White Paper – Outsourcing versus Insourcing
In a recent study of the state of logistics outsourcing, it was noted that despite challenging business conditions, aggregate global revenues for the 3PL sector continue to rise, and far more shippers (65%) are increasing their use of 3PL services than returning to insourcing (22%) some 3PL services. Outsourcing accounts for 54% of shippers’ transportation spend and 39% of warehouse operations spend. As found in past Annual 3PL Study surveys, transactional, operational, and repetitive activities such as transportation, warehousing, and freight forwarding tend to be the most frequently outsourced.
Additionally, the results of this study suggest that far more companies increase their logistics outsourcing in any given year than those that bring most logistics services back in-house. The measurement of these outsourcing/insourcing trends tends to remain fairly stable year over year:
Outsourcing: 65% of shipper respondents report increases in their use of outsourced logistics services this year, compared with 64% and 65% in the last two years. Three-quarters of 3PL providers see an increase in outsourcing among their shippers.
Insourcing: Generally, insourcing remains less prevalent, with 22% of global shippers indicating they are returning to insourcing many of their logistics activities. One region that evidences significant change from previous results is Europe, which dropped from 18% last year to 12% this year. 3PL reports of shippers in general returning to insourcing many of their logistics activities remains consistent at 37%.
So while rates of change to outsourcing/insourcing appear to remain stable in recent years, the general trend among companies is to increase their use of outsourced logistics services.
Reasons Why Companies Have Chosen To Outsource
While cutting costs is still a main driver for many organizations, the reasons companies decide to outsource today widely vary, going beyond dollar signs. This can be attributed not only to the degree of complexity and velocity of the companies supply chain, but the expectations and demand of the consumer as well. Although not an exhaustive list, the following are most representative of why companies choose to outsource:
- Lower costs
- Enhanced flexibility to grow or adapt based on changing business requirements
- Capital investment in facilities and equipment (or long-term lease commitments)
- Company Strategic Focus (focus on core competencies)
- Improved service
- Peak season or overflow capacity/constraints
- Access to capabilities (skills & processes) not available internally
- Workforce issues (e.g., labor concerns, hiring, compensation, etc.)
- Initial entry into a new market (geography or product)
- Access to technology not available internally
- Regulatory requirements and compliance issues
- Supply Chain Network reconfiguration
- Consolidation of existing facilities
Benefits/Drawbacks of Outsourcing
The benefits (and conversely the drawbacks) of outsourcing are directly related to the relationship between the company and its’ logistics provider. Successful outsourcing arrangements are typically well defined, planned and executed when there is a level of shared trust, collaboration and integration between both parties.
Reasons Why Companies Have Chosen Not To Outsource
While the general trend among companies is to increase their use of outsourced logistics services, there are also companies who choose not to outsource and maintain control of their supply chains internally (insourcing). Typically, companies choosing to insource have very complex supply chains with significant regulatory, political and customer challenges. While less prevalent, companies choosing to insource typically do so for the following reasons:
- Logistics is already considered a core competency
- In-house expertise exceeds the capabilities of most 3PL’s
- Logistics functions are too complex to consider outsourcing
- We know our business much better than a 3PL ever could.
- Too difficult to integrate information systems and flows
- A belief that cost reductions would not be realized through outsourcing
- Political climate where the benefits of outsourcing are outweighed by the negative publicity and/or ill-will derived from an outsourcing decision.
Benefits/Drawbacks of Insourcing
For companies choosing to insource, many are willing to forego the potential cost savings and flexibility benefits associated with successful outsourced relationships to maintain control and avoid uncertainty. In other cases, the decision to insource was based on solely reversing the effects of unsuccessful outsourcing decision.
Why we feel outsourcing with ASL is the best approach
Large volumes and low margins mean fast-moving consumer goods (FMCG) companies must respond quickly to deliver in-demand, on-trend products to increasingly demanding shoppers. While reducing costs are important, high order fulfillment rates, flexibility to proactively adapt to changes in consumer demand, shortening new product time to market and optimizing order cycle time are also a priority.
While most FMCG companies have taken the outsourced route primarily to reduce costs many point to the added adaptability and flexibility enjoyed as the keys to the success of their outsourcing decisions. It is primarily for this reason that we, at ASL humbly believe an expanded outsourcing relationship with ASL is the best approach. In reality, it represents the best of both worlds (insourcing and outsourcing) in that FMCG companies are not constrained with the costs (both upfront and long term) of a leased facility and yet maintain control of their logistics function.
There are a number of reasons for suggesting an outsourcing relationship with ASL, most notably:
Volumes historically fluctuate considerably which makes flexibility and adaptability (as it relates to resources and space) key considerations. The ability to handle volume swings by flexing labour, space requirements and hours of service (# of shifts) on a daily or as needed basis are typically more conducive in a shared use environment.
- Paying only for the resources used in a shared facility versus a fixed dedicated solution.
- Sharing risks with ASL.