Buyers who consider retaining a distributor or a logistics service provider often have these things in common:
- Inventory is needed in a new territory where the buyer has no established relationships.
- The buyer needs to avoid capital investment.
- The buyer needs to increase flexibility.
- The risk of unionization causes the buyer to outsource warehousing and delivery operations.
- High internal costs make it attractive to outsource.
Two of the dirtiest words in supply chain management are commoditization and disintermediation. In fact, they really refer to the same thing — the ability of the buyer of logistics services to destroy the vendor's effort to create a unique value proposition.
In wholesale distribution, disintermediation is the buyer's tactic of cutting out the middleman and buying directly from the manufacturer. When the manufacturer is capable of providing all the services developed by a distributor, the effort may well be successful. However, when the distributor can demonstrate capabilities that are not offered by the manufacturer, disintermediation becomes an empty threat.
The same challenge exists for logistics service providers and their customers. When the buyer considers such services to be a commodity, the decision will be based solely on price. Commodities are best defined as those products that most buyers consider to be standardized.
For example, relatively few motorists have developed a close personal relationship with a single vendor of gasoline. Therefore, nearly every service station has a prominent sign that advertises its price, and many motorists will move toward the low-price gas station.
How do vendors meet these needs?
Outsourcing of warehousing provides flexibility that cannot be duplicated with private warehousing. In effect, the public warehouse is a hotel for merchandise. A buyer with seasonal fluctuation of volume seeks the flexibility provided by a specialist who is willing to sell services with a transactional fee rather than a fixed-price contract.
While contract warehousing has shown substantial growth in the past few decades, there will always be a market for the vendor who provides a merchandise hotel rather than an apartment.
Many distributors and logistics service providers are union-free and intend to stay that way. A buyer who is concerned about unionization can reduce the threat by outsourcing those jobs that attract labor organizers. When the logistics operation moves overseas, particularly to nations where unions are more powerful than in the United States, the outsourcing of logistics services becomes attractive.
Some buyers of logistics services have an established wage scale that is significantly higher than prevailing wages for freight handlers. When the establishment of a private warehouse becomes a risky proposition, outsourcing of logistics services is a sensible option.
Refining the procurement function
While commodities may be bought on the computer, the selection of a service provider should not follow this practice. While the request for information (RFI) and request for proposal (RFP) may be standardized, a successful procurement routine requires personal attention and judgment.
One is the process of getting to know the people at the service provider. Does the organization have the stability and experience needed for success. Is there sufficient management depth? What is the provider's service record with other clients? Does the provider have the scalability to expand as your company grows?
No operation is trouble-free, so a resolution process is needed as part of the procurement function.
In appraising competitive providers, two critical elements are personal chemistry and trust. No computer process can measure these elements. Therefore, a critical phase of the buying procedure is an appraisal of the vendor's management and reputation.
Debunking the outsourcing myths
Everybody hopes that a change of warehouses will be seamless to the customer. It won't.
Be prepared for startup problems and customer complaints. Don't promise something that cannot be delivered. Smooth transitions are extremely rare, and realistic managers will be ready for bumps in the road.
Don't assume that the new provider's fully-trained staff will take over without errors. A new operation creates a culture shock, and that shock will extend to everyone who works in the warehouse.
Never assume that superior IT systems will automatically ensure superior performance. Systems can never be better than the people who use them.
Most importantly, remember that outsourcing is not the best solution to all applications. A lower price does not always equal a lower total cost. Finally, never assume that outsourcing will always save money.
Success factors
The most important factor is a supply of ample, accurate data; and it is sometimes necessary to admit that adequate data does not exist. Hide nothing. There will be enough surprises without contributing new ones.
Design realistic performance targets, and ensure that there is consensus about those targets. Get to know the people who are bidding for the contract, be sure that each candidate has enough time to develop a realistic response.
Recognize that the outsourcing of logistics services demands a true partnership. It must be a "win-win" relationship, and this attitude must be shared by everybody involved in the process. Those who take an adversarial approach cannot be tolerated.
