In the globalizing world within the new economic competitive environment, enterprises increasingly turn to outsourcing of logistic operations. Outsourcing in logistic becomes an effective business strategy, allowing transferring the field specific functions to outsourcers . This process enables the efficient usage of resources giving a chance to the company to concentrate on particular tasks and functions. Experts estimate the approximate volume of the US logistic outsourcing services around $80-90 billion . Despite an ever-increasing significance of the outsourcing operations, the strategic component of this type of business is not sufficiently researched. The scale of outsourcing operations can hardly be adequately estimated. However, in this paper an attempt has been made to study the problems and tendencies in this sphere while transferring some functions for the outsourcing. This paper will give the classification of outsourcing providers, outline logistic management peculiarities and underline the benefits vs challenges of the logistic operations outsourcing.
Outsourcing Providers Classification
In order to solve the outlined issue the commonly accepted classifier determining the competencies of the logistic operators will be used (Graph 1):
1PL or the First Party Logistics when the fright owner carries out all the operations;
2 PL or the Second Party Logistics when the outsourcer offers warehouse and transportation services;
3 PL or the Third Party Logistics when the significant complex of outsourcing services/additional services is carried out by the subcontractors;
4 PL or the Fourth Party Logistics when the company has an integrated complex of supply chain management outsourcers;
5 PL or the Fifth Party Logistics is the unified supply chain system performing logistic operations from manufacturing to the consumer stage in conjunction with e-Business.
Graph 1. Outsourcing Providers Classification (adopted by Ge, et al., 2004)
Majority of the US companies work according to the 3 PL scheme, which may be characterized by substantial decrease of costs and risks compared to the traditional system of logistic risk management . The economic advantage of the 3 PL outsourcing providers consist in improvement of ability to quickly react on changeable business environment, distribute risks, optimize the financial streams, access to resources unavailable to own organization. The 3 PL level providers are able to deliver not only traditional warehousing and loading/unloading services but also work as a zone of cargo consolidating, manufacturing/commercial export processing, packing and marking.
Outsources today provide the complex of logistic services, transportation, transport-expediting services and efficient functioning of multimode transport corridors using the new telecommunication technologies . It is important to underline that the task of complex outsourcing provision including all services from one supplier is quite complicated. Therefore, the 4 PL providers can offer new opportunities to make business more effective and organized. However, on the modern logistic development stage the level of the Fourth and Fifth Party Logistics becomes an integrating outsourcer, which unites capital, technologies and human resources in order to create an efficient supply chain considering all the risks, complexity and investments .
Logistic Management
Logistic management has evolved as a part of the supply chain, which organizes, plans and controls the efficient transfer of goods. The logistic expert trying to outsource some organizational functions should follow certain algorithms to foresee all the risks. It is appropriate to represent this algorithm in the form of five consequent stages: planning, estimation, analysis, choice and conclusion . The planning stage is characterized by the assignment (choice) of risk managers capable to estimate all the risks concerning the transfer of logistic services to an outsourcing organization.
The team of logistic experts has to be quite professional and highly qualified in project spheres; economic and technical. If the first stage is successfully completed vs the decision about outsourcing is confirmed, the second stage is elaborated to estimate how outsourcing of logistics is going to comply in the business environment of the company . The major question is what competitive advantages the company will acquire if the logistic functions are outsourced. The momentous decision to transfer logistic operations may allow the company concentrating on the core activities, restructuring of the supply chain, decreasing costs and improving of maintenance services. The primary goal of the third stage is to analyze and compare the inner costs and costs of the outsourced operations. It means that the company has to calculate the organizational costs and the logistic costs given to the outsourcer .
Estimating all the costs, the company decides whether the viability/non-viability of the outsourcing practice application is beneficial. Further, the supplier of the outsourcing services is chosen with respect to his market position and reputation. The final stage of the outsourcing project on the enterprise is marked by the choice of a certain outsourcer, negotiations process and signing off a contract. Then, all the logistics operations are given to the outsourcer during the integration process . Despite an increased interest to outsourcing of logistic services, it should be noted that this is not a panacea protecting from all the negative influences (risks), which are faced by the logistic management while planning the supply chain operations. Practice shows that such an outsourcing might be efficient if the company is really customer focused and is not oriented on the momentary profits.
Decision about outsourcing of logistic services is quite complicated and responsible; therefore, managers should meticulously plan, organize, calculate and perform all the operations. High quality supply chain work bases on the long-term business relations with the outsourcers while the choice of the provider has to be made considering the individual approach to all outsourcing implementation stages on the enterprise.
