LOGISTICS OUTSOURCING: CHANGING ATTITUDES? by Dr Soroosh Sam Saghiri, BingKai Huang, Dr Richard Gibson, Jo Godsmark Are attitudes towards logistics outsourcing in the UK changing and if so, how? Do the suppliers of logistics outsourcing services view its benefits and value proposition differently from those businesses which purchase logistics outsourcing services? And if attitudes towards logistics outsourcing are indeed changing, and if buyers and sellers do indeed view logistics outsourcing s value proposition differently, then what precisely lies behind these changes and differences? Research carried out by the Outsourcing & Procurement Forum of The Chartered Institute of Logistics and Transport (CILT) and Cranfield School of Management, has sought to determine the answers to such questions. The research combined an analysis of CILT s annual logistics outsourcing questionnaires over the four-year period 2010-2013 with semi-structured interviews probing the reasons behind some the trends, differences and perceptions identified in the survey data. Encompassing the views of a broad cross section of businesses with exposure to logistics outsourcing logistics service providers (LSPs), manufacturers, and retailers/wholesalers/distributors CILT s Outsourcing & Procurement Forum annual surveys, with around 150-200 responses each year during 2010-2013, are a unique window into contemporary industry thinking and practices across a wide range of logistics-specific issues. Each year s data on its own provides a snapshot view of the balance of opinion relating to each issue; taking several such surveys together provides the added dimension of time, enabling broad trends to be discerned. The result is not only a fascinating glimpse into the attitudes and perceptions prevailing in the logistics outsourcing marketplace during 2014, but an intriguing insight into how those
attitudes and perceptions had evolved over the previous four years years during which, it needs hardly be said, the UK logistics outsourcing industry was recovering from the steepest economic recession since the 1930s. We discuss these findings under four headings: * Degree of logistics outsourcing * Preferences in logistics outsourcing contracts * Customer-3PL relationship management * Technology and innovation in logistics outsourcing Degree of logistics outsourcing Consistently, across each of the four years 2010-2013, survey respondents were asked: What percentage of the following logistics activities do you currently outsource? In each case, the degree of logistics outsourcing could be categorized into four discrete levels of indicative usage: frequently use logistics outsourcing, corresponding to outsourcing 81%-100% of the respective activity; often use logistics outsourcing (41%-80%); less frequently use logistics outsourcing (1-40%); and never use logistics outsourcing (0%). Put another way, respondents to the question can be viewed as high level users of the respective logistics outsourcing activity, medium level users, low level users, and very low-level users. Table 1 below shows how levels of usage have changed over the four years. The outsourcing of back office tasks, for instance, has exhibited a net decrease, while the order management process exhibited a decrease, then an increase. The outsourcing of supplier management, returns management, E-fulfilment, procurement, and warehousing is
unchanged over the period. And finally, the outsourcing of transport, reverse logistics, and IT has increased over the period. The increase in the use of logistics outsourcing in transport was especially notable, rising over the period from high to very high. Table 1: Degree of logistics outsourcing Outsources Operations Past Now Trend Transport High Very high Increased Warehousing Low Low Unchanged Reverse logistics Low Medium Increased IT Low Medium Increased Procurement Low Low Unchanged Order processing Low Low Decreased and then increased E-fulfillment Medium Medium Unchanged Back office tasks Medium Low Decreased Returns management Medium Medium Unchanged Supplier management Low Low Unchanged Preferences in logistics outsourcing contracts Respondents were also asked a series of questions relating to such issues as contract length, open-book versus closed-book contracts, shared user facilities, the use (or not) of a 4PL, and the number of 3PLs. Collectively, it makes sense to group these under the heading preferences in logistics outsourcing contracts. Table 2 below summarises the main findings.
Warehousing contract Transport contract Table 2: Preferences in logistics outsourcing contracts Logistics Outsourcing activities Past Now Trend Use of 4PL Medium Low Decreased Use of one single 3PL Medium Medium Unchanged Use of more than one 3PL High Very high Increased Use of share user High High Unchanged Use of dedicated operation Low Low Unchanged Use of open book Low Medium Use of closed book (volume related) High Medium Decreased and then increased Increased and then decreased Use of 4PL Low Very low Decreased Use of one single 3PL High Very high Increased Use of more than one 3PL Medium Low Decreased Use of share user Medium Medium Use of dedicated operation Medium Medium Use of open book Medium High Use of closed book Medium Low Decreased and then increased Increased and then decreased Decreased and then increased Increased and then decreased In terms of the logistics outsourcing of transport activities, for instance, some clear trends
were discernible most notably a move away from single sourcing. Over the four years in question, the use of 4PL logistics outsourcing providers has decreased, from a medium level of use, to what is now a low level of use. Likewise, the use of more than one 3PL rose from high to very high. On the question of open-book versus closed-book contracts, open-book fell out of favour, while closed-book gained in favour but in neither case was the trend an unbroken rise or fall. In short, it appears that the industry seems happy with a hybrid approach to open-book and closed-book contracts, adopting each on its merits for particular situations. In terms of the logistics outsourcing of warehouse activities, a similar fall was seen in the use of 4PL logistics outsourcing providers over the four years in question, with reported usage falling from low to very low over the period in percentage terms, a reduction from 20% in 2010 to around 7% in 2013. Similarly, the use of a single 3PL for warehousing activities increased from high to very high - 64% of respondents reporting the use of a single 3PL in 2013, versus 45% four years earlier in 2010. In contrast, the use of more than a single 3PL dropped slightly, falling from medium to low from 35% in 2010, to 30% in 2013. Trends in other contract preferences in the logistics outsourcing of warehousing activities were less clear-cut. The same hybrid approach to open-book versus closed-book contracts was seen over the period, with closed-book falling out of favour, while open-book gained in favour a complete reversal of the situation in respect to the logistics outsourcing of transport activities. But again, in neither case was the trend an unbroken rise, or fall.
