Logistics Outsourcing: Two Paths to Take

  Good leaders know the importance of sharing business objectives with their teams.  When you help your team understand the goals and how the goals are linked to success for the enterprise, they often can surprise you with their creativity, innovation and effectiveness.  Unfortunately, sometimes companies forget this when they are developing logistics outsourcing partnerships.  Too often, smart leaders manage relationships based on "optimizing the next transaction"instead of forming long-lasting, strategic relationships.

When companies engage in logistics outsourcing but limit the scope, discussions and partnership, they leave money on the table.  Instead of engaging the partner, they force the partner into a very tactical buy/sell relationship.  Often, each party is completely focused on the "cost" of the next transaction instead of reaching long term objectives.  

The result?  

They lower the cost of the next transaction, but raise the overall cost structure of the supply chain.

The Red Widget Company decided they wanted the lowest possible storage and handling costs for their product.  The company brought in a few "vendors" and then negotiated hard on two items: pallet storage rate and pallet receiving and shipping rate.  They ended up with the lowest cost logistics outsourcing provider and lowered their transaction costs 3%, but continued to see supply chain costs increase.

The Green Widget Company had a broader objective.  The company wanted to lower their overall supply chain costs and thought of those costs broadly as including transportation, storage, distribution, damages, inter-mill transfers, etc.  They brought in supply chain partners for a wide ranging discussion on how to meet their objectives.  After careful analysis, the partners found opportunities to lower transportation costs through collaborative distribution, reorganize the distribution network to better align with shipping (inbound and outbound), and upgrade material handling equipment (at a higher cost) to reduce damages and improve productivity.  The Green Widget Company lowered overall supply chain costs by 11%.

Engaging your business partners in broad discussions about your objectives is high value and sustainable.

Engaging in bidding processes to lower the cost of a single element of your costs is low value and not sustainable.

For an alternate approach to managing logistics outsourcing partnerships, read the white paper:What's an Embedded 3PL?