Logistics outsourcing: changing attitudes?

Transcription

1 YOUR INSTITUTE Logistics outsourcing: changing attitudes? Outsourcing of logistics services has become a popular and effective strategy for many companies. The process of contracting with other businesses to handle various aspects of logistics has provided many arguments for the benefits and restraints that logistics outsourcing has. Above: Without the specialist skills of logistics outsourcing, the world s supply chains would operate less effectively AUTHORS Dr Soroosh Sam Saghiri, BingKai Huang, Dr Richard Gibson FCILT and Jo Godsmark FCILT FURTHER INFORMATION See page 48 SECTOR HIGHLIGHTS Are attitudes towards logistics outsourcing in the UK changing, and if so, how? Do the suppliers of logistics outsourcing services view its benefits and value proposition differently from those businesses that purchase logistics outsourcing services? If attitudes towards logistics outsourcing are changing, and if buyers and sellers do view logistics outsourcing s value proposition differently, then what precisely lies behind these changes and differences? Research carried out by the Institute s Outsourcing & Procurement Forum and Cranfield School of Management has sought to determine the answers to such questions. The research combined an analysis of CILT s annual logistics outsourcing questionnaires over the four-year period ( ) with semi-structured interviews probing the reasons behind some of the trends, differences and perceptions identified in the survey data. Encompassing the views of a broad cross-section of businesses with exposure to logistics outsourcing the Forums annual surveys, with around responses each year during , are a unique window into contemporary industry thinking and practices across a wide range of logistics-specific issues. Each year s data provides a snapshot view of the balance of opinion relating to each issue; taking several such surveys together, provides the added dimension of time, which enables broad trends to be discerned. The result is not only a fascinating glimpse into the attitudes and perceptions prevailing in the logistics outsourcing marketplace during 2014, but also an intriguing insight into how those attitudes and perceptions had evolved over the previous four years during which the UK logistics outsourcing sector was recovering from the steepest economic recession since the 1930s. Degree of logistics outsourcing Across each of the four years survey respondents have been asked: What percentage of the following logistics activities do you currently outsource? In each case, the degree of logistics outsourcing could be categorised into four discrete levels of indicative usage: frequently use logistics outsourcing, corresponding to outsourcing 81 of the respective activity: often use logistics outsourcing (41 ): less frequently use logistics outsourcing (1 ): and never use logistics outsourcing (). Put another way, respondents to the question can be viewed as high-level users of the respective logistics outsourcing activity, medium-level users, low-level users or very-low-level users. 44 FOCUS DECEMBER 2014

2 Table 1 shows how levels of usage have changed over the four years. The outsourcing of back-office tasks has exhibited a net decrease, while the order management process showed a decrease and then an increase. The outsourcing of supplier management, returns management, e-fulfilment, procurement and warehousing, is unchanged over the period. Finally, the outsourcing of transport, reverse logistics and IT has increased. The increase in the use of logistics outsourcing in transport was especially notable, rising over the period from high to very high. Figure 1: Industry participants impressions regarding the length of logistics outsourcing contracts Preferences in logistics outsourcing contracts 40.0 Respondents were also asked a series of questions relating to issues such as contract length, open-book vs closed-book contracts, shared-user facilities, the use of a 4PL and the number of 3PLs. Table 2 summarises the main findings; in terms of the logistics outsourcing of transport activities some clear trends were discernible, most notably a move away from single sourcing Increased Decreased Over the four years in question, the use of 4PL logistics outsourcing providers has decreased from a medium level of use, to what is now a low level of use. Likewise, the use of more than one 3PL rose from high to very high. On the question of open-book vs closed-book contracts, open-book fell out of favour, while closed-book gained in favour, but in neither case was the trend an unbroken rise or fall. In short, it appears that the sector seems happy with a hybrid approach to open-book and closed-book contracts, adopting each on its own merits for particular situations. Figure 2: Changing perspectives on the customer-3pl relationship In terms of the logistics outsourcing of warehouse activities, a similar fall was seen in the use of 4PL logistics outsourcing providers over the four years in question, with reported usage falling from low to very low over the period; in percentage terms, a reduction from in 2010 to approximately 7% in Commodity provider Trusted advisor Supply chain partner Other Similarly, the use of a single 3PL for warehousing activities increased from high to very high ; 64% of respondents reporting the use of a single 3PL in 2013 compared to 45% in In contrast, the use of more than a single 3PL dropped slightly, falling from medium to low, from 35% in 2010 to 3 in The same hybrid approach to open-book vs closed-book contracts was seen over the period, with closed-book falling out of favour, while open-book gained in favour: a complete reversal of the situation in respect to the logistics outsourcing of transport activities. Again, in neither case was the trend an unbroken rise or fall. Figure 3: Industry views on the customer-3pl relationship Similarly, no clear unbroken trend has emerged over the four-year period with respect to shared-user facilities vs dedicated facilities. It seems likely that this reflects a pragmatic view by buyers and sellers of logistics outsourcing activities that each has its merits within particular situations. Manufacture Logistics service provider Retailer/ Wholesales/Distributor Finally, respondents were asked about their preferences with regards to the length of logistics outsourcing contracts related to transport and warehousing. As Figure 1 shows, industry participants impressions regarding the length of logistics outsourcing contracts show a clear trend over the four-year period. Simply put, the industry consensus is that logistics outsourcing contracts are getting shorter. Commodity provider Trusted advisor Supply chain partner Other 45

