Pros and Cons of Outsourcing Logistics - Research Paper Example

Pros and Cons of Outsourcing Logistics Due to the increase in competition in the business world, many companies and businesses are devising new ways to remain competitive and improve their services. One such strategy applied by most companies around the world is outsourcing logistics. This paper will discuss in detail the concept and nature of outsourcing logistics. It will also provide an example of application of this business strategy as well as pros and cons of applying this strategy. Introduction Logistics Outsourcing is a process whereby businesses entrust some of their non-core functions and activities to other companies to direct their resources and efforts on the growth of its core business (Laowee.com, 1). Therefore, in outsourcing, the contracting company farms out some of its services to another company. The goal of this process is not just to cut costs but also to employ skills that are not available internally. Presently, there is an increase in the number of outsourcing companies putting outsourcing logistics on the limelight. Consequently, there is rise of debates on whether outsourcing logistics is undesirable or desirable (Carter, 1). Increased globalization of corporations has led many organizations to carry out their activities in the most effective and cost-efficient way so that they outlive the competitive pressures. In this case, the companies adjust by including only the efficient activities hence raising the need for outsourcing the remaining activities. While in the past years, outsourcing was mainly for the short-term reduction of costs, it has become a long-term strategic cooperation in the recent years. This has brought about the development of new outsourcing business models. Some areas like shipping and warehousing have a long history of outsourcing for cost-reduction purposes in the field of logistics (Kersten. et al, 2). The main reason why outsourcing is a practical business strategy is its ability to help the contracting company to focus on issues important for survival and future growth having allowed the outsourcing company to control their resources hence spreading risks. To many firms, logistics outsourcing is a means of reorganizing their distribution networks thus increasing their competitive advantages. In the last several years, there has been a dramatic growth of logistics outsourcing by use of a third party logistics (3PL) provider for all or part of an organization’s logistics operations (Regan & Wang, 1). Sometimes, an organization decides on outsourcing when it is hard to handle all aspects of the business. In addition, another reason for outsourcing logistics is that there are a few processes limited for a short time and are therefore not practical to hire experts for a short period (Mehta, 1). However, in most cases it is difficult handling the high demand of every department within an organization especially the call center services and sales services. Additionally, many of the cases are temporary and it is not ideal for the company to appoint an in house department to manage this work. It is the duty of the outsourced company to accomplish the necessary actions once they have received the duties (Inso.us, 1). Nature and application of outsourcing logistics A decade ago, the third party logistics was just surfacing in many parts of the world. However, as the rate of the service grew, there was a difference in many parts of the globe on the rate of growth across tasks and the reasons for this growth. For instance, in Europe, the main use of third party logistics was for both international transport and distribution of products in foreign markets. About two-thirds of the European distribution centers mainly used by manufacturers from America, Japan, Korea and Taiwan currently use the third party logistics providers. In the US, for example, the recent trend is for firms to concentrate on their core business competencies so as to form a sustainable competitive advantage. Since this requires outsourcing support activities, it becomes a growing opportunity for 3PLs (Regan & Wang, 1). The present business environment has made the growth of outsourcing logistics more prevalent. In this regard, there has been development of a number of different outsourcing business models. The range of logistics outsourcing relationship can be limited to a few simple duties for example storage and transportation. However, in the recent years, there has been a dramatic growth in the outsourcing of complex bundles of logistics functions, often known as contract logistics (Kersten. et al, 2). Mehta adds that outsourcing can be for both within the country or outside. The main reasons for outsourcing offshore are the availability of cheap labor and expert knowledge on some business processes (2). Outsourcing logistics in practice (example of Dachser Company) An example of a fully integrated range of logistics services modified to match perfectly to the needs of each individual customer is Dachser Contract Logistics. To accomplish this, Dachser set up its entire range of services and unite its individual logistics modules to design the best solution for the customer (Dachser.us, 1). It manages even the complex projects easily because of its comprehensive logistics consulting, problem-solving capabilities and innovative IT systems (2). A detailed analysis of each customer’s core requirements and conditions forms the basis of the planned optimization process. These consist of business processes market requirements, product characteristics, or material and information flows. Consequently, the customers receive a perfect logistics package all the way through the whole supply chain. This offers the customer a benefit and a lasting competitive advantage in his markets (Dachser.us, 3). In addition, the customers decide on the processes they wish to outsource according to their individual needs: from value-added services modules, warehousing, transport to packaging, assembly, quality controls or repairs. In addition, Dachser also handles labeling, returns and claims management, and display building (Dachser.com, 3). When accomplishing projects, the focus for Dachser is on active logistics consulting. Dachser specialists and members of the customer’s staff form up teams that guarantee smooth implementation, high process quality and continuous optimization of the contract logistics solution (Dachser.com, 4). The foundation stone for an optimum combination of the different service modules in Dachser is its global network, competent staff and clever IT solutions (5). Pros and Cons of Outsourcing logistics It is evident that the links of the supply chains should be strong for any business to operate smoothly. The operation of logistics system affects most stages of a business from production to warehousing and from shipping to maintaining good relationships with buyers. Although it is uncommon for smaller businesses