Transportation Management Outsourcing

It’s not a light switch! Global trends and best practices in what to outsource and what to ‘insource’ in the transportation management process, have shown that it’s not a simple on-or-off choice.

Over the past two decades the global trend towards the outsourcing of transportation management has grown significantly within the cargo owner community. This in turn has fuelled consolidation within the Logistics Service Provider (LSP) network, resulting in the emergence of the ‘Mega LSP’ whose organisation often dwarfs that of the client who they are servicing. South Africa has paralleled this global phenomenon.

Simultaneously, these LSPs have rapidly expanded the range of services that the client can outsource to them, resulting in an even greater loss of control over the Transportation process for the cargo owner. But what activity should be outsourced and what should be kept in-house? While there is no definitive answer to this question, research is showing that outsourcing is not as simple as a ‘light switch’ – either on or off, all or nothing.

3PLs under pressure

A glance at the financial results announcements of the major players in the South African third-party logistics provider (3PL) industry shows a common trend: profitability under pressure due to difficult economic conditions. The CEOs of these 3PLs attribute their less than stellar results to factors including increased global competition, stagnant domestic economic growth, labour unrest and geopolitical change to mention but a few.

The situation is not much better for manufacturers and retailers who are faced with declining consumer demand due to rising living costs, spiralling food and petrol prices, and above inflation price increases on basic services such as electricity and water. To ensure business survival, companies now need to operate more effectively and efficiently than they have had to in pre-recessionary market environments. A new solution needs to be found.

The management teams of the Mega LSPs are under increased pressure to perform as shareholders want to see positive growth in the form of new business wins. What this means is that to “keep the lights on”, 3PLs often have to drop rates and margins in order to secure new contracts knowing full well that they are going to make little or no profit on the business, at least in the initial phase of the contract. This is a lose-lose situation for both 3PL and cargo owner as it ultimately leads to a non-sustainable business relationship.

The Contract Maturity Life Cycle

An outsourced general freight transportation contract is typically of a multi-year duration and when negotiated on the basis of very low profit margins is doomed to fail. What normally transpires is that in the initial phase, the 3PL adds value and improves service levels mostly by taking care of the ‘low hanging fruit’ – the easy wins to improve efficiencies in the client’s logistics operation. The client is happy and the 3PL is off to a good start although often at low levels of profitability.

By the next phase, the honeymoon is over and as profits remain flat for the 3PL, service levels start slipping. Into the next phase, the 3PL typically uses less resources dedicated to the contract in order to overcome the pressure for profits. In this instance customer service levels can deteriorate significantly and the whole cargo owner/service provider relationship frequently becomes adversarial.

In the final phase, the relationship between cargo owner and 3PL can break down completely to the extent that the 3PL resigns itself to losing the business when it goes out to tender again and therefore focuses primarily on maximising profitability before the contract expires.

Ultimately this type of business engagement is not healthy and leads to a breakdown of trust between the client and its service provider. The cargo owner is faced with spiralling costs and service degradation over the period of the contract whereas the 3PL feels hard done by and that there is nothing in it for them in the long term. While this may be more the case for general freight contracts as opposed to a dedicated fleet contract similar parallels can exist.

What is the Number-one Reason for a Failed 3PL Partnership?

According to cargo owners

  • Poor Customer Service (50%)
  • Failed Expectations (24%)
  • Cost (10%)
  • More Competitive Options (7%)
  • Loss of Control (6%)
  • Cultural Dissimilarities (2%)
  • Other (1%)

According to 3PLs

  • Poor Customer Service (16%)
  • Failed Expectations (50%)
  • Cost (6%)
  • More Competitive Options (9%)
  • Loss of Control (2%)
  • Cultural Dissimilarities (10%)
  • Other (7%)

