Defining Your Transportation Strategy: Insourcing vs. Outsourcing
Every day, transportation managers are working to strike the right balance between controlling costs, keeping all facets of their shipping operations running on time, and maintaining a safe working environment for personnel. With all the analysis and strategy that goes into this work, selecting the best method for supporting the overall transportation function is of critical importance. Thankfully, there are several options available depending on the size of the business, complexity of the shipping operations and other related factors. These options include leveraging internal staffing and technology, outsourcing to a third-party logistics (3PL) provider, or implementing some combination of these two alternatives.
Given the unique differences and requirements by industry, geography, line of business, corporate objectives, operating philosophy, etc., there is rarely a clear and obvious set of circumstances or conditions for universally determining which choice makes the most business sense. And even for those companies that opt to utilize 3PL partnerships, there are often routine justifications (internal policies, changing market dynamics, etc.) for periodically reconsidering those arrangements, particularly as the contract lives of those relationships start nearing their end.
Let’s consider the pros and cons of each approach:
- Leverage internal staffing and technology: Many companies simply don’t have the scale or complexity in their shipping operations to warrant partnering with a 3PL for their transportation needs. With a fully in-house scenario, the shipper maintains complete control over all aspects of their operations, from negotiating carrier rates, to planning and optimizing loads, to executing the distribution plan. The key is having the appropriate level of staffing resources as well as the appropriate set of transportation systems capabilities in place. Benefits to the organization include full visibility of shipments as they move through the supply chain and tight control of costs at every step. The ability to control costs is particularly noteworthy as the team is inherently incented to work with carriers to achieve the lowest possible rates for their direct employer.
- Outsource all shipping operations to a 3PL: For companies with complex and/or larger-scale shipping operations, outsourcing all activities to a 3PL can be a wise move, provided adequate cost control structures are in place. One of the biggest benefits to turning the reins over to a 3PL is that shippers can take advantage of the 3PL’s existing investment in transportation management system (TMS) technology. Many shippers lack the internal resources and/or financial wherewithal to implement and maintain these types of systems. 3PL partners can often help to defray these costs because the 3PL’s investment in both resources and technology is ordinarily spread across multiple customers, thereby reducing expenses for each individual shipper. In this scenario, the 3PL typically hosts the technology and gives the shipper at least some minimum level of access to maintain visibility to the process.
The downside of fully outsourcing to a 3PL is that they frequently charge on a cost-plus model, meaning they will pass through all administrative and transaction costs, with an automatic markup generally in the 6-12 percent range of the total, for the duration of the contract. This quite literally means they have no incentive to control costs when it comes to planning and optimizing shipments. A 3PL may not aggressively investigate consolidation opportunities such as multi-stops/multi-drops or cross-docking that could save thousands (or millions) in transport costs. Negotiating the 3PL contract should include frank discussions of how each of these areas would be handled.
- Take a combination approach: Finally, some organizations may opt for a ‘best of both worlds’ structure. In this way, they may choose to perform the carrier rate negotiations, planning, and optimization functions internally, including using their own TMS. They can then turn the execution of these orders over to the 3PL, which is a capability that all 3PL’s must provide simply to remain competitive. This gives shippers the chance to negotiate the strongest rates with their network of carriers and to also optimize how shipments move through the supply chain. They can take advantage of load consolidation and cross-docking opportunities where beneficial and cost effective. Much like the first scenario, the prerequisite here is that the shipper has key staffing resources and effective technology in place.
Both the strategic nature and inherent complexity of this business decision demands that companies routinely conduct thorough and comprehensive analyses to determine the appropriateness and effectiveness of their approach. What makes sense one year may not the next. These analyses must minimally consider short-term through longer-term impacts relative to costs, benefits, and risks from a financial, operational, organizational, and technological perspective. And again, these analyses may produce differing results based on a company’s varying operating geographies, lines of business, organizational objectives, and other factors.
At 4SIGHT, we have a team of highly experienced transportation and logistics professionals that fully understand the many complexities associated with developing and deploying this critical business strategy. In fact, we’ve helped guide numerous clients through the formal evaluation and implementation process.
The 4SIGHT Transportation Business Case Analysis is a highly structured consulting effort, designed to analyze your company’s current approach in support of its transportation functions, and deliver a comprehensive set of recommendations to optimally align the appropriate support strategy with your financial, operations, organizational, and technology objectives.