There are undoubtedly some potential risks to consider when a company chooses to outsource its logistics operations to a 3rd party logistics provider (3PL) for the first time. This short article takes a look at 5 of those potential risks that need to be managed through a comprehensive and carefully considered tender management process.
1. Lack of Control
Lack of control over many aspects of the business is a major concern to many companies who are considering outsourcing logistics functions. Most important of these concerns is the lack of control over the general management of the department or function that has been outsourced. This may manifest itself as a loss of direct control over the delivery of the products and can potentially affect the customer experience. Concerns may also be raised over the potential loss of company staff with expertise in logistics operations who will likely transfer under TUPE to the chosen 3PL.
2. Increased Costs
The increased costs are not immediately obvious, particularly as the overwhelming and obvious need for outsourcing to a 3PL is primarily to save costs. However, those hidden costs are there, when considered carefully. For example, it is necessary to remember that 3PLs are experienced in the negotiation of contracts. The company considering outsourcing may not have this expertise and therefore will need to pay for legal services to negotiate a contract with the 3PL. The company will need to ensure it negotiates clear operating principles agreed by both partners as well as an agreed exit strategy on both sides. Without these agreements in place, the risks to the user company are very significant, potentially impacting heavily on the customer experience. It is also necessary to consider the additional costs incurred during the interim period of change from managing the logistics function in-house to outsourcing.
3. Lowering of Standards
The 3PL will potentially have no experience or understanding of the core business of the company and will be motivated by profit and meeting the terms of the contract at the lowest possible cost. They may not share the same company culture and ethos as the commissioning company and therefore the company may experience what they consider to be a lowering of standards. This could translate into a lack of focus on the customer experience.
4. Breaches of Confidentiality
Outsourcing to a 3PL could potentially lead to a breach of confidentiality, resulting in the exposure of customer personal data or the sharing of commercially sensitive information. If a company were to consider outsourcing functions such as HR or recruitment, there are clearly obvious risks to the security of personal data which must be considered in the negotiated contract. However, there are also concerns to be considered in the outsourcing of the transportation. The 3PL will need to have and maintain detailed records of your company’s customers, locations, order volume, new products and planned growth.
5. Over-reliance on a Single 3PL
Contracting with a single 3PL puts the company at a greater risk when it comes to the financial security of that provider. Financial loss or bankruptcy of the 3PL leading to the loss of a certain service or function within the company could potentially limit or completely stop production which could be fatal for a company. This risk can be mitigated by using more than one 3PL and therefore spreading the risk or ensuring contingency planning forms part of the outsourcing strategy.
All of these risks can be addressed and mitigated through professional logistics tender management. Please contact us if you are considering outsourcing for the first time, or re-tendering an existing operation.