Logistics. Outsourcing: A Ropewalk for Balancing Logistics Performance and Control WHITE PAPER. Team Bundlebaaz: Naman Goel.

Transcription

1 WHITE PAPER Logistics 2015 Outsourcing: A Ropewalk for Balancing Logistics Performance and Control Team Bundlebaaz: Naman Goel Pankaj Bhatia NMIMS Mumbai

2 Abstract This paper analyzes the relationships between a firm and its logistics provider to suggest a framework for efficient management of alliance between the two parties. Firstly, a framework is suggested to evaluate which areas of logistics a firm must outsource depending upon the importance of that function in a firm s business model and industry s competitiveness of that function. Then we analyze what functions companies outsource ranging from transportation to strategic decision making. Further, problems that arise during outsourcing are analyzed. Then a framework is discussed which establishes step by step how a company must approach outsourcing decision by having a strategic vision, choosing outsourcing function and mode of relationship carefully, the need of key performance indicators, implementation strategy and exit plan to efficiently manage balance between performance and control. 1

3 23% 55% 86% ARE INCREASING THEIR USE OF OUTSOURCED THIRD PARTY LOGISTICS SERVICES OF TOTAL LOGISTICS EXPENDITURES ARE DIRECTED TO OUTSOURCING OF SHIPPERS VIEW THEIR OUTSOURCING RELATIONSHIPS AS SUCCESSFUL The Need for Outsourcing Though every enterprise has unique needs and different number of staff, still there can be several common factors which can lead to companies considering for outsourcing: Desire for savings: Outsource providers help in formulating cost reduction strategies which focus on company outcomes. They help in reducing costs through lowering freight charges, less inventory in transit, and better production planning through increased transport visibility Insufficient technology/resources to gain a competitive advantage: Outsourcing can allow the companies staff to pursue their core operations and perform more strategic and value centric projects and thus these 3PL parties add specific capabilities to complement the company s own expertise, like providing the best practices for solving issues such as transportation challenges that confront the firms Figure 1: Outsourcing Services deliver Measurable 11% LOGISTICS COST REDUCTION Need for an agile Supply chain to accommodate rapid growth through merger or acquisition: As the race begins to find synergies, efficiencies and savings in the new distribution networks, companies need to outsource the execution and analysis to a provider with an extensive, worldwide network of capacity and global technology. Outsourcing can provide different units of an organization to come together to form a unified structure 6% INVENTORY COST REDUCTION 23% LOGISTICS FIXED ASSET REDUCTION Need of world class technology, but affordability is an issue: For a highly efficient supply chain, companies need to purchase systems which are expensive to buy, implement and maintain. Outsourcing providers can add the latest global transportation technologies to help the partner in deploying and following the shipments worldwide, across all modes Figure 2: Reduction due to 3PL 2

4 Global Scenario: R eg ion 2012 G lobal 3P L rev enues billion US $ % Increas e since 2011 North America E urope Asia Pacific Latin America O thers Total The Global 3PL revenues of 680 Billion$ for 2012 showed an increase of 9.9% over This increase clearly shows that more and more companies are getting aware of the added value the logistics outsourcing can have on the effectiveness of logistics and supply chain. Figure 3: Growth of 3PL Companies Source: IBID What should you outsource? Figure 4: Sourcing Opportunity Map Source: HBR article: Strategic sourcing from periphery to the core A sourcing opportunities map helps in determining which functions have the highest outsourcing potential and which functions should remain under the company s control. The axis plot the nature of services, i.e. if they are proprietary or common. The less proprietary or more common a function is, the stronger chances are or outsourcing. The point of discussion can be the opportunities that fall in the middle of the opportunity sourcing map. They will require a more detailed analysis of the company and the industry. Several factors like, regulation, standards, and alternative products have to be considered to figure out the future of those capabilities. To have a knowledge about the relative financial stakes involved to highlight the biggest opportunities, the sourcing opportunity map can be populated with dots to represent the cost at stake for each capability. 3

