FOUR SUPPLY-CHAIN FUNCTIONS SHIPPERS SHOULD OUTSOURCE 

Some shippers prefer to go it alone, keeping all of their end-to-end supply-chain functions in-house. After all, they reason, nobody is as knowledgeable about their company’s needs as someone on the inside. While such an attitude may seem judicious, it can be bad for business, warns Joe Carlier, senior vice president of Sales at Penske Logistics. Although Carlier concedes that certain operations can be properly performed in-house, he questions why shippers would want to “spread themselves thin” by handling them all.

“When a customer asks me why they should outsource, I throw back, ‘Why on earth would you not want to?’” he says. To Carlier, it all comes down to one key distinction: whether the supply-chain operation is core or non-core. He urges shippers to eliminate functions that aren’t essential to one’s business and invest capital in critical operations. Distributors, for instance, should keep all warehousing activities in-house since they’re core to their business, Carlier says. “Focus only on what’s important,” he advises, “such as introducing a new product to the market, [finding] additional revenue streams, limiting your overall capital investment and using that capital in other core areas of your business.”

Such a model has certainly served eSecuritel well, says Phil Mitchell, the company’s senior director of Logistics. Mitchell says outsourcing certain supply-chain operations to UPS frees up the North American telecommunications company to focus on its core purpose: keeping customers’ mobile devices operational. “Our [relationship with] UPS allows us to remain in control of our supply chain,” he says, “which provides us the flexibility to quickly expand our operations as we onboard new customers.” UPS handles all of eSecuritel’s warehousing and fulfillment operations in the U.S. and assumes responsibility for the company’s warehousing, fulfillment and reverse logistics activities in Canada.

Mitchell calls the outsourcing relationship a win-win situation for both UPS and eSecuritel. In the U.S., for instance, the Alpharetta, Ga.-based shipper was able to achieve industry-best order cutoff times—a feat Mitchell directly attributes to UPS. “eSecuritel operates in an industry where our customers can’t afford to be without their mobile devices for even a day,” he adds, “so it’s incredibly important for us to be able to take an order any time during the day and guarantee delivery of a replacement device to that customer the very next day.”

Subcontracting select logistics functions also propelled eSecuritel’s Canadian operations, Mitchell says. He reveals that UPS helped bring the cellular goods shipper to Canada—a nation where it had previously lacked a physical presence. That’s not to say that eSecuritel has played a passive role in its supply-chain management, Mitchell points out. “We still [control] the entire supply chain,” he says, and handle procurement, supply and demand planning, order management, vendor management and repair operations in-house; the company also manages reverse logistics in the U.S. The arrangement has been so successful for eSecuritel that Mitchell encourages other shippers to follow suit.

Many logistics experts also endorse a partial-outsourcing model. Instead of handling all supply-chain operations in-house, shippers should consider subcontracting certain functions to third-party logistics (3PL) providers, they say. Deciding which functions to outsource, however, is entirely dependent on the company. Even so, below are four activities that may give shippers the most bang for their buck:

 1. Warehousing

Maintaining a brick-and-mortar facility is no small task. Along with requiring adequate physical space, operating a warehouse necessitates sufficient capital—and manpower. Penske’s Carlier estimates that labor accounts for 80 percent of warehousing costs, in fact. “Why tie up those dollars in nothing but labor?” he asks, rhetorically.

Labor expenses aside, shippers must also consider the cost of warehouse management systems (WMS). Logistics experts agree that these technologies are integral to managing the flow and storage of goods within a warehouse, as well as processing the associated transactions. They’re also expensive. Employing a 3PL, however, can mitigate these costs and lead to better outcomes for shippers, Carlier asserts. “If you don’t have warehousing technologies inside your four walls, more often than not a third-party provider will provide you with a better [value] with their warehousing management system,” Carlier says. He explains that the systems employed by 3PLs often feature advanced technologies, such as labor management, which in turn boost company productivity.

Joy Taylor, CEO of TayganPoint Consulting Group—which counts Aramark, Johnson & Johnson, Merck and Bristol Myers Squibb among its clientele—cites a similar benefit. Warehouse management systems are quite complex, she explains, and leaving them to the experts can prevent a lot of headaches for shippers. “Although a basic functionality of distribution, process fail points and system limitations are usually found more around WMSs and mechanical/automated handling systems,” Taylor says.

Not that such limitations necessitate total outsourcing, she points out. Taylor explains that shippers operating multiple warehouses often run some facilities in-house and then outsource the rest. This tactic provides companies with continuous benchmarks of how their outsourcing partner is performing, she says, which enables them to sustain best-in-class performance standards for their self-operated locations. “Having these outsourced warehouses is also one way to minimize business risk,” Taylor adds.

