If you are a growing business considering outsourcing your logistics operations to a 3rd party logistics provider (3PL) for the first time, there a few areas that you need to consider beyond simple cost. This article is aimed at providing advice to small and growing businesses, but the advice will hold true for any business considering logistics outsourcing.
It’s important to say that the 3rd party logistics sector is very mature in the UK and provides a highly valued service across almost all industries. In fact, it is very rare to find any major business that does not outsource some element of their logistics operation, most commonly transport but also all aspects of warehousing from bulk storage through to pick and pack operations and kitting.
There are many potential benefits of outsourcing your logistics operations; from increased labour force flexibility and cost sharing of key assets, through to accessing improved technology platforms to enhance the customer experience. If you are at the stage where you have just completed a logistics tender process, or are at the early stages of considering outsourcing for the first time, here are some key points to consider.
You would do it, but will the 3PL?
Many businesses grow on a can-do attitude. There may be service level agreement with customers, but when those customers want something outside of the agreement the answer is always “yes!” and key people in your business bend over backwards to make it happen. That may mean working late or abridging processes to expedite quickly.
Will the 3PL you select also do this? Consider if it is even reasonable to expect the 3PL team, who may be dealing with many logistics clients, to constantly make exceptions to expedite orders for your customers that make high demands. It may be the case that you will need to manage your customer expectations and encourage adherence to the service levels that you have in place.
Manage your expectations on price
If your logistics operations are relatively small, then there will be little opportunity for the 3PL to design a solution that significantly reduces cost. Without the scale to innovate and drive down costs, you will find that most 3PLs operate to a very similar cost base – costs for people, vehicles, fuel etc. vary little across the UK and from provider to provider. Be aware of this and manage your expectations on price. It will be far more productive in the long run to focus on service and relationship.
Relationship is key
Look to choose a provider that you feel comfortable with and that has a culture that reflects the culture of your own business. For example, if you have an owner operated business you may seek out a smaller, possibly family run, 3PL provider who has long standing contracts with business that are culturally like you and where the 3PL can demonstrate how they’ve supported that client.
You need to be able to build a solid working relationship with the 3PL team, and to treat that team as an extension of your own team. This is why many smaller businesses are wary of outsourcing to some of the major 3PLs in the UK. These large 3PLs have client portfolio revenues in the hundreds of millions and there is often genuine concern on how a comparatively low value contract will be prioritised in terms of service, or when there’s an issue.
Divorce is tricky
It is very difficult to transfer back to an in-house solution once you have outsourced to a 3PL. Of course, there will be legal complexity if you breach the contract commitment term, but that is far from the only issue. By outsourcing your logistics operation, you will also potentially transfer people, knowledge, systems and assets. There is no guarantee that these elements will transfer back to you and you may find yourself starting from ‘scratch’ with your logistics set-up.
It should also be noted that even when there is a ‘good’ exit from a logistics contract, at least as far as the relationship is concerned, there will still be a notice period of 3 to 6 months and it is very difficult to keep people on the shop floor motivated to maintain the level of service you expect.
Invest in a contract lawyer
Your logistics operations are likely to be a fundamental, customer facing part of your business proposition and, as such, service disruption should be avoided at all costs. If there is a breakdown in the relationship between you and the 3PL, you need the confidence that the contract is as clear and as comprehensive as possible on all potential scenarios.
With this in mind, it is ill-advised to sign a 3PLs standard contract. The standard contract is unlikely to be balanced and at the very least you should engage your own contract lawyer to review, if not write, a bespoke contract. Of course, this comes at a price, but considering the potential risks, legal advice is not an area where you should ‘nickel and dime’ when it comes to logistics outsourcing.
Outsourcing logistics operations can bring a huge value in increasing operational flexibility, geographic territory expansion, reducing capital commitment and introducing some of the best logistics professionals to manage your operation. The clear majority of outsourced operations work very well and disaster stories are few and far between. However, it’s important that you enter the relationship with your eyes wide open and fully protect your business from any potential exposure.
If you need support in any aspect of outsourcing your logistics operation, contact our logistics consultants today.