The final part of our series on scaling logistics networks! Now that we have dealt with the strategic, spatial and temporal aspects of network scaling in the first three parts, we will devote this part to operational implementation.
"Do we want to hire and train our own specialists or rely on the resources of an external service provider for all or parts of our operations?” This is the question many e-commerce companies ask themselves when it comes to logistics outsourcing. That’s the obvious thing to do. There are many providers of third-party logistics (so-called 3PLs), including almost all the big names in logistics. However, the related discussions are seldom truly differentiated. That’s why in this article we will discuss the advantages, disadvantages, opportunities and risks of targeted outsourcing or even insourcing in the context of logistics.
Developments in the logistics sector show making use of logistics services is not an exception, but rather an integral part of strategies to secure competitiveness and performance. The reasons given for these decisions include saving capital, conserving internal resources and focusing on core areas of expertise. In the case of partial outsourcing, it is often the case that logistics service providers specialise in the relevant processes and can thus offer more efficient and higher-quality processes through specific know-how or technological set-ups. This in turn automatically becomes a competitive differentiator in favour of the client.
Outsourcing logistics capacities often involves relocating all, some, or even only individual processes to a country that will still have a lower wage level for skilled logistics staff, at least for the foreseeable future.
The classic case with which most people are certainly familiar are Eastern European return centres for originally German orders. Since accepting and checking returns is a relatively time-consuming manual process – even trained staff can ‘only’ manage 30 to 40 items an hour, depending on the set-up! – it often pays off to redirect returns to other countries. There, the parcels are then processed, bundled and sent back to the German logistics centre from where they originated. In contrast to forward logistics, the additional transport time in reverse logistics is only marginally significant, especially when customers receive their money back unchecked in the case of returns that have been notified.
Now, in the case described above, strictly speaking, it is not the outsourcing itself that supposedly cuts costs. You could also open your own return centre and potentially have the same difference in pay. What makes many companies prefer the external solution is simple risk minimisation. Setting up your own logistics abroad is a risky venture, beginning with the construction project, which should not be tackled without experts who are familiar with the target region as well as local building and fire safety regulations. In addition to wage costs, which in some cases have a very specific structure, there are also different regional demands on employers and, last but not least, different strike cultures. It is, of course, not impossible, but service providers have often been operating for many years in the respective region and have a more solid picture of the labour market.
There is another aspect of risk that we should not forget, i.e., if the goal of building logistics capacity is not to reduce costs but to create real customer value (e.g., by having a satellite warehouse close to urban centres), it is rarely certain how much this significant effort will in fact boost the market. If a company was too optimistic, it is of course easier and more cost-effective to sell off outsourced operations than to close down an entire location of its own.
In the context of process costs, the company’s own operations would have to be classified as more favourable in the long term, since a service provider always has to calculate with a margin in order to operate profitably. There are, however, a few effects that can make external service providers attractive despite the aforementioned margin.
Specialisation: If only certain processes or product ranges are outsourced, the service provider may be able to specialise more than you yourself could. In our returns example, for instance, you should keep in mind that in a typical set-up it is precisely the returns reception staff who need the most intensive training.
Economies of scale: Especially with low process volumes, fixed costs (buildings, overhead, etc.) are a significant factor when the company performs everything itself. In a multi-user set-up with a service provider, these costs are shared between the different clients.
Seasonal adjustment: Although it is true that a large part of online trade has to cope with strong winter months while service providers also have to brace themselves with investments and short-term, expensive capacities, nonetheless, these service providers can place at least some anti-cyclical processes or product ranges over the same resources and thus improve utilisation.
It is also important to consider the case where a company has failed to create its own capacities in time. In a situation like this, outsourcing part of the processes to a logistics partner is supposedly the quickest and safest way to create capacity. Although such rushed decisions are not ideal, they are at times the best way to limit damage.
As explained above, service providers offer a variety of advantages and opportunities that make an external logistics partner very attractive. Of course, there are also some unavoidable disadvantages and risks when processes are outsourced.
First of all, there is the loss of control and transparency. This is not important when everything runs smoothly. However, when clarification is needed, this set-up often complicates the flow of information, i.e., from the client to the seller to the service provider and then back again. Naturally, logistics partners do strive to provide a (commercially justifiable) maximum of influence and insight into the processes taken over. That being said, however, this is hardly comparable with a company managing all of its own operations and it also involves a considerable amount of IT integration. Incidentally, the latter is always the case when logistics processes are outsourced – plug & play is extremely rare in this context.
In addition to the IT effort involved, handling a corresponding contract award project also involves a considerable amount of work. From tender documents and negotiations to acceptance and ramp up, there is a number of challenges to work around. Since projects like these are either new or at least rare for most e-commerce companies, they often lack the necessary experts in-house. At worst, you will be contractually bound in a suboptimal set-up for the next three to five years.
Finally, we would like to go back to the theory which states that the more favourable option in the long term is for a company to run its own operations. Above a certain scale, this is indeed the case (apart from the quite widespread circumvention of a company’s own wage commitments by subcontractors). So, you have to think about mastering the somewhat more difficult small to medium-sized phase yourself in order to learn step by step, build up know-how and then be able to scale up later.
If you look at medium and big players, you can see that the trend is towards hybrid insourcing and outsourcing solutions, both vertically and horizontally. Amazon and Zalando have built up their own delivery services in recent years, which allowed them to become more independent of the CEP market, to gain more control and transparency, and because their scale allowed them to do so (vertical insourcing). An interesting side effect to this development is that both players can now also offer their own fulfilment services and, through this platform strategy, have become themselves in part 3PLs for their suppliers (horizontal insourcing).
Conclusion: Outsourcing is particularly interesting at the beginning and decreases with continued growth until optimal hybrid solutions have become established. In practice, you need to look at each individual case carefully in order to make an informed decision. We will be happy to assist you in this process. Talk to us via e-mail, or via LinkedIn and Xing.