to outsource these services for peace of mind, a company of any size can gain from employing a third-party logistics firms to gratify their needs (Lively, 1). One major disadvantage of outsourcing logistics is harming the local labor force. It is evident that outsourcing results in fewer jobs. This happens because there is a shift of jobs to other locations, especially to countries with cheaper labor, even though they could be done in home organization (Carter, 6). Consequently, the high competition for jobs leads to a decline in the labor rates. In addition, unemployment due to outsourcing logistics affects a country’s economy. Moreover, some complaints claim that there is no realization of the true business value leading to underpayment (7). Apart from unemployment, most contracting companies lose their key members of staff causing a loss of experience, loss of knowledge and exposure. This loss affects the company negatively. In addition, there is loss of responsiveness or flexibility within the organization with the remaining staff experiencing a low morale since they mistrust the company. Similar to other projects there are inhibitors, most of which come from the staff. This is because the staff fear the ambiguity that surround the project and they experience insecurity of their jobs since they are not sure whether they will lose them. Additionally, they fear the loss of control and the direction of the project. Managers too experience fear in the form of loss of core competencies within the company and the uncertainty about the success of the project. The fear about the success of the project is mainly because the outsourcing decision is difficult if not impossible to reverse and reversing the decision would mean bringing the outsourced project in house and they fear whether they can withstand that (ORiordan, et al, 6). Another major advantage of outsourcing logistics is reduction of major operating costs of a business. It is evident that through cost minimization, most companies and businesses are able to operate continually (Carter, 2). For instance, outsourcing logistics helps in reducing maintenance and operational costs substantially. Many studies indicate that cost reduction is the major compelling factor of companies and businesses to outsource their logistics (Inso.us, 8). One of the major costs reduced or minimized by outsourcing logistics are overhead costs of carrying out a certain back-office function, which are always enormously high (6). For instance, a certain company or business might necessitate expansion of business premises and offices due to growth of the business. If for example the present location of the business is costly and there lacks room for expansion, the business can choose to outsource some of its non-core operations to help reduce the necessity for more office space (Bucki, 7). Other costs substantially reduced by outsourcing logistics are transportation and delivery costs. If a delivery company delivers the products f the primary company to the required locations, then the primary company will save money in the long run in terms of transportation costs such as fuel and repairs (Lively, 3). In most cases, companies select delivery or supply companies that have the best form of protection and insurance against accidents and damage of products. In addition, such companies should be very efficient and not often susceptible to various accidents and risks (6). Despite logistics outsourcing having advantages in cost reductions, there may be difficulties or complexities in the management of logistics operations. For instance, there some cases that require the hiring of a more competent and highly professional personnel to handle issues regarding purchasing and contract management. In this regard, some firms become obliged to learn concerning new systems introduced by the third party logistics provider. This will mostly occur when the third party logistics provider chooses to alter the manner it offers its services. In addition, if the third party logistics provider adjusts its staff or organization, the other company has to invest in creating new joint ventures and comprehending the manner of operations in the fresh environment (Regan & Wang, 5). Another major advantage of outsourcing logistics is the probability of companies tapping more experience and expertise and obtains access to intellectual property, in addition to sustainable sources of proficiency. This is because the logistics provider company may provide the necessary expertise through its operations. This method reduces the necessity of training and developing such expertise within the company. In addition, through the provision of g new service-level accords in their agreements, companies can ensure that the quality of the production or services still remains. In most cases, these agreements often have penalties or lawful redress for contraventions (Carter, 3). Although outsourcing logistics might offer new expertise, there some cases where it may cause incompetency and lack of motivation. This occurs because the outsourcing company gets the managerial rights from the primary company. In this regard, the other company may not have a personnel that is innovative as well as that have motivation to propel the company to greater heights. Such employees may only work due to obligation and not out of self motivation. In this case, such a workforce might only be concerned with making out of the project, without paying much concentration to appropriate work management (Mehta, 3). Outsourcing logistics helps companies to share its business activities and concentrate on the major functions of the business. This is because as businesses expand and grow, also their premises will require expansion and there will be need f extra employees. This expansion of the business might start to use human and financial resources, which deprives the business of its major activities that makes the company triumph. Outsourcing the non-core functions and operations helps the management of the company to refocus on he core and major business operations without compromising quality or service in the back-office (Bucki, 2). Despite this risk-sharing advantage, there is the risk of data leakage hence compromising of the confidentiality of the primary company. There may be possibilities of leaked data or mishandling of company information since there is movement of data between the companies (Carter, 9). The main companies heavily hit by leaked or poorly handled information are the companies, which mostly outsource their payroll, HR, and order taking services. In this case, outsourcing this nature of process to individuals outside of the company clearly allows them to observe secretive and confidential information on the other firm’s finances and dealings (Inso.us, 10). Mehta affirms that there is particular confidential information of a company that should operate within the boundaries of that company if the company is to run