Source: Inbound Logistics' 3PL Perspectives Report 2012

The argument for Outsourcing over Insourcing

The downside of insourcing has been well documented before, mostly by companies promoting the benefits of outsourcing, however these criticisms are still valid. For most manufacturers and retailers, transport logistics is not a core competence and the argument for focusing on what you do best still holds strong. By outsourcing the transportation management process, cargo owners no longer need to worry about purchasing new vehicles or maintaining their fleet and those assets can be moved off balance sheet. Likewise you do not need to manage drivers and operational staff as that is the problem of the LSP. By outsourcing logistics, companies are also able to benefit by partnering with a provider that will make investments in technology on their behalf although more often than not that is used as a ‘lock-in’ strategy by the LSP as a means to retain the contract over a longer term.

Insourcing vs. Outsourcing

Whether choosing to insource or outsource the transportation management process, retaining strategic and in many cases management control is critical to a successful outcome. Depending on their level of supply chain maturity, some clients may choose to outsource more of the process than other companies while others may initially decide to outsource but then bring back some of the key functions in-house such as the planning process. Often clients only focus on one aspect of their supply chain for outsourcing such as the primary transportation and view their primary and secondary transportation as almost disparate activities (frequently with different outsourcing philosophies and even different outsource partners). What is critical of a successful outsource relationship is that the cargo owner has deep visibility across the entire supply chain – firstly, as a means to understand and maintain customer service levels; and secondly, to ensure that cost is optimised for the cargo owner’s behalf (particularly through transparent rate visibility).

The solution? A collaborative transport community

Fortunately, a new generation of transportation management technology is available that enables leading manufacturers and retailers to achieve the advantages of outsourcing without the unwanted loss of control.

A true Software as a Service (SaaS) multi-tenant transportation management solution enables all users (cargo owners, carriers, suppliers, consignees, and other trading partners) to conduct business on the same software instance on the same platform. The transport data, from millions of loads and billions of Rand in spend, flows through this single system and enables network-wide visibility, collaboration and business intelligence by providing a "single view of the truth" for cargo owners and suppliers, carriers, 3PLs and trading partners.

As a result of this uniformity, transportation network data - such as rates, carrier performance, and transit times - provides comparable data sets to create market level indices. SaaS TMS solutions help cargo owners improve performance by providing an industry frame of reference, beyond historical only company data, allowing unparalleled visibility to industry network data. SaaS transportation network members utilise quantitative benchmarking to identify ‘what’ can be improved, ‘why’ differences exist and ‘how’ to improve performance. By accessing network data, users are able to make smarter decisions for continuous improvement.

A multi-tenant SaaS TMS platform provides unique functions that can only be delivered through the power of a collaborative network: supplier inbound management, appointment scheduling, benchmarking and network-wide reporting, a private transportation marketplace to obtain capacity and lower costs, and total supply chain visibility. As the transportation network expands so does the opportunity for higher levels of success in customer service and collaboration.

Supply chain visibility, cost structure, flexibility and scalability, as well as business intelligence are key benefits of true SaaS TMS platforms. A fundamental critical success factor when choosing a multi-tenant SaaS TMS platform is that the platform provider should be independent and not linked to any LSP. If the platform is provided by an outsource partner it can be counter-productive, driving the wrong behaviour and ultimately not providing the appropriate level of visibility for the client due to the inevitable conflict of interest.

Fundamentally what this new generation of technology provides for the cargo owner is much needed control over the transportation management process. In so doing it enables the flexibility to effectively implement and manage the correct balance of outsourced and insourced activities by providing the unparalleled level of visibility necessary to support this approach.

Neil Larkens

Neil Larkens

Connect with Neil Larkens

Neil has over 15 years’ experience in project management and solution implementations in the supply chain and logistics industry. Neil has been closely involved in the implementation of a number of Transport Management Systems across various industry groups. Following various logistics-related positions within AECI and Barloworld Logistics, and some time spent as a management consultant at Accenture, Neil joined Transnova to lead the Pre-Sales and Implementation teams of the business.