Outsourcing logistics services: Advantages and disadvantages

Nowadays, many companies are outsourcing their logistics services to take advantage of the cost-saving advantages it provides. Even so, for outsourcing to be effective in logistics, it must be possible to measure the productivity of its processes to establish clearer and more precise parameters of the true advantages and disadvantages of outsourcing logistics processes.

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The commercial expansion allowed logistics to become a strategic factor for all companies that aspire to growth. Reality shows that the more a company's sales increase, the more complex logistics processes become, so choosing the right means to carry them out becomes a challenge.

Outsourcing logistics services can mean an excellent opportunity to reduce the workload and increase profitability, but also not in all cases the best results can be obtained, coming to involve more expense and waste of time than an improvement of processes.

Deciding to outsource logistics services can be difficult. But given the volatility of freight rates, booming e-commerce, changing government regulations, and the constant onslaught of new technology, it's getting harder to do it all one way. In this article, we tell you about the implications, advantages, and disadvantages of logistics outsourcing.

What does it mean to outsource logistics services?

Before the 2000s, most companies handled their shipping and logistics. They could have their assets, such as trucks and a warehouse, or hire those services directly. But as supply chains became more complex and technologically driven, companies began to outsource logistics services.

Today, many companies use an external logistics provider for outsourced logistics services, including transportation, warehousing, and cross-docking (the intermediate point where the order is assembled for a customer. It involves concentrating, assembling, and redirecting to the endpoint), inventory management, packaging, and freight forwarding. A relationship with an external logistics provider is a form of business process outsourcing that focuses on the strategic operation of the customer's supply chain.

Many companies even outsource other non-core functions, such as accounting, IT, and human resources. Companies may hire various third-party providers to manage specific traffic segments or customer bases. Or, they can outsource the entire supply chain.

The outsourced logistics provider makes day-to-day operational decisions, allowing in-house staff to focus on their daily tasks that can add value to you. Typically, these services are bundled together to provide a single point of contact for all (or part) of a company's supply chain.

Carriers will typically consider outsourcing logistics services when there is a change in company structure or strategy, or simply when costs are rising and service levels are falling. Outsourced logistics can help your company scale as it grows organically, and adapt the supply chain to incorporate the latest e-commerce capabilities.

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Advantages of outsourcing logistics services

For all that has been analyzed so far, outsourcing logistics services can mean an important competitive advantage, which is why we list its main advantages below.

1. Long-lasting relationships.

The objective of outsourcing logistics services is to develop a long-term strategic alliance with the customer. Unlike a transportation broker, which is typically only concerned with moving freight from point A to point B, on a transactional basis, you will invest in third-party logistics providers on a deeper level.

2. Access to experience.

Due to its extensive experience, an outsourced provider will include people, processes, and technology at a level higher than what a single company can develop independently. Despite fluctuating capacity, increased carrier demands, and disruptions within the industry, a third-party provider has the expertise to manage the supply chain using insights and analytics for decision making.

Outsourcing logistics services will help you determine the most efficient route for your products. You'll have expert help as you evaluate the best options for your business. Outsourcing can also take over inventory management and warehouse operations as needed.

3. Access to technology.

One of the main advantages of outsourcing logistics services is access to new technology. An example of this is the functionality of the Internet of Things (IoT), which is already becoming the new standard for all supply chains.

By outsourcing logistics to an external provider, you will also have the benefit of real-time inventory updates. Imagine the benefits this will have for agriculture, healthcare, retail, and other inventory strategies implemented in the future.

4. Cost reduction.

With greater supply chain visibility, a logistics provider can help reduce inventory and reverse logistics costs. It will also increase cash flow through more efficient fulfillment. This will allow businesses to react faster to customer demands, especially with a forward-deployed inventory model and agile network of couriers and carriers.

Additionally, outsourced logistics services can integrate reverse logistics to return items to inventory faster, helping to reduce transportation costs.

An outsourced provider also can provide a range of services under a single point of contact. This virtually eliminates the internal costs of supporting accounts for warehousing, fulfillment, and transportation between multiple vendors.

5. Scalability.

A logistics provider can quickly scale up or down to respond to demand without sunk costs for personnel, real estate, or equipment.

These services are designed to manage on-time deliveries, efficient supply chains, and shorter shelf-life products. It can also support rapid expansion into new markets or new supplier sources, such as e-commerce, online shopping, and other omnichannel initiatives.

Disadvantages of outsourcing logistics services

1. Loss of control.

Most third-party logistics providers adopt customer branding for assets and employees, so the relationship is typically invisible to customers. It is still a challenge to hand over your logistics operations to a third party if you are not sure of the benefits.

Your provider will be responsible for an important part of your relationship with customers. Any failure in the service will be reflected in your company, not in the outsourced provider. However, contracts and service level agreements can help address this and prevent problems before they occur.

2. Strategic misalignment.

There are no magic formulas for supply chain success. Both parties in an outsourced relationship must share an understanding of the strategy as well as the KPIs that drive value. The logistics provider can provide innovative solutions and a demonstrable competitive advantage, so it should be considered as a strategic partner, not as an expense.

On the other hand, the third-party provider must be prepared to engage the customer at that level and not see the relationship merely as an opportunity to increase profits. Instead, you need to become a true multi-service provider and be willing to seek outside expertise to handle new challenges, such as international shipping.

3. Integration of information technology.

Integration with IT can be the biggest challenge. Data must flow between systems and all parties must have deep visibility to manage and optimize the network. Customers must be willing to adapt to new systems to enable integration. Lack of buy-in from internal IT often leads to failed relationships.

4. Unavoidable costs.

While outsourcing may be seen as a cost-cutting measure, it is a value-creating decision. Customers must fully understand the cost implications. Return on investment can be derived from impacting value beyond the customer's supply chain.

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In summary, although outsourcing logistics services mainly generates a competitive advantage by allowing cost reduction, access to new technologies, and establishing long-lasting relationships with suppliers, it can also represent a great challenge for other companies that have dedicated their entire lives to providing their own logistics services with internal staff.

It will be necessary to see in these cases if internal collaboration is up to the task of sustaining these costs. If so, outsourcing would not be a solution. Yes, they can implement better technologies for logistics management at your service. However, if internal collaboration does not add value by generating more costs than benefits, outsourcing logistics services can mark the way forward.