Outsourcing of logistics functions within firms is a business dynamic 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.

3PL Logistics For Outsourcing

Firms are increasingly seeking to treat logistics operations strategically to gain a competitive advantage. Greater flexibility, operational efficiency, reduced cost, improved customer service levels, and a better focus on their core businesses are part of the advantages that may accrue from Logistics but firms often lack the competence to run efficient logistics services. As Tom Peters says, every organization should “Do what they do best and outsource the rest”. Likewise, many researchers support the idea of outsourcing Logistics functions to third Partly Logistics (3PL) providers. Outsourcing, as such, has proven to be a big value creator in many other industries. In terms of user expectations; reduction in Logistics Cost, focus on core competence, improvement in customer satisfaction, productivity improvement, improved return on assets, and increased inventory returns are the top parameters for which firms outsource logistics.

However, a 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 the 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 the 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 the 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 perceive 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 the right 3PLs in order to create value through outsourcing. And, choosing 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 its quest for time-based competence, the list and relevance of selection parameters are also changing. Broadly these parameters can be classified into four categories:

4 Forms of 3PL Logistics For Outsourcing 

  • 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 an 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 of solutions combining all the above? Can they think of logistics solutions that align with 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 of 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 dilute your position as a selector but also hampers your organization’s 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 Genex LogisticsMansingh 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 mj@genexlog.com or contacted at +919810404438.

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