Benefits and Challenges of Outsourcing Logistic Operations
There are certain benefits accompanying the process of logistic outsourcing. First it deals with the corporate advantages such as ability to dispose the off-target activities without getting rid of control. This process helps to improve the cash flow and ROE. Besides, capital/time release allows the company management concentrate on core activities adding value to production facilities and marketing. Outsourcing of logistic services enables creation of profitable partnerships with the outsourcing companies and elaboration of sophisticated software system control (POS, ERP, MRI, etc.) .
Operational advantages of logistic outsourcing include increased output and improved Key Performance Indicators (KPIs). Labor risks in case of outsourced logistics are much lower while manufacturing gains are high due to application of informational technologies (e.g. FRM services, data interchange). Further, information benefits helps the company to improve the real time integration of supply chain systems ensuring accurate and up-to-date data reporting. Timely obtained data is the basis for decrease of logistic costs.
However, the benefits of logistic operations outsourcing may be accompanied by certain risks/challenges. These risks may arise during the seasonal fluctuations when the distribution of goods is hard to manage. The points when the company has to scale operations and adapt immediately to market volatility expose companies to financial and operational risks . The most important issues are outlined in the following questions:
Whether the goods were delivered in the right place
Whether they arrived on time
Whether the condition of the delivered goods was satisfactory
Any disruption in the supply chain process causes failure of logistic operations leading to losses in revenues for the company. It becomes especially obvious during the Christmas time when sales increase dramatically. Thus, ensuring efficient collaboration with the trusted 3, 4, 5 PL outsourcers may guarantee smooth sales operations during the sales spike periods avoiding business risks. There are also some risks of inventory management during the peak seasons. The consumers’ buying behavior is hard to predict, their loyalty is quite changeable; therefore, absence of a sophisticated inventory management system may put business into revenue shortage. According to (Duke, 2016) “without the tools and expertise to accurately forecast inventory needs, business could be vulnerable to a disruption in the supply chain that can result in a considerable loss in profits”. If the outsourcer can efficiently manage the logistic operations, forecasting changes in consumers' demand and preferences, it can significantly improve the profitability of the company. Demand planning software, forecasting tools and on-line communication between the company and the outsourcer is a perfect success recipe in the global economic environment.
Conclusion
In this paper, an attempt was made to analyze the types of outsourcing providers, peculiarities of logistic management and the possible outcome/risks of outsourcing the logistic operations. It is important to underline that in order for the logistic outsourcing to succeed, business should be scalable, i.e. flexible to fine-tuning supply chain operations, helping to make quick decisions. The properly chosen outsourcers have to know how to use the warehouse spaces and provide for the inventory needs especially during the peak seasons. Another important point in choosing the right outsourcer is the viable costs option, when business pays only for the used warehouse spaces and for labor used to pack, compile and deliver the orders . This scheme proved to be more profitable than provision of logistic operations by means of the company.
Besides, 3,4,5 PL providers can represent an expert knowledge in warehousing and transportation coping with the tasks better than the company not specializing on logistic market. Despite the transportation and inventory strategy of the outsourcing provider, the main objective is to satisfy the customers’ needs by delivering goods on time and in perfect condition. Therefore, outsourcing of logistic operations is a multilevel task depending on the logistic service providers, corporate goals of the company and changeable economic climate.
References
Aghazadeh, S. (2003). How to Choose an Effective Third Party Logistics Provider. Management Research News, Vol. 26, pp. 50-60.
Cheong, M. L. (2003). Logistics Outsourcing and 3PL Challenges. The Singapore-MIT Alliance (SMA), pp. 2-8.
Cheung, K. L., & Lee, H. (2012). The Inventory Benefit of Shipment Coordination and Stock Rebalancing in a Supply Chain . Management Science, pp. 300–306.
Duke, S. (2016, 02 13). Outsourcing Logistic Management. Retrieved from www.laneyduke.com: http://www.laneyduke.com/warehousing-distribution/outsourcing-inventory-management/
Ge, J., Ding, L., Bussayadilokskul, N., Zhang, L., Hsn, B., & Cai, Z. (2004). Outsourcing Logistics Services Including 4PL. Logistics Management , pp 2-27.
Langley, J. (2014). Third Party Logistic Study: Results and Findings of the 18th Annual Study. The State of Logistics Outsourcing, pp. 2-56.
