Outsourcing of logistics function within firms is a business dynamics of growing importance all over the world. A growing awareness that competitive advantage comes from the delivery process as much as from the products has been instrumental in upgrading logistics from its traditional backroom function to a strategic boardroom function. Outsourcing is a practice that creates opportunities for positive synergy by bringing together the core competencies of two companies. Outsourcing takes different forms. It may be based on a single transaction, on a continuous relationship over a certain period of time, or on a combination of the two.
However, study on user experiences of 3PL usage in India does not show encouraging results on the user’s expected parameters. This study by Frost & Sullivan shows that, Indian Logistics Service Providers (LSPs) lag significantly below end-user expectations on key performance criteria such as attitude of staff, process improvement capabilities and material safety. As per the report, a significant share of companies across industries could not gain notable (5 percent or more) improvement in their logistics efficiency despite using third party logistics (3PL) providers. Does it mean that LSPs simply lack capability to deliver or is it an issue with the wrong selections of LSPs?
While globally, LSPs have delivered greater benefits to firms in managing complex supply chains, the (missing) key here seems to be outsourcing logistics activities to experienced logistics service providers (LSP), also known as third-party logistics (3PL) providers. As a result the crux seems to be losing out in translation of user expectations into LSP deliverables due to inexperienced 3PLs getting selected to perform the job. Lower preference for the long term contracts by many firms with 3PLs as found out in the report, also indicates that firms perceives many of these ‘3PLs’ as mere ‘handlers’ rather than “value creators”.
With Logistics cost as 13% of GDP, Indian Logistics Industry is pegged at more than 200 Bn$. Though 3PL forms a very small share of that, however, its rapid growth may push many such ‘handlers’ from the wide and fuzzy Indian Logistics spectrum into performing the job.
Hence users need to understand and select right 3PLs in order to create value through outsourcing. And, chosing the right 3PL provider would require careful examination of what the firm expects from a 3PL provider. Quality, delivery, and price are considered the traditional selection factors that receive the greatest attention from industrial buyers. Many studies found that the strongest reasons for outsourcing were access to skills, cost reduction, gaining flexibility, performance improvement.
However, with the enhanced importance of Logistics, its fast changing landscape and quest for time based competence, the list and relevance of selection parameters is also changing. Broadly these parameters can be classified in four categories:
Functional Capability – Do the LSPs have enough bandwidth to comprehend and execute user expectations into a workable process? Can they map out the delivery process with respect to an intangible outcome? Do they understand the specifics of industry that they are pitching in? Do they have enough management bandwidth and manpower to execute such activities? How much are they geared up to cope up with change and complexity? Are they mere ‘handlers’ or value creators?
Solutions Capability – Do the LSPs understand the geographical, regulatory, competitive, cultural, and social environments? Do they understand the emerging trends in the industries? Are they capable of analyzing the challenges that firms face with respect to the above parameters and any other emergent parameters. Are they capable of thinking solutions combining all the above? Can they think of logistics solutions that align to the broader business strategy of the firms? Are they mere ‘warehouse finders’ or Logistics consultants?
Infrastructure & Resourcefulness – How resourceful are the LSPs. Do they have or can they arrange required resources important to deliver the service. Do they have enough financial, knowledge and IT resources?
Current Performance / Experience – Do the LSPs have enough showcases in the region? Or do they have the commitment or resources for knowledge transfer across regions?
The idea here was to acquaint you with the criticality of LSP / 3PL selections in order to enhance your user experience. As Logistics plays an important role in your overall business strategy, a wrong selection will not only dillute your position as a selector but also hampers your organizations business goals big time.
The above list gives a broad categorization of parameters and does not offer a workable process for LSP selection. However, you can use the above categorization to create your own list of parameters specific to your requirements. Do check this space for a drilled down list of parameters / detailed selection process in the subsequent article soon.
About the Author:
Mansingh Jaswal is Director & Chief Executive Officer with a leading supply chain solutions company Genex Logistics (Genex LogiSolutions Pvt. Ltd)., having a professional experience of over 17 years in Supply Chain, Logistics, Transportation, Express Distribution and International Freight. He is also a Strategic Management Research Scholar at Management Development Institute (MDI), Gurgaon, India.
He can be reached at email@example.com or contacted at +919810404438.
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