2. Transportation-related technologies

Technology is always evolving, and staying abreast of these changes can seem like an insurmountable task. By the time most shippers complete an IT installation, Carlier says a “newer and better” product usually comes to market. It’s a vicious—and often frustrating—cycle. “Not only that,” Carlier says, “but being able to integrate your supply-chain technologies into functional areas, such as warehousing and freight payment auditing services, is a pretty large undertaking for an organization that doesn’t [already] have one in place.” Again, he asks, “Why tie up that capital?”

When companies handle IT capabilities in-house, the costs are fixed; such expenses are converted to variable costs if companies outsource their IT services. Carlier says freeing up this capital enables shippers to invest in core areas of their business—which impacts their bottom line. Plus, he adds, outsourcing may elevate shippers’ IT capabilities. “In many cases, outsource providers really do execute at a higher level [than their clients],” Carlier says.

George Abernathy, president of transportation management services and logistics technology provider Transplace, agrees that outsourcing IT services can lead to better outcomes for shippers. But instead of advocating a full outsourcing model, Abernathy endorses a hybrid approach. He says the percentage of outsourcing versus insourcing is entirely company-specific, however.

“Each shipper needs to determine the optimal blend of outsourcing based on the size and ease of their network,” Abernathy says.

One exception is shippers managing multiple transportation modes. In that case, he says, “It’s likely that the sophistication necessary to have the service at cost goals being met would probably not be best met by outsourcing.”

3. Returns handling and processing 

Thanks to the advent of e-commerce, reverse logistics is big business. Gone are the days when people primarily returned goods to a brick-and-mortar store; nowadays, purchases are often made online and returned by mail. Such a transition may be good for business, but it also presents a host of challenges for shippers, logistics experts say.

It’s why TayganPoint Consulting Group’s Joy Taylor encourages companies to consider outsourcing. Instead of managing reverse logistics in-house, shippers should employ a 3PL to handle returns processing, she asserts. Outsourced tasks can range from picking up products from dissatisfied customers to repairing or disposing of unwanted goods. 3PLs can also handle customer calls, Taylor says, which enables them to manage the returns process from start to finish. “Those who make this their core business sometimes do best outsourcing this functionally,” she adds.

Even so, she admits that entrusting a third party to handle customer calls isn’t without risk. Taylor says before handing over the reins to a 3PL, shippers should determine whether they want to outsource any functions that involve direct customer contact. If the answer is yes, she says companies should proceed forward—albeit with caution.

“Apart from the customer contact aspects, there are many parts of [reverse logistics] that are either commoditized or too specialized, and outsourcing them can provide the benefits of scale and flexibility, which might not be there if kept in-house,” Taylor says.

UPS handles eSecuritel’s returns in Canada, and Phil Mitchell says the process has worked extremely well for the telecommunications company. In addition to minimizing headaches, subcontracting eSecuritel’s reverse logistics operations has led to better customer outcomes. And happy customers mean repeat customers.

4. Manufacturing

The supply-chain sector is undoubtedly in flux, with a lot of production moving from China to South Asia, Mexico and even back to the U.S. Effective supply chains are responding to this change and adapting to the shift in market demand. “Inefficient supply chains, on the other hand, tend to respond very slowly, which costs much more money and ultimately impacts production and service,” Penske’s Carlier says. Avoiding this fate has led many shippers to forgo in-house production facilities and outsource their manufacturing operations.

Taylor says it’s a trend she’s witnessed in her work with global shippers. “Certain parts of the world have access to specific resources or expertise, and others are just cheap,” she says. Although this doesn’t mean that factories must be outsourced, Taylor says it enables shippers to tap into such expertise without making the long-term commitment of an in-house facility.

“Manufacturing outsourcing can be done for reasons of speed to market, flexibility and cost,” Taylor adds. Many shippers also employ third-party manufacturers for tax purposes, hoping to take advantage of different corporate tax rates across the world. This tactic isn’t just opportunistic, Taylor says; it’s good business.

Along with manufacturing, more complex supply chains often include assembly, or late-stage configuration, Taylor says. “There is then a debate about whether or not these assembly operations should be in-house or outsourced.” The answer to that, she says, lies in the degree of business risk involved and how core these operations are to the success of the product. Like with any supply chain function, however, companies must carefully weigh the pros and cons of relinquishing an in-house operation and outsourcing production capabilities. After all, doing so can make or break a manufacturer. “So choose wisely,” Taylor says.