Benefits of Outsourcing Logistics
Statistics show that over 75% of companies outsource logistics and supply chain activities to third-party logistics providers. Today, businesses are experiencing complex supply chains due to the dramatic rise in e-commerce, globalization, and technology. Therefore, most companies acknowledge the benefits of outsourcing logistics because even though supply chain operation is becoming challenging, it’s vital for any enterprise’s success. For instance, to thrive in today’s e-commerce industry, shippers need to outsource logistics to gain efficient inventory management. Therefore, it’s vital to know the logistics outsourcing meaning as well as the advantages and disadvantages of outsourcing logistics before considering outsourcing.
So, what is outsourcing logistics? Logistics outsourcing definition is simply hiring an outside company to handle several supply chain activities. The major types of logistics outsourcing services include transportation, warehousing, inventory management, fleet management, order fulfillment, etc. The outsourcing industry is rapidly growing, and globally, businesses are spending around 10.4% on outsourcing costs. Additionally, 45% of companies plan to increase their outsourcing expenses. And reports show that enterprises are outsourcing approximately 68% of their supply chain operations in the U.S. Most businesses are taking it further and deciding to outsource overseas. In the U.S, companies have moved about 300,000 jobs overseas.
Why outsource logistics? There are benefits of outsourcing logistics that business operators need to know to remain competitive in the industry. Here are a few:
- Boost Productivity– Third-party logistics firms have skills, experience, and technology. Most of the third-party partners are experts in particular subject matters. Outsourcing logistics to a partner can translate to excellent performance because they are better equipped to handle the logistics functions. In addition, third-party firms get exposed to difficulties in their line of business, making them excellent at adapting to adversities. Using a partner with advanced skills can considerably enhance your performance and productivity. For example, you can outsource back-office tasks affiliated with logistics management functions, and a partner will handle invoices, stock management, delivery, and returns. The third-party logistics company can utilize transparent systems that ensure you don’t lose any control. Additionally, third-party logistics firms have the skills needed to measure performance and better track productivity. A partner can quickly identify an area that requires improvement to boost overall productivity.
- Reduce Costs– According to reports, around 68% of businesses claim that working with third-party logistics companies has significantly reduced their logistics expenses. You don’t require to invest in distribution infrastructure when working with a third-party firm. A partner invests in buildings and systems, and all you have to pay for are the overhead costs. The overhead expenses are lowered because you share them with the third-party company’s other clients. For instance, third-party firms have upgraded systems for transportation management and warehouse. Working with a partner can help you avoid extra software acquisition, programming, and maintenance costs. Outsourcing logistics is beneficial for enterprises, especially for small businesses, because it lowers high transportation costs. The burden of having trucks, hiring drivers, maintaining equipment, and assuming liability, are not yours to bear when you involve a third-party partner. For example, In the U.S, hiring an in-house logistics manager can cost you over $64,000 annually in salary, and that’s just one person.
- Increase Flexibility- Companies find it challenging to adjust labor and space when necessary quickly. Hence, it can be difficult for a business to scale up or down. Fortunately, third-party companies are great at increasing or decreasing labor, transportation, and space when needed. Third-party partners utilize temporary employees and a virtual workforce, making it easier to ramp labor up or down. Therefore, a logistics firm is highly skilled at addressing economic needs without a permanent cost burden. In addition, many third-party companies have local and global distribution networks. Therefore, working with a partner can allow you to expand your network rapidly.
- Improve Customer Service– Third-party companies streamline logistics management functions. For example, if you’re a small business, you might have fewer trucks and drivers, making transportation a slow process. In addition, you’re faced with a limited freight capacity. Such a situation can affect your customers’ satisfaction. Fortunately, third-party logistics firms can offer carrier partners a large volume of stable freight. Therefore, a third-party partner is better equipped to streamline the shipping process. An efficient shipping system translates to improved customer satisfaction because the products arrive on time. Reports show that about 88% of companies claim that working with third-party logistics firms has significantly enhanced customers’ service. A third-party company can help you solve capacity issues and meet consumer delivery needs.
