What is logistics outsourcing?
When businesses cannot run their supply chain management efficiently, they enlist an external provider (such as a third-party logistics provider) to handle their warehouse management and shipping operations.
Most companies, including eCommerce businesses, realize the importance of outsourcing their logistics operations as it helps them focus on manufacturing and sales. Commonly outsourced logistics include repetitive and transactional tasks, whereas most businesses retain in-house strategic functions such as customer communication.
According to a recent Gartner survey, 66% of logistics managers increased their logistics outsourcing budget in 2021, and 74% expect to increase it further in the next two years.
If you are struggling with increased customer orders, missed shipments, damaged inventory, or delivery delays, it may be the right time to farm out your logistics to an order fulfillment service.
In this article, we’ll review the advantages and disadvantages of logistics outsourcing and go over the different types of logistics services to help you make an informed decision.
Benefits of Outsourced Logistics in Your Supply Chain
Here are some common advantages of switching to an order fulfillment service:
- Help you focus on core business activities: Warehousing and transport operations can sidetrack you from your core competencies. You can focus on developing better products for your customers when you outsource your logistics.
- Reduced procurement and logistics costs: With logistics outsourcing, you no longer have to worry about expanding your supply chain capabilities, managing workload, and maintenance.
- Increased flexibility: An outsourcing partner ensures compliance with regulations when handling certain goods or operating warehousing machinery. Moreover, you don’t have to deal with hidden costs of in-house warehousing, such as processing job orders and purchase orders.
- Access to the outsourcing partners’ expertise and technology stack: Many businesses find they could be better off outsourcing their order fulfillment processes like picking, sorting, packaging, labeling, and handling returns. Similarly, you’ll also be able to use their warehouse management system (WMS) to monitor your stock levels in real-time and replenish them before they run out.
- Helps you better meet customer expectations: Logistics services have the resources and technology to reduce the risk of disruptions in your efficient supply chain. They are better equipped to anticipate market and customer demand variability, keeping your order fulfillment operations running smoothly and improving customer satisfaction.
Potential Drawbacks of Outsourced Logistics
Let’s go over some of the reasons why you should keep your warehousing operations in-house:
- Less control over warehouse and inventory processes: Most SCM (supply chain management) partners spend a lot of time and money developing their supply chain processes to match their specific needs. When you outsource logistics operations, you have to work with the “one size fits all” solution provided by the service provider. They decide how your shipments will be handled, stored, and delivered to customers. Any error on their part can lead to damaged inventory, wrong delivery, and lost sales.
- Unforeseen costs: While logistics providers can help you realize cost savings, sometimes their customs, taxes, and shipping costs like packaging, handling, and other hidden fees can add up to make a dent in your profit margins.
- Integration issues: Most SCM partners offer cutting-edge warehouse and transport management systems (TMS), however, it doesn’t guarantee a smooth transition. There is usually a considerable amount of time required before you can integrate your shipping data with their logistics management systems, resulting in delays.
Now that you have a basic understanding of the pros and cons of outsourcing logistics, let’s dive in further to learn about the different types of third-party logistics providers.
Types of 3PL Providers
Third-party logistics service providers generally specialize in several services that can be scaled or customized based on market conditions, demand, and delivery requirements. These include:
- Transportation network planning and optimization
- Freight forwarding
- Kitting/Pick & Pack
- Order Management
- Inventory management
- Cross-docking services
- Reverse logistics
- Light Manufacturing/Assembly
- Call Center Management
The most commonly outsourced logistical activities include functions that are repetitive and transactional. Customers tend to retain in-house strategic, IT-centric, and customer-centric operations.
In terms of services, transport, and regions spectrum, the 3PL market is broadly segmented into Domestic Transportation Management (DTM), International Transportation Management (ITM), Value-added Warehousing and Distribution (VAWD), and Dedicated Contract Carriage (DCC).
Below we’ll take a look at the different types of 3PLs:
Dedicated Contract Carriage (DCC)
3PLs providing this service deal with delivering goods from one place to another. To fulfill shippers’ transportation needs, they provide dedicated resources, including trucks, trailers, pickups, drivers, and fleet management.
According to the American Trucking Association, the record deficit of truck drivers in the United States—a shortfall of 80,000 drivers—has caused significant supply chain disruptions. DCC services can help businesses bridge the gap by providing shipping services without requiring any investment.
DCC 3PLs have the resources to meet unique customer requirements efficiently. They offer dedicated capacity and scalability to meet their client’s changing needs. However, when demand peaks, DCCs eventually turn to the market to hire new drivers if they receive more orders than they can handle.
Domestic Transport Management (DTM)
DTM is a type of 3PL service that only deals with transporting goods inside North America. They offer a viable solution for companies that need to ship large numbers of orders.
Domestic Transport Management services are non-asset-based (don’t own any logistics equipment) and provide value-addition services to their customers. They brokerage movements through roadways, waterways, airways, and railways.
DTM 3PLs can help shippers improve their logistics operations by finding the right balance between different modes of transportation. For example, implementing a multi-transport strategy of both trucks and trains to meet peak demand during the holiday season and save on transportation costs. Similarly, they may hire smaller transport companies to handle excess shipment load.
The Domestic Transportation Management (DTM) has captured about 32% of the 3PL market share in 2022 due to the growing consumer demand in the retail and healthcare sectors.
International Transport Management (ITM)
International Transportation Management (ITM) services provide air and ocean freight forwarding, additional value-added services, and customs brokerage.
Like DTMs, ITM 3PLs are non-asset-based freight brokers providing value-added transportation management services to their customers such as access to new markets. They act as intermediaries between transportation providers and their customers to facilitate the shipment of goods.
ITM services oversee and manage all points of the goods transportation from the origin to the destination country. This includes picking up shipments from the customer, handling the required paperwork, arranging transportation, customs clearance, real-time tracking, auditing, and warehousing the shipments.
The International Transportation Management (ITM) segment accounted for the largest market share of 42.13% in 2020.
Value-added Warehousing and Distribution (VAWD)
The Value-Added Warehousing & Distribution segment offers on-demand storage and related transportation management services to their customers. They employ cutting-edge inventory management technology and the required resources to efficiently manage your inventory replenishment. This includes receiving inventory at their distribution centers, kitting, assembling, inspection, sorting, handling returns, packaging goods, and delivering them to the end consumer.
VAWD 3PLs are asset-based and are traditionally contracted under multi-year deals.
In 2020, the VAWD market reached $46.7 billion due to the expanding eCommerce industries.
Optimize your logistics outsourcing with Sifted
There are benefits and drawbacks associated with both warehousing internally and outsourcing it to a 3PL partner. Identifying the right option for your business will help you improve the quality of your services and keep your customers happy.
Sifted Logistics Intelligence uses AI to compare your unique shipping profile with potential carriers. This approach helps you track important KPIs, analyze shipping data and make better carrier decisions.
Ready to optimize your supply chain management? Get a free demo from Sifted!