I have had the privilege to join couple of recent projects in Wiima, where we have consulted our customers in outsourcing warehousing. In this article I want to share my experiences, the pros and cons of outsourcing and a few tips for selecting the third party logistics (3PL) partner.
Both of these cases were also having a location optimization playing a big role as majority of both suppliers and customers were located outside Finland. In these cases the key is to understand the impact on cost and complexity not only in warehousing but also in transportations both in- and outbound and calculate the total end-to-end costs. The benefits of outsourcing warehousing are nice aligned with the overall benefits of outsourcing. However these are the ones particular to warehousing.
PROS
1. Focus on the essential business activities by delegating the most time-consuming and tedious tasks.Often it is good to focus your time and resources on where your company is best. For example new technology companies typically focus on R&D and product managements leaving manufacturing, logistics and distribution to others. Or manufacturing companies rarely produce all their raw materials.
2. Lower operational and capital costs by paying less for specialized services.
Expenses related to buildings, equipment, information systems and operating the processes will be divided amongst many customers and will gain from better utilization rates. Additionally 3PL service providers typically operate with a transaction based price list which makes it transparent and easy to follow.
3. Larger talent pool available by accessing experts from 3PL companies.
An experienced service provider has expertise in how to optimize warehouse operations and typically they are certified according to relevant standards and they actively follow the regulatory requirements of their industries like for example handling of dangerous goods or health and safety in warehousing operations.
4. Flexibility by demand volatilities of different customers offsetting each other
A good 3PL partner is scalable and can scale up (and down) according to your needs. Especially if you have strong seasonality pattern the 3PL partner may have other customers with reverse patterns. Additionally, the scalability means the possibility to relocate your warehouse if the old location is not optimal.
5. Increased process efficiency by improving the quality and speed.
As warehouse operations are the core business of these companies and they typically have very large volume of warehousing, inbound and outbound transactions they have naturally very high incentive to make it as efficient as possible including also highly sophisticated warehouse management systems with integrations to customers ERP’s.
CONS
1. Best fit for your supply chain by selecting the right partner with experience in your industry.
This is crucial. It is important to select the right size partner, who will be able to grow in the same pace with your growth. Additionally, the threshold to change a 3PL service provider is high and gets even higher the more sophisticated s2s integrations is being built.
2. Security
If your products require specific security level or handling your orders include highly sensitive information outsourcing may be the wrong option.
3. Mismanagement of outsourced warehouse by thinking it’s not my problem anymore.
Out of sight – out of mind… It is important to remember that even if the people are not in your direct payroll anymore, it is still your stock and your process and your customers they serve. If handled badly you end up carrying the extra costs. And remember the importance of follow the performance, setting targets, communicating strategy and managing changes of this team will not completely disappear when outsourcing.
4. Losing control by not being able to directly manage your warehouse
This may lead to quality non-conformances, quantity discrepancies, delays and damages. It is easier to shout your direct orders if the warehouse or shipping point is in a shouting distance. However, if you are able to remove the root cause for your need to (micro)manage by developing processes, reducing complexity or otherwise making is “mistake-proof” losing the control could be shifted from the list of cons to the list of pros.
Five tips for selecting a 3PL partner:
1. Start with Rough-cut location scenarios:
In our recent projects we have studied the inbound and outbound material flows, calculated the “center of gravity” for those flows and calculated a rough-cut e2e total costs for selected representative locations. For example in Poland the labor cost levels may sound very lucrative, but if the center of gravity for your customer base lies close to Luxembourg we better look for a solution in northerns France or western side of Germany.
2. Run a professional RFQ
I would say this is the most important phase. RFQ needs to describe your needs for warehousing, shipping, transportation etc. as thoroughly as possible. Actual volumes, their volatilities and seasonalities and forecasted volumes in terms of # of orders, pallets and boxes in inbound, inventory and outbound are important. A systematic structure in the RFQ helps also to compare the received offers. Additionally, when the service provider sees that you have put some effort to the RFQ it hopefully makes them to create a serious offer.
3. Conducts a financial review
3PL partner needs to have financially solid position to be able to invest in operating your processes and ensure continuity. Finding a new partner and relocating warehouse in laboursome, costly and may even jeopardize your supply capability. This may be done remotely.
4. Carry out an operational review
to ensure the match in between your processes and their capabilities. Some of these service providers are more like long term parking spaces and some of them are like fast paced fe-commerce fulfilment centres. (the ranging is typically visible in the transaction based price lists as well). Sometimes they may also have capabilities going beyond your current needs and processes but you might find them useful in the future. In this part you should invest in travelling.
5. Define service level agreement jointly with your service provider
This defines it all:
- Contacts
- Processes: who does what and when?
- Tracability and batch management
- Expected leadtimes for receiving, picking, packing and shipping
- Accuracy in inventories
- Communication and exceptions management
- Pricing and invoicing
- Bonuses and sanctions
ABOUT THE AUTHOR:
Jussi Laaksonen, Key Account Manager at Wiima Logistics, is a dynamic logistics and supply chain professional with an impressive portfolio. Boasting a wealth of knowledge and experience in sourcing, procurement, supply chain management, and logistics, Jussi brings with him a unique blend of skills and leadership abilities, honed through a distinguished career at prestigious companies like Nokia, Teleste, and Relex.
Jussi plays a pivotal role in the evolution of Wiima’s 4PL service offering. Leveraging his insights and industry expertise, he contributes significantly to the service development process, always striving to push the boundaries of what’s possible.
A passionate advocate for the logistics and supply chain industry, Jussi’s enthusiasm is infectious. He thrives on creating meaningful relationships with clients, dedicated to providing them with the highest level of service.
