How Businesses Are Outsourcing Their Logistics Operations
More companies are realising that outsourcing their logistics to one or even two trusted partners may be the solution to their needs. The landscape has changed: distribution has become more complex, new technologies are being used to manage every aspect of the transportation of goods.
Many distributors and shippers are finding they do not have the level of expertise, nor the capital required, to run a modern and efficient logistics operation themselves. They would prefer to focus on their core business rather than manage multiple service providers.
Cost reduction may be one objective for outsourcing, but supply chain managers want faster speed to market, end-to-end visibility and better data quality. According to Gartner’s Outsourcing Trends 2020 survey, it is not only about cost optimization. “Companies that invest in outsourced logistics typically find that it is worth the money even if it does not result in hard cost reduction.” Only 34% of survey respondents named saving money as a priority.
The Power of Technology in Logistics Operations
Third-party logistics companies (3PLs) are focusing on improving supply chain visibility, flexibility and accuracy using the newly available tools. They are using mobile technology for asset tracking and maximising the allocation and use of resources. There are rapid developments in handheld devices to support logistics operations.
Supply chain employees now expect the same experience and intuitive interfaces on their work smartphones as they do on their personal mobile applications (apps). These technology tools promote collaboration between shippers and their chosen 3PL partner. Immediate communication lets supply chain managers receive real-time updates and insights, identifying opportunities and areas of concern as they happen.
Building partnerships with 3PLs
There is a visible move towards strategic partnerships between shippers and 3PLs. In the past, there has been some reluctance to develop firm and lasting relationships in case their logistics provider failed to deliver. Forward-looking 3PLs are already working hard to create an environment that attracts partners from manufacturing and distribution companies.
Investments in technology allow 3PLs to offer tailored solutions to help their customers to realise efficiencies and adapt to change. One of the main considerations in contracting with a 3PL partner is mitigating risk.
Contracting principles
Logistics contracts with 3PLs are usually for three years or longer partly due to the capital investment needed. To ensure that your 3PL partner remains in business for the long term, pricing must be based on terms that provide a fair and market-related profit margin.
At a minimum, agreements must include:
- A clear definition of the services you are contracting for (scope of work)
- The start and termination dates including in and out transition arrangements
- The pricing of each of the services and the escalation formula
- The payment terms
- The agreed performance standards and metrics. These can be included in the contract or as a Service Level Agreement (SLA) addendum
- Terms and conditions including data management, confidentiality, warranties, and guarantees
Bear in mind that 3PLs are experienced in the negotiation of logistics contracts and will aim to achieve the solutions that suit them best. Some of the areas that must be settled are:
- Specific allocation of responsibilities of both parties
- Contingency plans
- Who owns the assets?
- How to handle consequential damages and losses
Look for a proven track record with the chosen software tools they use and consider how it will interface and link with your existing systems.
Negotiating a supply agreement takes time. Take time to develop the scope of work and design the operation you need. Think through the risks and the consequences and how to prevent potential problems. Read our article to learn about closed and open book contracts.
References
https://www.gartner.com/smarterwithgartner/logistics-outsourcing-trends-in-2020/
It is advisable to appoint an experienced logistics consultant and legal assistance to support you through the contracting process. Read our clients’ case studies and testimonials for more information about projects or you contact us for any enquiries via email at [email protected], by phone at +44 (0)1926 430 883 or by submitting an enquiry form.