successfully. This includes private information concerning employees, salary payments as well as financial status of the company (4). Outsourcing logistics ensures that business operations occur constantly and are available to customers on a daily basis. This is possible because through outsourcing, various business activities of a certain company can occur within different time zones in different locations. For instance, “when the organization from Country A goes off-duty, the organization from Country B can take over.” In addition to this, there is the possibility of developing and promoting a certain product speedily due to outsourcing (Carter, 4). Despite this advantage of availability of services, there exists a problem of misguided information or at times, inadequate information in logistics outsourcing. In this case, the third party logistics provider often has incomplete information concerning the contracting company. Likewise the contracting company may lack complete information concerning the third party logistics provider. This may probably lead to complexities in the management and control of prices of products. For instance, due to incomplete information, the third party logistics provider may offer very different prices to the ones in the original structure of the contracting company (Regan & Wang, 5). Although the major advantage of outsourcing logistics ids reduction in operation costs, sometimes there are hidden costs involved especially in the case of outsourcing to other countries. These costs often do not occur in the original contract agreement but nevertheless, they affect the contracting company. This may occur incase of a poor outsourcing provider, who might add costs not previously agreed upon (Inso.us, 12). When such a case occurs, it may be very difficult for the contracting company to prevail against the other company in court since the other company makes the contract (Mehta, 6). Transferring in- house logistics operations to a third party logistics provider perhaps present the most indefinable hidden cost. In most cases, most companies do not comprehend the amount they have spent until the transition ends. Management involved with outsourcing logistics present the other major source of hidden costs. These costs majorly occur in the areas of assessment of the fulfillment of contractual requirements, negotiating with logistics providers, and negotiating any required contact changes. Often, the management does not reflect on these costs since they only become noticeable when overall outsourcing costs have clearly soared (Regan & Wang, 6). In addition to hidden costs, there are some logistics providers who offer low quality services that may compromise the reputation of the contracting company. In most cases, the main concern for logistics providers is profit making, which is different from that of the contracting company whose main objective is to develop the business and establish a good reputation. This aspect of profit-making concern by the logistics provider may compromise the quality of the services. Often poor outsourcing firms will extend the timeframe for delivery date or offer a sub standard service (Inso.us, 11). Despite some logistics providers offering poor services, some Logistics service providers have improved skills and experience in addition to superior equipment. This often makes such logistics providers to offer quality services in an efficient and speedy manner. In addition, it is evident that most companies are unable to control and manage their logistics, which necessitates the significance of logistics providers (Kersten. et al, 7). In the contemporary business world, outsourcing logistics provides a vital means of strengthening business relationships. This helps the individual companies obtain superior technologies that might not be obtainable in the companies when operating solely. With strengthened relationships, contracting companies will have the chance to offer more dependability and trust to the outsource providers therefore creating more time in the organization. In addition, outsourcing helps firms to become more responsive to handle situation more easily as they happen (ORiordan, et al, 4). Another disadvantage of outsourcing logistics is the tendency of the contracting companies to depend too much on logistics providers. This causes sluggishness in the operations of the contracting companies such that when operating solely, they cannot offer quality services. In addition, this tendency causes the contracting company not to improve its staff quality or technology (Laowee.com, 8). Regan & Wang affirms that by contracting out logistics activities to a single logistics provider for an extended period, the contracting firm may become susceptible and might even lose control of part of its logistics activities (6). There are some hidden benefits of outsourcing logistics, which most firms do not even consider or realize. For instance, logistics providers may offer the contracting company expertise and ideas that might not develop in the company. In addition, outsourcing logistics protects many current jobs and allows firms to invest extra money in the next-generation technologies and business schemes that will generate the jobs of the future. Moreover, it can also help to get rid of the barriers generated between different departments within a firm and allows for the integration of distanced departments (ORiordan, et al, 5). Conclusion It is evident that outsourcing logistics present many advantages to the contracting company in terms of cost reduction, diversifying of risks, and continuity of service provision among others. However, outsourcing logistics may present some disadvantages including overdependence of logistics provider, poor quality of service provision, loss of privacy and loss of jobs among others. This however does not mean that outsourcing logistics is not beneficial, rather it is a vital business strategy to maximize sales and improve service delivery in the competitive business world. Works Cited Bucki, James. Outsourcing Advantages: A Back-Office Operations Illustration. 2011. Web. Carter, Peter. Advantages and Disadvantages of Outsourcing. 2011. Web. Dachser.com. Core competence: Contract logistics. 2010. Web. Dachser.us. Contract Logistics. 2011. Web. Inso.us. Advantages and Disadvantages of Outsourcing Call Center Services. 2010. Web. Kersten, Wolfgang. et al. Motivation for the outsourcing of complex logistics services. 2007. Web. < http://www.poms.org/conferences/cso2007/talks/09.pdf> Laowee.com. Logistics Outsourcing Risk and Decision Analysis. 2010. Web. Lively, Kathryn. The Advantages of Using a Third-Party Logistics Firm. 2011. Web. Mehta, Suketu. Outsourcing: Disadvantages of Outsourcing. 2011. Web. ORiordan, Aoife. et al. Outsourcing: A Way to Improve the Responsiveness and Agility Within the Organization. 2005. Regan, Amelia & Wang, Chuanxu. Reducing Risks in Logistics Outsourcing. 2003. Web. Read More