The benefits of outsourcing logistics are undeniable. However, it’s also good to learn the challenges of outsourcing logistics. Here are the critical issues in logistics outsourcing:
- High Costs– Most companies outsource logistics because it helps in expense reduction. However, some third-party logistics firms can have hidden costs that later affect your productivity. As a business owner, ensure you inquire about all involved expenses before getting into a contract with any third-party company. Additionally, ask about the exit charges and lapse fees. Most third-party firms are good at contract negotiation. Therefore, if you lack such expertise, you can outsource legal services to ensure a transparent contract with the logistics company.
- Loss of Control– Outsourcing logistics can translate to losing control over many operations in your company. You can lack control over activities such as the delivery of products. If the third-party company makes a mistake, you can find it difficult to help mitigate the situation. As a business owner, you can take the necessary measures to ensure control. Such measures can include working with a partner that has transparent systems to allow you to monitor every outsourced operation.
- Breach of Confidentiality– Hiring a third-party logistics company results in sharing sensitive information. For instance, if you’re outsourcing transportation, you’ll need to give out your customers’ data and more. Any breach of confidentiality can damage your business, and it’s vital to minimize such risks. You can ensure you have a legal agreement to protect your business.
The advantages and disadvantages of outsourcing logistics mentioned above can help you weigh your options. But, you can address and mitigate all the challenges of outsourcing logistics. Transportation services are the most popular types of logistics outsourcing services. However, you can outsource any other logistics service or a combination.
Globally, most logistics outsourcing companies offer transportation and storage services. Logistics firms streamline the movement of products from the point of origin to the point of consumption. In addition, logistics companies manage tangible products such as supplies, materials, food, hardware, etc. However, most small enterprises lack the know-how and resources to handle their logistics. Fortunately, logistics outsourcing providers can help you with any logistics issue as a business owner. Here are the types of logistics service providers:
- First-Party Logistics Companies or 1PL– 1PL are firms that handle their logistics functions. Such companies are responsible for transportation, shipping, and warehousing. However, today most businesses are running away from such a model.
- Second-Party Logistics Firms or 2PL– 2PL are companies that manage the transportation aspect only. 2PL outsourcing logistics examples include trucking and shipping companies.
- Third-Party Logistics Firms or 3PL– 3PLs are the most popular logistics companies. A 3PL firm may manage all logistics activities or some elements in distribution and warehousing. A third-party firm handles inbound and outbound transportation services. Examples of 3PLs include courier firms and freight forwarders. Freight forwarding firms are responsible for providing effective and affordable transportation services. Most of these companies work with other firms that have close connections with ports globally. Therefore freight forwarding firms don’t manage freight. Working with a freight forwarder firm can better fulfill your shipping needs if your business deals with international shipping.
- Fourth-Party Logistics Companies or 4PL– 4PLs are lead logistics providers (LLPs). These companies help optimize the supply chain. 4PLs hire freight firms, 3PLs, and others to handle aspects of the supply chain. LLPs oversee warehousing, transportation, and other operations of the supply chain. An ideal example of a 4PL is Amazon.
- Fifth-Party Logistics Firms or 5PL– 5PLs merge the shipping needs of various 3PLs and sometimes LLPs. These logistics service providers understand, plan, execute and handle all logistics functions. If your enterprise is in the e-commerce sector, you might find 5PL firms ideal for your logistics needs.
The providers mentioned above are the types of logistics outsourcing companies near Indianapolis. However, with the evolution of technology, the logistics level can reach 10PL services. In addition, the progression of artificial intelligence can further transform the logistics industry. As a business owner, it’s vital to evaluate the ideal logistics outsourcing companies for you and your enterprise. You can consider factors such as control when deciding. For instance, some businesses prefer controlling the decision-making process while others prefer to let the logistics companies take charge.
Outsourcing logistics will help you focus on other vital business operations. Most company leaders regularly analyze their supply chain management. It’s essential to understand how to optimize every function in the supply chain. Additionally, it’s vital to learn what competitors are up to and get ahead to maintain your success. Outsourcing can help you regularly track your performance and productivity. Before outsourcing logistics, ensure you carefully review the proposals from logistics companies. You can outsource legal services when assessing the proposals. This procedure helps you mitigate the risks of outsourcing logistics. Outsourcing logistics will help your enterprise thrive and expand in today’s business realm.