Similarly, no clear unbroken trend is emerged over the four-year period with respect to shared-user facilities versus dedicated facilities. Again, it seems likely that this reflects a pragmatic view by both buyers and sellers of logistics outsourcing activities that each has its merits situations. Finally, respondents were asked about their preferences in respect of the length of logistics outsourcing contracts both transport-related outsourcing contracts, and warehouse-related outsourcing contracts. As Figure 1 below shows, industry participants impressions regarding the length of logistics outsourcing contracts show a clear trend over the four-year period. Simply put, the industry consensus is that logistics outsourcing contracts are getting shorter. Figure 1: Industry participants impressions regarding the length of logistics outsourcing contracts 100.00% 80.00% 60.00% 40.00% Increased Decreased 20.00% 0.00% 2010 2011 2012 2013 That said, buyers and sellers of logistics outsourcing activities have different perspectives on this overall trend. A majority (56%) of manufacturers, for instance, believe that the length of outsourcing contracts has increased. A majority of LSPs, on the other hand, together with retailers/wholesalers/distributors, hold the view that the length of outsourcing contracts has decreased over the past few years, with 58% of LSPs taking this view, as do 61% of the retailers/wholesalers/distributors respondents.
Customer-3PL relationship management Participants were also asked a series of questions designed to probe the calibre of relationships within the industry specifically, in the context of relationships between buyers of logistics outsourcing services, and the 3PLs providing them. Figure 2: Changing perspectives on the customer-3pl relationship 100% 80% 60% 40% 20% Other A trusted advisor A supply chain partner A commodity provider 0% 2010 2011 2012 2013 In particular, as Figure 2 above shows, it seems that the nature of that relationship is undergoing a period of evolution. In 2010, clients mainly regarded their suppliers as a supply chain partner. But over the past few years, the percentage of regarding their logistics outsourcing suppliers in this way has decreased from 67% in 2010 to 58% in 2013, while the percentage seeing their logistics outsourcing suppliers as commodity providers has increased from 19% in 2010 to 26% in 2013. Moreover, as Figure 3 below shows, perceptions of the relationship vary according to the industry role played by the respondent. Interestingly, a larger proportion of both manufacturers and retailers/wholesalers/distributors were inclined to see logistics outsourcing providers as supply chain partners than were logistics outsourcing providers themselves. Similarly, the highest proportion of respondents seeing logistics outsourcing
providers as commodity providers was to be found among logistics outsourcing providers themselves. Figure 3: Industry views on the customer-3pl relationship Other A supply chain partner A trusted advisor A commodity provider 100% 80% 60% 40% 20% 0% Manufacturer Logistics service provider Retailer /Wholesaler/Distributor The research also probed problems experienced within customer-3pl relationships. Customers, it transpired, were characterised by such failings as reacting too severely to the first quality breakdown, misinterpretation of service agreements and metrics, and delaying or failing to finalise contracts. Suppliers, on the other hand, were seen by customers as failing to manage expectations, making last-minute changes, being insufficiently proactive in terms of communication, and failing to adjust processes and retrain staff as operational changes and quality issues arose.
