INTRODUCTION TO OUTSOURCING AND 3PLS
TRADITIONALLY, organisations would manage both their core and non-core business processes on their own.
With the increasingly competitive business operating environment, many organisations now need to streamline and re-evaluate their systems and processes to be more efficient and cost-effective.
One trend that has emerged is the outsourcing of non-core business activities – namely the outsourcing of functions such as logistics, information technology (IT) and financial-related services 3pl provider.
Many organisations in a variety of industries are realising that there are numerous benefits in outsourcing their 3pl logistics needs. Total global logistics costs run in excess of US$2 trillion (RM7.6tril). Of this, the value of third-party logistics is valued at US$100bil (McKinsey Quarterly, 2003). This 3pl services shows that in attempts to be cost effective today’s organisations are increasingly allowing expert third-party logistics providers to manage their entire supply chains.
The term “outsourcing” refers to the practice of organisations to reduce costs by transferring portions of work to outside suppliers, rather than completing them internally. Logistics concerns the detailed planning of movement of products, from source to warehouses, retailers, etc.
The concept of outsourcing stems from its comparative advantage. Many see outsourcing of logistics services as a means of cutting costs but, really, it is more than that. It is a strategic tool that gives the manufacturer an edge over its competitors.
Outsourcing of logistics began in the United States and Europe, where it is now prevalent, with many organisations turning to dedicated third-party logistics providers that offer better costs control and more efficient customer response, alongside shorter delivery times, to match the required product cycle. They are able to develop customer-specific logistics solutions that meet the requirements of individual customers.
In the US today, approximately 400 of the 500 largest manufacturers (or 80%) use third-party logistics. This represents tremendous growth in the outsourcing of logistics services from, say, a decade ago when fewer than 185 of the largest manufacturers engaged third-party logistics providers.
In Asia, the outsourcing of 3pl logistics is still in its infancy, but the trend is definitely beginning to take shape. In the forefront of this new wave are multinational companies (MNCs), with larger local manufacturers close on their heels. Particularly in Malaysia, many 3PL provider organisations have begun to utilise third-party experts to manage their storage, processing and distribution activities 3pl.
What is interesting about logistics outsourcing in Asia is the growth of a niche sector, namely that of the provision of temperature-controlled logistics services. This caters mainly to products such as perishables that require relatively low and stable temperature throughout the supply chain – from the point of source to the end customer. By maintaining “no break in the cold chain”, product freshness is assured and product life extended.
In Nigeria today, outsourcing has become a readily accepted means of increasing performance of non-core supply chain activities. 3pls companies are increasing everyday and the sector is said to worth over N100 billion annually.
Why outsource logistics?
As companies begin to re-engineer and redefine their business processes, they realise that their logistics deserve closer attention. The “simple” management of incoming and outgoing goods accounts for about 10% of the total cost of a particular product. More often than not, the level of throughput (bulk of products moving from the warehouse to the destination) of an individual manufacturer is not sufficiently high to achieve economies of scale, and thus affects product margins.
Manufacturing companies that outsource their logistics services generally manage to reduce their operational costs by between 20% and 30%. The third-party logistics provider manages the storage, distribution and inventory level, sometimes integrating the procurement, processing, warehousing, marketing and distribution with finance.
Engaging a third-party logistics provider also stems from the decision to acquire expertise, talent or resources not otherwise available in the organisation to manage its logistical needs. Having a centralised base in the outsourced logistics services, an organisation can allocate all of its resources to core business activities.
With continuous improvement of technology, systems and processes, third-party logistics providers are better able to constantly evaluate and implement best practices in its field. As it is their core business, logistics players can concentrate their resources on developing value-added services such as bulk-breaking, packaging or labelling. All of these are likely to incur additional costs to an organisation if done internally.
Most manufacturers cannot justify the investment costs in setting up a warehouse or the operational costs involved in the distribution process. Such high capital expenditure is a burden for most organisations. In the temperature-controlled logistics arena, there is the added infrastructure cost of specially designed warehouses, specialty equipment and refrigerated trucks. Having an outsourced logistics partner, an organisation is able not only to cut its costs but also manage its resources more efficiently as, for example, the pre-determined fee for logistics services allows better forecasting and planning.
With the growth in demand for their services, third-party logistics providers are keeping abreast with IT developments to capitalise on the e-business solutions available. Given the complexity of transportation and warehousing, the Internet offers itself as a suitable platform on which communication among the parties involved can be better managed.
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