Outsourcing a portion or all of your supply chain management functions to a third-party logistics (3PL) company is becoming a popular choice in today's competitive environment. This article will examine the top five pros and cons of 3PL outsourcing.
What Is 3PL Outsourcing?
Third-party logistics companies provide transportation, warehouse processes, and other supply chain functions for partner companies.
3PL companies provide expertise in all supply chain management areas, which provides plenty of benefits for their partner companies. It is not without its downside as well. If the relationship is not managed appropriately, the benefits of outsourcing can be negated.
These are the top five pros of outsourcing logistics. Each one has multiple benefits but all boil down to increased operational efficiencies for the companies involved.
Outsourcing the supply chain saves both time and money. As everyone knows, in business, time is money, so saving time is another cost savings. Companies choosing to outsource these functions save on capital investments on multiple fronts (transportation, IT, personnel), shipping and inventory management costs, and warehousing efficiencies. Outsourcing to 3PL companies has been shown to reduce the time needed to process returns and reduce the need to hold inventory for contingencies. Plus, shipping costs can be more effectively managed with the right contract in place than when dealing with multiple carriers.
Access to Experts
One of the primary benefits of outsourcing logistics to a third-party is that the 3PL company is a logistics expert. They can make strategic recommendations and execute supply chain functions at a high level because that is their core function. That leaves the contracting company able to focus on what it does the best.
3PL companies stand at the forefront of IT innovations in the supply chain. They are the ones making the investments in the latest inventory management and transportation software. The increase in the prominence of the Internet of Things (IoT) devices allows companies to track shipments much more effectively. Integrating the IT functions with their outsourcing partner provides a superior data connection and visibility to the supply chain functions, even if the 3PL company is doing the decision-making. Effective IT integration provides increased peace of mind for the contracting company as they can track performance and view their business data at a glance, often in real-time.
Scalability and Flexibility
Being able to scale to meet increasing customer demand or move into other market verticals is often key to its success. An outsourcing agreement allows companies to scale up or down very quickly, as there is no increased capital cost (such as buying additional trucks) or employee impacts (laying off workers in times of increased demand). This scalability and flexibility are desirable to rapidly growing companies and is one reason that outsourcing to 3PL companies is so popular.
Over 90% of companies involved in outsourcing logistics to a third-party state that their relationship is the primary driver of success for both companies. The logistics company brings a wide variety of existing relationships to the table, which allows their partner companies access to transportation companies that they may never have had relationships with before.
There are also hidden benefits for the 3PL companies that may go unnoticed. One of these is the ability to strike a balance between full-truckload (FTL) and LTL (Less Than Truckload) shipping methods by combining shipments for multiple customers on one route. This can be a big factor in reducing costs and would not exist without a network of strong relationships.
For every pro on the list above, there is a related con. Here are the details of the top five cons of outsourcing your logistics to a third-party company.
There is no doubt that there are significant cost advantages to outsourcing supply chain functions. However, unless the contracts are structured appropriately, as costs to supply those functions increase, the company outsourcing its logistics can see its cost benefits rapidly melt away.
Loss of Control
It is difficult for any company to give up control of any of its core functions. The supply chain has direct impacts on customer satisfaction. If customer satisfaction begins to decline, it can be difficult to manage the issues if customer satisfaction is primarily related to supply chain problems. The outsourcing of logistics requires the company to trust its partner. They have to become comfortable with giving up control of the supply chain to reap the new relationship's many benefits.
IT Integrations with legacy systems can be difficult to manage and are often stymied by one party's refusal to cooperate with their partner company. IT functions must be able to transfer data seamlessly up and down the supply chain to reap the benefits of rapidly changing technology. In general, the 3PL company has its finger on the latest technological improvements in inventory management, analytics, and overall supply chain management. Companies who outsource to 3PL companies must be willing to integrate their IT functions to create a new, secure network environment for their logistical data.
To succeed, both parties must share the same vision and align strategically. Key Performance Indicators (KPI) must be developed and shared by both parties, and the 3PL must be treated as a strategic partner rather than a perfunctory cost center.
Although strong relationships can come out of an outsourcing arrangement unless both companies focus on communication, that relationship can quickly sour. Poor communication is cited as the number one reason outsourcing relationships fail. To reap the benefits of outsourcing logistics, your intercompany communication needs to be top-notch. None of the other benefits will be realized if the flow of information does not pass smoothly between partners. Both companies must stay on the same page throughout the relationship.
If you are wondering where can you get pallets, then a 3PL partner may be able to assist you. Otherwise, you can always purchase pallets directly from a manufacturer without involving the company in additional 3PL outsourcing.