Thursday, December 1, 2011

Transportation Outsourcing: Factors affecting decisions

Remaining profitable in competitive markets depends upon maintaining lean and efficient operations.

However, achieving distribution efficiency can be challenging, particularly when working with a large and diverse customer base. Companies have to make a decision on whether to outsource or insource their transportation to gain that competitive edge over their rivals.

So what factors drive this decision? According to a KPMG survey, almost 77% of survey respondents outsource at least 10% of their transportation functions. In addition, almost 55% of respondents outsource 91% or more of their transportation-related supply chain activities. [1]

43% of manufacturers regarded cost to be the number one factor in all of their supply chain management (SCM) outsourcing decisions. Moreover, 77% rated it “most important” or “second most important [2].”

Companies, normally outsource to gain a competitive advantage. A study by ARC Advisory Group lists the following as the main reasons why companies outsource transportation related IT services.

  • These services fall outside their core competencies.
  • It is tough to find human expertise and resources.
  • Companies prefer to eliminate assets and free up working capital to expand their operations.

The number one factor in a transportation outsourcing decision is ‘Cost’. In other words, companies that do not specialize in the transportation function are more likely to be less efficient than the firms that do specialize in transportation. Relative to transportation service providers, these firms have trouble adding value to their supply chain through the possession of assets required for the transportation of goods or the related IT functions. Consequently, many companies are exploring a plethora of transportation related services. They desire the control of in-house transportation and the price of the low cost carrier. [3]

The number two factor for SCM outsourcing decisions was “flexibility to increase or decrease capacity [2].” In some cases, this also drives a manufacturer’s decision to keep transportation in-house. Manufacturers with their own transportation services have increased control over inventory shipments and customer delivery [2]. This, in turn, gives them the ability to reduce costs by increasing productivity [1].

“Quality improvements” is the third most important factor in an SCM outsourcing decision. This is also very important for transportation outsourcing in today’s competitive environment. The customer’s perception of quality can be preserved or enhanced with effective transportation. However, if executed poorly, the transportation function can damage a company’s reputation for making a quality product. A company that makes a quality product but can’t get it to market on-time will miss opportunities.

Rounding out the top five were “technological capability” and “workforce flexibility,” respectively [1]. Both factors are critical in a transportation outsourcing decision. Companies that outsource transportation need to know that there must be excellent coordination between purchasing and transportation. This will give the outsourcers an opportunity to take advantage of low priced carriers and retain control over other logistical aspects of their supply chain. To gain a competitive edge, they will need to keep up with the speed of technology and be ready to adapt to change [2].

Do you think there are any other major factors affecting the companies’ decision? With governments getting more stringent about environmental norms and the passing of legislations imminent, do you think that ill-informed outsourcing partners could malign a company’s reputation? Will this be another factor based on which outsourcing decisions will be based? Only time will tell!

References:

[1] - KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

[2] - KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase III Stores Online.

[3] - http://scm.ncsu.edu/scm-articles/article/transportation-outsourcing-decisions

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