addition to personal support
Cons of 4PL
• Little control over logistics
• Likely to be expensive
The difference between 3PLs and 4PLs and other logistics Providers
- each successive type of logistics provider offers greater involvement in the supply
- as for which one will work for a company, that depend on the business model,
infrastructure, budget, and how much control the company want over their supply
chain.
 Fifth – Party Logistics (5PL)
- handles all aspects of supply chain management for a client through
organizing, planning, and implementing their logistical needs. It goes beyond
specific supply chains and focuses on larger supply networks.
- provide valuable supply chain analytics and business intelligence, aiding
businesses in making informed decisions. They excel in managing supplier
relationships and procurement activities, fostering productive partnerships.
- prioritize compliance with regulatory requirements and industry
standards, ensuring the supply chain remains aligned with essential
guidelines and best practices. This may include sustainability standards,
regional transportation rules, warehouse management, and more.
 - even leverage robotics, blockchain, Artificial Intelligence, and
Machine Learning technologies to further optimize a business’s supply
chain.
PROS:
Enhanced Efficiency - Meticulous planning and route optimization
assist in the minimization of transportation costs, resulting in
remarkable cost savings for the company
Error And Fraud Reduction - The use of AI and other automated
solutions can help business owners detect and prevent fraudulent
activities within the supply chain. This includes theft, counterfeiting,
and unauthorized access to sensitive data.
Scalability - Extensive networks and resources are offered by 5PLs, both
domestically and internationally. Established relationships with carriers,
customs authorities, and distribution centers worldwide are in place.
Disadvantages:
Premium Cost - Comprehensive services that span from procurement to
distribution
Increased Dependency - can lead to reduced control over specific
functions. such as inventory management or order processing.
Top 5PL logistics solutions providers
• UPS Supply Chain Solutions
• DHL Supply Chain
• XPO
• Kuehne + Nagel
• DB Schenker
Logistics Outsourcing
- the strategic use of outside parties to perform activities traditionally
handled by internal staff and resources.
- one of the fastest growing areas.
- since the early 1990’s there has been a significant increase in the
number of organizations that have decided to outsource all or some
aspects of their logistics function.
Reasons for Outsource Logistics Operations
1. Freedom to focus on critical operations
2. Reduce back-office work
3. Enhanced customer satisfaction
4. Reduced liabilities
5. Efficient handling of Petty expenses
6. Economies of scale
7. Efficient Real-time tracking
8. Other relevant benefits:
• Good warehouse management system(WMS) ensuring safety of your goods;
• Control remains with you, the client
• Easy outsourcing operations process with duly signed documentation
Selection of Appropriate Service Provider
Some of the factors to consider include:
1. Review critical aspects like gap analysis, cost analysis, supply chain operations,
and feasibility of outsourcing, among other aspects.
2. Identify the service providers expertise – number and capacity of warehouses,
transportation system, procurement process, customer service channels, etc.
3. Check if major logistics processes such as pre-receiving, receiving, inbound
inspection, pick up and drop are in place, and to what extent.
4. Perform a competitor analysis for cost-to-benefit ratio and check their
customer interaction levels, back office support, exceptional incidence rates,
performance index, etc.
Types of Outsourcing
There four types of outsourcing:
1. Manufacturing outsourcing
2. IT-outsourcing
3. Knowledge Process Outsourcing (KPO)
4. Business Process Outsourcing (BPO)
The main classification features of outsourcing are:
5. According to economic sector: Industrial, commercial, building, medical, etc.
6. According to the types of logistics services: Transportation, warehousing,
marketing, consulting, etc.
7. According to the amount of power provider receives from a company: Full
outsourcing, partial outsourcing and joint outsourcing.
4. According to the location: insourcing, outsourcing and offshoring
5. According to the time: long term, urgent, seasonal.
Business Process Outsourcing: outsourced Logistics Services
- range of logistics functions that can be outsourced are listed below on the
picture. All the numbers are taken according to 2016 Third-Party Logistics
Study.
Table: Outsourced Logistics Services
On the whole, all the operations that can be outsourced can be divided
into three categories:
1. Physical logistics and delivery
• Transportation
• Manufacturing
• Packing
• Physical flow of goods
2. Non-physical logistics (Information):
• IT services
• Operations management services
3: Reverse-logistics:
• Returns
• Disposal of goods
• Flow of physical goods from downstream to upstream
Core and Non-Core Activities
- every company should decide how many and which
particular activities to outsource.
- This decision is based on the definition of core and
non-core activities.
- Core activities are relevant for the companies in
order to gain high customer value, that is why non-core
activities should be outsourced.
The list of activities that are better not to outsource can be created:
1. Core activities which bring company the biggest profit
2. Activities in which company is specialized and has a good knowledge
base
3. Functions with high customer impact, because in case of outsourcing
company loses a part of the control for customers feedback.
4. Activities that are inefficient and currently cause different challenges
for a company. It is better initially to solve all problems in-house.
5. Activities that requires specialized knowledge. For example, company
may have a specific technology, which was created particularly for
some activities. Moreover, this technology is the property of the
company.
Offshoring