5 As shown in the study below, conducted by Capgemini, as their 18 th Annual Third-Party Logistics Study, it is evident that the companies outsourced those areas which are more transactional, operational and repetitive. Functions like domestic and international transportation, warehousing, freight forwarding, etc. Though these activities are regarded as common and routine, it is important not to think of them as commodities as they can be a differentiating factor from the customer s view point. But, the more strategic and IT intensive activities, like IT services, supply chain consultancy services, order management and fulfilment, etc. were less frequently given to the 3PL. Thus the companies were basing their 3PL decisions on the sourcing opportunities map. Figure4: Percentages of companies outsourcing Source: 2014 Third-party Logistics Study Problems with 3PL Cultural Differences: Most of the times there is unavailability of data but parties have to forge ahead, full of hope. Such a jump into the unknown complicates the all-important business of establishing relationships and developing a clear vision of mutual trust and expectations. In such situations, it is important for managers to overcome the limits of different cultures and forge an alliance. Otherwise, there will be cultural clashes between employees of two or more companies working towards a common goal. Lack of Management Support & Know-How: When a firm has had poor operational performance in its in-house logistics service, a firm looks for a 3PL option. If the firm selects a third party option, the executives also have to know how to manage the relationships with the third party representatives, which may not be possible for a logistics manager who has badly managed the logistics activity in the first place. 4

6 Over-dependence on 3PL provider: Sometimes a firm becomes over dependent on the third party logistics provider. By contracting out logistics activities to the same third party, the firm can find itself in an increasingly vulnerable position and can even lose control of its logistics activities. Loss of Control over 3PL provider: All collaborative projects result in some loss of control. Similarly, in projects which are outsourced, partial control of a project passes from the sponsor to the collaborator. Since the information available to the Logistics manager would be less comprehensive, a lack of effective communication could ensure as a result. This could lead to problems of quality and delay, and even mistrust. Fear of losing control, lack of management conviction and failure of communication are prime reasons for failure of Outsourcing. Thus we suggest a framework which help an organization manage information flow, keep strategic control of situation and perform better. Since Logistics outsourcing is a form of strategic alliance we first suggest guidelines which will help develop a framework: It s no longer ownership of capabilities that matters but rather a company s ability to control and make the most of critical capabilities Source: Harvard Business Review -Strategic Sourcing from Periphery to the core Partnerships need to work While these partnerships can help in cost reductions, they can be used to bring about an increase in competitive advantage. For a partnership to work, these guidelines can be followed: View the arrangement as the implementation of a strategic plan. Seek an arrangement that achieves economies of scale while spreading risks Recognize that the benefits can be gained through a long term relationship, in which all the parties are interdependent Sharing information necessary to function well Build trust between organizations by establishing clear roles Knowing very well that the alliance might well be 5

7 Framework to manage performance and control for efficient Logistics Outsourcing Successful logistics outsourcing requires meticulous planning and execution % of outsourcing fails because of lack of management conviction and planning. Here are steps that a shipper can adopt to ensure successful outsourcing. A. Understand what you should outsource? Perform Strategic Assessment 1. Cross Functional Team: Create a cross functional team from all domains specially those responsible for orchestrating customer experience and company s brand. Empower the team to ideate evaluate their company s core competency, unique value proposition and role of logistics in achieving these goals 2. Evaluate your technical capabilities: Whether your current technology will cater to future demands. 3. Evaluate Outsourcing Opportunities: Decide level of outsourcing. Evaluate whether you want to outsource only transportation/warehousing or planning as well or entire logistics management including procurement, selection of vendors and forecasting. Perform Strategic Assessment Cross Functional team Technical Capabilities Evaluate Outsourcing Opportunities Level of Strategic Control High Medium Low The choice depends upon sourcing matrix as described earlier. If Logistics is not proprietary to a company and is neither unique in industry then it becomes high candidate for outsourcing B. Decide the level of Strategic Control: Intensity of Logistics Provider Involvement High Strategic Control: If transportation is an integral part of your business and brand you may want to maintain high strategic control. Outsourcing only transportation or warehousing while maintaining strategic decision making is suitable in this case. Such relationship is transactional in nature and called Vertical Relationship. Amazon s differentiation is same day delivery which involves meticulous logistics planning. Thus it keeps entire logistics in-house or in certain areas outsourcing only transportation Medium Strategic Control: If customer satisfaction only depend upon network s effectiveness and not on transportation then consider medium strategic control. Outsource transportation and provide freedom over everyday decision while observing key metrics continuously. Make logistics provider partner. Levi s came up with Levi s Personal Pair where a customer can either opt for pickup from store or FedEx delivery for $5. Levi s promised delivery of 6