3 YOUR INSTITUTE LOGISTICS OUTSOURCING: CHANGING ATTITUDES? Figure 4: Top reasons for the non-renewal of outsourcing contracts Others Reduced trust Lack of innovation and technical improvements Lack of innovation and technical improvements Flexible requirements Poor service and performance High cost High cost Figure 5: Different attitudes between clients and 3PLs to innovation That said, buyers and sellers of logistics outsourcing activities have different perspectives on this overall trend. A majority (56%) of manufacturers believe that the length of outsourcing contracts has actually increased. A majority of LSPs, on the other hand, together with retailers/wholesalers/distributors, hold the view that the length of outsourcing contracts has decreased over the past few years, with 58% of LSPs taking this view, along with 61% of the retailers/wholesalers/distributors who responded. Customer-3PL relationship management Participants were also asked a series of questions designed to probe the calibre of relationships within the industry, specifically in the context of relationships between buyers of logistics outsourcing services and the 3PLs providing them. As Figure 2 shows, it seems that the nature of that relationship is undergoing a period of evolution. In 2010, clients mainly regarded their suppliers as a supply chain partner, but over the past few years, the percentage regarding their logistics outsourcing suppliers in this way has decreased from 67% in 2010 to 58% in The percentage seeing their logistics outsourcing suppliers as commodity providers has increased from 19% in 2010 to 26% in Furthermore, Figure 3 shows that the perception of the relationships between 3PLs and the customer varies according to the industry role of the respondent. The majority of manufacturers and retailers/wholesalers/distributors saw logistics outsourcing providers as supply chain partners. Manufacture Essential Not important Logistics service provider Important Very important Retailer/ Wholesales/Distributor The highest percentage of respondents who saw logistics outsourcing providers as commodity sources was found among the providers themselves. The research also probed the problems experienced within customer-3pl relationships. Customers were characterised by failings such as reacting too severely to the first quality breakdown, misinterpretation of service agreements and metrics, and the delaying of or failing to finalise contracts. On the other hand, suppliers were seen by customers as failing to manage expectations, making last-minute changes, being insufficiently proactive in terms of communication and failing to adjust processes and retrain staff as operational changes and quality issues arose; see Table 3. Above: The logistics outsourcing profession delivers significant cost savings and efficiencies to its clients Finally, this part of the research looked at the major reasons for the non-renewal of logistics outsourcing contracts. As Figure 4 shows, at the beginning of the four-year period, of respondents cited the levels of service that had been provided as the most popular reason for the non-renewal of an outsourcing contract. By 2012, the continuing volatility of the global business environment had brought about a change in sentiment, with costs coming to the fore as a reason for non-renewal this was cited by 32% of respondents. In contrast, just 12% cited the importance of service as a reason for non-renewal had reduced markedly. Most notably over the period, the role played by technology as a factor in the non-renewal of contracts, accounting for of non-renewals in 2012, was double the percentage that was cited in FOCUS DECEMBER 2014