Types of Outsourcing
3PL and 4PL
There are different ways of possible appearance of 4PL providers.
1. 3pl provider is developing till the level of 4pl.
2. Consulting company acts like 4pl.
3. Company that offer IT services is becoming 4pl provider
4. Joint organization in supply chain is modifying to a 4pl provider.
There are different models of 4PL. It can act as:
1. Lead logistics provider
2. Solution integrator
3. Industry innovator
The disadvantages of 4PL are:
1. Reliance on partners to provide the service
2. Reluctance on the part of 3PLs work for 4PLs
3. Confusion as to who are the true 4PLs
Selection Process
There are many factors to consider:
1. Focus of a provider on continuous improvement,
2. Using new IT,
3. Collaborative partnerships,
4. Variety of value-added services,
5. Ability to provide with core services,
6. Quality,
7. Understanding of the contract,
8. Technical feasibility,
9. Ability to manage,
10. Experienced and high-qualified personnel,
11. Financial resources of provider,
12. Type of provider,
13. Recommendations and feedback from the previous clients
Decision-Making Process

Four Perspectives of the Balanced Scorecard

 A framework for evaluating potential providers

Outsourcing decision Stop

YES NO

1. Process to be outsourced
2. Potential Outsourcee

Are necessary conditions Evaluate alternative

Order qualifiers met? outsources

Level of difference in working environment

Critically of outsourced process

Approach to managing
- Outsourced operations
- Nature of relationship
- Contingency planning

Cost of managing relationship and potential benefit derived from relationship

Cost to benefit Evaluate alternative

Order winners trade -off outsources

Implement outsourcing arrangement

Monitoring Relationships with Providers
There are five principles of monitoring logistics outsourcing:
1. Principles of company’s way of working: It includes quality of services,
risk prevention and service potential.
2. Competence of provider: main components are provision with
information, prevention of conflicts inside a company.
3. Principle of motivation: can be divided into 2 parts: moral and material
incentives.
4. Principle of optimal hierarchy: that means the ability to delegate
authority.
5. Principle of economic feasibility.
Four stages of an outsourcing relationship:
1. Master-servant stage: The company which outsources is the main, it
establishes the rules and targets. The main driver is low cost.
2. Consultative stage: Provider acts as a consultant. Main drivers are,
cost, quality, reliability and reactivity.
3. Peer-to-peer relationship stage: Represents equal in rights
relationship.
4. Competitive stage: Provider starts to compete with the outsourcing.
 Problems of Relationship between a Company and a
Service Provider
1. Termination of relationships
2. Excessive dependence on a provider
3. Privacy
4. Self-satisfaction
5. Attitude
6. Contractual reasons
7. Legislative reasons
8. Problems concern data exchanging
The main reasons of partnerships failures

Factor Outsourcer ranking Provider ranking

Poor communication 1 1
Lack of top management support 2 10
Lack of trust 3 4
Lack of quality commitment by supplier 4 18
Poor up-front planning 5 5
Lack of Strategic direction for the relationship 6 3
Lack of shared goals 7 2
Effectiveness of Outsourcing Relationships
Advantages of Logistics Outsourcing
1. Reduce overall logistics costs 10. Scale labor
2. Avoid distribution infrastructure 11. Scale infrastructure
investments 12. Increase capacity
3. Avoid systems investment 13. Improve performance
4. Avoid fleet investments and 14. Increase speed to market
maintenance
15. Improved visibility
5. Leverage freight buying power
16. Gain perspective
6. Share freight costs
17. Gain control
7. Reduce liability in freight operations
18. Improve continuously
8. Transform fixed to variable costs
19. Focus on your core business
9. Quickly access new markets
Pitfalls in Logistics Outsourcing
1. Outsourcing without proper appraisal process
2. Choosing a low-pricing vendor for cost-benefit
3. Not specifying roles and responsibilities in writing
4. Not viewing logistics outsourcing as a strategy
5. Disconnect between client & outsourcing agents
Logistics network Optimization

Logistics Network is what links manufacturers, suppliers, wholesalers, retailers and

consumers; and is therefore a key component within the Supply Chain. Transport, warehouse
and distribution centre operations are what link manufacturers to end consumers
Logistics network optimization is about determining the number, location, and size, of
warehouses that the optimal for each business by taking into account a wide range of
constraints in one’s supply chain

Logistics network optimization is for supply and sales of finished goods, it sometimes include
sourcing of parts or raw materials.
Need for Logistics Network Optimization

1. The addition of new sales channels in a country

2. Increases/decreases in demand (by product and/or geography),
3. Changes in manufacturing capabilities (relocation/opening/closing of factories)
4. Changes in retail channels
5. Changes in marketing strategies (to focus more on specific region or product),
6. Mergers and acquisitions of new businesses,
7. Integration & closures of branches in a business
8. Changes in competitors’ network strategy
Types of Logistics Network
Point-to-Point vs. Hub-and-Spoke
Point-to-Point: a single facility serves the needs of customers across
different areas.
-single manufacturing facility serves order from each
individual customer, it often causes long lead times and
difficulties to reflect different product mixes from
customer.
Hub-and-Spoke: each hub in different areas is in charge of providing
services to customers in the area.
Everything either originates in the hub or is sent to the hub for distribution to
consumers. From the hub, goods travel outward to smaller locations owned by the
company, called spokes, for further processing and distribution.
Horizontal vs. Vertical
Hub & Spoke is divided into two types:
Horizontal Structure: in which products are delivered directly from a
RDC (Regional distribution Center) in 1-tier.
Vertical Structure: in which products go through 2-tiers of a CDC
(Central distribution Center) and then a RDC.
Based on the amount and frequency of orders, products are classified into three
categories:
A - placed in regional distribution center
B - placed in regional distribution center
C - placed in central distribution center
Vertical Structure