8 customized jeans in 21 days. Thus effectiveness of network is important to Levi s and not transportation. Levi s chose medium control by monitoring delivery performance continuously. Low Strategic Control: If objective is only cut costs and day-to-day tasks and the logistics provider is highly capable then maintaining low to medium control is suggested. Relationship takes the form of Strategic Alliance where both companies modify their structure to achieve an objective. Shipper ensures that it provides all necessary information. Third party logistics provider provides complete service to shipper like procurement, sourcing, warehousing, transportation and distribution. Decide a Logistics Partner Past Experience Gemba Communicate goals and responsibilities Structure Operating Model Planning Joint Operating Controls Communication Risk/Reward Sharing Trust and Commitment Contract Style Scope of Relationship Financial Investment Nike, Inc., the global leader in athletics shoe provider outsources 100% of its manufacturing and logistics. Athletics wear is highly technological and marketing intensive business. Nike maintains core competency by focusing on preproduction (Research & Development) and post production (Sales & Marketing) and outsources non-core area like production. It has Strategic Alliance with its contract manufacturers which provides Nike manufacturing flexibility and logistics capability. Both Nike and contract manufacturer serve same end-customer by sharing tasks in the value chain thus forming a mutually beneficial Strategic Alliance C. Decide a logistics partner Empower the cross-functional team to decide on a logistics partner based on: Past Experience- Invite logistics provider to make a presentation. It will help narrow down on their strengths and weakness Gemba- Visit their facility to gain a first-hand experience in their management rigor and capability Communicate goals and responsibilities- clearly communicate goals of outsourcing, key metrics and responsibilities and gain a consensus D. Structure Operating model: Structure of relationship refers to the processes, investment, activities and priorities that will help sustain the relationship. An operating model must include Planning- Clear Vision Joint Operating Controls- Amount of strategic control exercised by shipper Communication-Channels through which communication between shipper and logistics provider will happen 7

9 Risk/Reward Sharing- Compensation structure for logistics provider and risk sharing structure by supplier in case of low production, slow moving inventory Trust and Commitment- In case logistics provider serves multiple clients it should be clear that he would give priority to whom Contract Style- Duration of contract and exit clauses Scope of Relationship- Vendor, Partner or Strategic Alliance Financial investment- How much investment will be shared between shipper and logistics provider E. Implementation Plan and On-boarding: After selecting a logistics provider most challenging job is to implement logistics outsourcing model developed. Company must decide how short or how long the implementation phase will be. Most outsourcing projects fail due to lack of on-boarding of logistics provider and lack of commitment and information sharing. Implementation Plan & On- Boarding Data Sharing Senior Management Commitment Continuous Monitoring/ KPI Cost Performance Value Creation Exit Plan Compensation Asset Sharing Time Other Legal Provisions On-boarding must include continuous data sharing and commitment of senior management in the early days to build trust and confidence between both parties F. Continuous Monitoring/ Key Performance Measures: To balance between performance and control and for successful alliance the shipper must define performance indicators and must evaluate them at predetermined intervals according to strategic control the shipper wants to exercise. Shippers measure performance in three broad categories: 1. Cost: Logistics Cost 2. Performance: % on time delivery, Average Order Cycle, Inventory Turnover 3. Value Creation: Increased ROI, Decrease in Working Capital G. Exit Plan An alliance may not last forever and prudence suggests that an exit plan must be drafted for smooth break-up of an alliance. Exit plan must include compensation to both parties, ownership of assets, time duration and other critical legal provisions 8

10 Conclusion Companies in this competitive world are looking to reduce their cost of goods sold and thus identify logistics outsourcing as a primary method of achieving sustainable competitive advantage. However not every company is successful in doing so because most lack control and management support apart from failure of information management. Thus companies must treat logistics outsourcing as a partnership and carefully evaluate which part of logistics management they must outsource. Further they must evaluate what level of control they must maintain. Using the framework suggested in the paper companies can manage their outsourcing program with step by step approach. 9

11 References Bowersox, Donald J. (1990, August). The Strategic Benefits of Logistics Alliances. Harvard Business Review Joseph Fuller James, O Conor, Richard Rawlinson (1993, August). Tailored Logistics: The Next Advantage. Harvard Business Review Mark Gottfredson, Rudy Puryear, Stephen Phillips (2005, February). Strategic Sourcing: From Periphery to the Core. Harvard Business Review James Brian Quinn, Frederick G. Hilmer s (1994, April). Strategic Outsourcing. MIT Sloan Management Review Capgemini Consulting (2014, April). Third Party Logistics Study: The state of Logistics outsourcing John J. Coyle, Edward J. Bardi, C. John Langley Jr. (7 th Edition). The Management of Business Logistics: A Supply Chain Perspective James R. Stock, Douglas M. Lambert (4 th Edition). Strategic Logistics Management. Mc-Graw Hill Irwin Publications 10