Table 3: Problems experienced in customer-3pl relationships Customer initiated problems Supplier initiated problems Unrealistic goals Delaying or failing to finalize the Contract Poor decision-making mechanisms Misinterpretation of the service agreements and the associated metrics Lack of trust and Reacting too severely to the first quality breakdown Failure to manage expectations Making last-minute decision and changes Not having executive support Not being proactive with Communication Failing to adjust processes and retrain staff as operational changes and quality issue arise Finally, this part of the research looked at the major reasons for the non-renewal of logistics outsourcing contracts. As Figure 4 below shows, at the beginning of the four year period, the levels of service that had been provided comprised the most popular reason for the non-renewal of an outsourcing contract, cited by 40% of respondents. By 2012, though, the continuing volatility of the global business environment had brought about a change in sentiment, with cost coming to the fore as a reason for non-renewal, cited by 32% of respondents. The importance of service as a reason for non-renewal, in contrast, had reduced markedly, being cited by just 12% of respondents. Most notable over the period has been the role played by technology as a factor in the non-renewal of contracts, accounting for 20% of non-renewals in 2012, double the percentage cited in 2010. Figure 4: Top reasons for the non-renewal of outsourcing contracts
% 100 Others 80 Reduced trust 60 40 20 0 2010 2011 2012 Lack of innovation and technical improvement Flexible requirements Poor service and performance High cost Technology and innovation in logistics outsourcing On which note, it is appropriate to turn to the role played by technology and innovation in general within a logistics outsourcing context. Overall, innovation is clearly prized. Over 90% of respondents, in fact, concur that innovation in the arena of logistics outsourcing is either important, very important, or essential a number that is little changed over the 2010-2013 period. Moreover, what change there has been over the period has been in the shrinking of the proportion of respondents seeing innovation as important, and the growth in the proportion of respondents seeing it as very important. Across the four year period, the percentage of respondents declaring innovation to be very important rose from 32% in
2010 to 50% in 2013. But what s even more striking is the divergence of opinion among the three logistics outsourcing communities of manufacturers, LSPs, and retailers/wholesalers/distributors. As Figure 5 below highlights, all LSPs accord innovation with some degree of importance, with the largest proportion (48%) describing the ability to innovate as essential. In contrast, among their clients in manufacturing and retailing/distribution/wholesaling, smaller proportions of respondents see it as either essential or very important, with a larger proportion regarding it as merely important. Figure 5: Different attitudes between clients and 3PLs to innovation Essential Important Very important Not important 100% 80% 60% 40% 20% 0% Manufacturer Logistics service provider Retailer /Wholesaler/Distributor Conclusion
A major participant in the global economy, the logistics outsourcing industry delivers significant cost savings and efficiencies to its clients in the manufacturing and retailing/distribution/wholesaling industries. Simply put, without the economies of scale and specialist skills of the logistics outsourcing industry, the world s supply chains would operate less effectively, and the vital goods that they deliver would be more expensive. And yet, as this research has demonstrated three major outcomes: The gaps in responses between LSP respondents and their customers shows that there is an opportunity for users of logistics services to share their goals and priorities more closely with their outsourced partners. LSPs need to be aware that the selection and performance criteria against which they will be judged changes over time based on market conditions and industry trends this is true of current contracts as well as new business. IT and innovation have become hygiene factors in this industry and LSPs need to respond accordingly. If you are interested in the issues and topics raised in this article you might consider attending a series of events on the Logistics Outsourcing Lifecycle run by the Outsourcing and Procurement Forum. Following the success of the first event on Strategic Planning in 2014, the forum s 2015 events will be focusing on the next stage of the lifecycle: Procurement and Implementation. The first of these, in February, will include topics and discussion points relating to Procurement and Contracts. As before the event will be a mixture of presentations and expert led discussion workshops. Event: Outsourcing Life Cycle Master Class: Step 2a Procurement & Contract Thursday 5 th February 9am 2pm Wright Hassall, Leamington Spa. Places are limited. To secure your place please contact ana.walker@ciltuk.org.uk. About the authors:
Dr Soroosh (Sam) Saghiri BingKai Huang Dr Richard Gibson Jo Godsmark Is a senior Research Fellow at Centre for Logistics & Supply Chain Management (LSCM), Cranfield School of Management, academic representative in CILT s Outsourcing & Procurement Forum, and Committee Member for CILT s London Region. He may be contacted at: s.saghiri@cranfield.ac.uk Is an MSc Logistics and Supply Chain Management student at Cranfield School of Management. Is a seasoned operator currently working within global supply chains. His research interests include the areas of logistics service provision, supply chain risk management and the deployment of inventory management tools within oil and gas supply chains. For further information or to discuss the content of this article, he may be contacted at: Richard.gibson@idrislogistics. co.uk Is a director at Labyrinth Logistics Consulting Limited, specialising in logistics outsourcing, logistics strategy and network design. She is also Chair of the Outsourcing and Procurement Forum and a trustee of Transaid. She may be contacted at: jogodsmark@labyrinthsolutio ns.co.uk About O&PF The Outsourcing & Procurement Forum is one of the active forums of the Chartered Institute of Logistics and Transport (CILT) which tries to contribute to the area of logistics and supply chain outsourcing. O&PF produces whitepapers and reports and set up events and workshops on relevant subjects and support regional CILT groups by providing speakers and workshops on the topic of logistics outsourcing. For more information, please see www.ciltuk.org.uk/aboutus/professionalsectorsforums/forums/outsourcingprocurement.aspx About LSCM The Centre for Logistics & Supply Chain Management at Cranfield School of Management is one of Europe s largest centres dedicated to research and education in logistics and supply chain management. It performs a variety of research; from long-term, research council funded projects which focus on the generation of new knowledge to dedicated, industrially funded work that addresses specific needs. To learn more how Cranfield can support your organisation visit: www.som.cranfield.ac.uk/som/lscm