Can logistics cost really come down by completely outsourcing the function to a service provider? Some thoughts.
Lets first look at the way in which an external player can add value.
Customized solutions: The other extreme of completely managing logistics assets and resources in-house is outsourcing where the external party has a common infrastructure of fleet and storage spaces which he uses for all his customers. The value addition here is the strength of the infrastructure in terms of reach and assets. However, in between these two extremes is an area consisting of partially dedicated and shared assets which has not yet been fully explored by external players. The road here is much difficult to tread as it involves both companies to work as partners with a lot of mutual trust and sharing of information. Is there a scope for logistics cost reduction here? Definitely yes, but why restrict views to reducing only the freight cost. As logistics is a contributor to the organization as a whole, companies should look at reducing the overall costs of the organization as a whole looking at the impact of inventory costs, customer retention & service costs and transactional costs also. Can any external player do it? Obviously the company needs to be strong in logistics. Besides, it needs to have strengths in providing alternative models of working as well and designing cost effective solutions.
Value added by a logistics firm is in the eyes of the customer. It is usually company specific such as reduction in freight, reduction in breakages, better stock availability, better fulfillment response time, etc.
Synergic Consolidation is one more possible way of adding value. Express companies manage costs by consolidating loads of several companies on predetermined routes. I am not talking about this. Synergy has to be more than this and would involve shared processes, information, routes, loads, etc where a group of companies work together through the logistics provider to reap the benefits of collaboration. Is it feasible? Yes. Can any LSP do it? Obviously not. The skills required here go way beyond logistics and involve a very high level of integrity, trust, energy and an ability to manage change.
Another way a service provider can add value is using technology. This goes much beyond the track and trace solutions provided by express cargo companies. One of the reasons supply chain is so exciting is because of the potential enablement IT can provide in terms of visibility and control. MIS reports, alerts, decision support systems, planning and scheduling systems, inventory and obsolescence control, pull based systems, service level reliability are just some of the big value adds that immediately come to mind. The possibilities are endless. What capabilities are required here? Besides logistics, strong strength in IT in terms of software, infrastructures and processes.
It is very difficult for one player to possess all the capabilities mentioned above. Value would hence need to be generated through partnerships with other companies having complimentary set of capabilities.