4 Table 1: Degree of logistics outsourcing Below: Clear trends were visible in terms of the logistics outsourcing of transport activities Technology and innovation in logistics outsourcing It is appropriate to turn to the role played by technology and innovation in general within a logistics outsourcing context. Overall, innovation is clearly prized; over 9 of respondents agreed that innovation in the arena of logistics outsourcing is either important, very important, or essential a level that has only changed a little over the period. Moreover, what change there has been over the period can been seen in the shrinking of the proportion of respondents who view innovation as important, and the growth in the proportion of respondents seeing it as very important. Across the four-year period, the percentage of respondents declaring innovation to be very important rose from 32% in 2010 to 5 in What is even more striking is the divergence of opinion among the three logistics outsourcing communities of manufacturers, LSPs, and retailers/wholesalers/distributors. As Figure 5 highlights, all LSPs see innovation with some degree of importance, with the largest proportion (48%) describing the ability to innovate as essential. In contrast, among their clients in manufacturing and retailing/distribution/wholesaling, smaller proportions of respondents see it as either essential or very important, with a larger proportion regarding it as merely important. Transport contract Warehousing contract Outsourced operations Past Now Trend Transport High Very high + Increased Warehousing Low Low Unchanged Reverse logistics Low Medium + Increased IT Low Medium + Increased Procurement Low Low Unchanged Order processing Low Low + Decreased and then increased E-fulfilment Medium Medium Unchanged Back-office tasks Medium Low Decreased Returns management Medium Medium Unchanged Supplier management Low Low Unchanged Table 2: Preferences in logistics outsourcing contracts Logistics outsourcing Past Now Trend activities Use of 4PL Medium Low Decreased Use of one single 3PL Medium Medium Unchanged Use of more than one 3PL High Very high + Increased Use of shared-user High High Unchanged Use of dedicated operation Low Low Unchanged Use of open-book Low Medium + Decreased and Use of closed-book High Medium + Increased and (volume related) Use of 4PL Low Very low Decreased Use of one single 3PL High Very high + Increased Use of more than one 3PL Medium Low Decreased Use of shared- user Medium Medium + Decreased and Use of dedicated operation Medium Medium + Increased and Use of open-book Medium High + Decreased and Use of closed-book Medium Low + Increased and Table 3: Problems experienced in customer-3pl relationships Above: Research carried out by Cranfield School of Management investigates the changing attitudes to logistics outsourcing Customer initiated problems Unrealistic goals Delaying or failing to finalise the contract Poor decision-making mechanisms Misinterpretation of the service agreements and the associated metrics Lack of trust and reacting too severely to the first quality breakdown Supplier initiated problems Failure to manage expectations Making last-minute decision and changes Not having executive support Not being proactive with communication Failing to adjust processes and retrain staff as operational changes and quality issue arise 47

5 YOUR INSTITUTE LOGISTICS OUTSOURCING: CHANGING ATTITUDES? Conclusion As a major participant in the global economy, the logistics outsourcing profession delivers significant cost savings and efficiencies to its clients in the manufacturing and retailing/distribution/ wholesaling industries. The use of a single 3PL for warehousing activities increased from high to very high Simply put, without the economies of scale and specialist skills of logistics outsourcing, the world s supply chains would operate less effectively and the vital goods that they deliver would be more expensive. However, this research has demonstrated three major outcomes: The gaps in responses between LSP respondents and their customers show that there is an opportunity for users of logistics services to share their goals and priorities more closely with their outsourced partners LSPs need to be aware that the selection and performance criteria against which they will be judged change over time based on market conditions and industry trends; this is true of current contracts, as well as new business IT and innovation have become hygiene factors in this industry and LSPs need to respond accordingly About the authors Dr Soroosh (Sam) Saghiri is a senior Research Fellow, Centre for Logistics & Supply Chain Management, Cranfield School of Management, academic representative in CILT s Outsourcing & Procurement Forum and Committee Member for CILT s London Region. s.saghiri@cranfield.ac.uk BingKai Huang is an MSc Logistics and Supply Chain Management student at Cranfield School of Management. Dr Richard Gibson FCILT is a seasoned operator currently working within global supply chains. His research interests include logistics service provision, supply chain risk management and the deployment of inventory management tools within oil and gas supply chains. richard.gibson@idrislogistics.co.uk Jo Godsmark FCILT is a Director, Labyrinth Logistics Consulting Limited, specialising in logistics outsourcing, logistics strategy and network design. She is also Chair, Outsourcing & Procurement Forum, and a trustee of Transaid. jogodsmark@labyrinthsolutions.co.uk About LSCM The Centre for Logistics & Supply Chain Management, Cranfield School of Management, is one of Europe s largest centres dedicated to research and education in logistics and supply chain management. It performs a variety of research, from long-term, research council-funded projects that focus on the generation of new knowledge to dedicated, industrially funded work that addresses specific needs. Further information, website: FURTHER INFORMATION If you are interested in the issues and topics raised in this article, why not join our Outsourcing & Procurement Forum? The Forum produces white papers and reports and sets up events and workshops on relevant subjects, and supports CILT regional groups by providing speakers and workshops on the topic of logistics outsourcing. Further information, website: FURTHER RESOURCES Following the success of the first event on Strategic Planning in 2014, the Outsourcing & Procurement Forum s 2015 events will be focusing on the next stage of the lifecycle: procurement and implementation. The first of these will be: Outsourcing Life Cycle Master Class: Step 2a Procurement & Contract, 5th February, hrs, Wright Hassall, Leamington Spa, and will include topics and discussion points relating to procurement and contracts. As before, the event will be a mixture of presentations and expert-led discussion workshops. Places are limited. To book, ana.walker@ciltuk.org.uk 48 FOCUS DECEMBER 2014