Pros And Cons Of Logistics Outsourcing

Selection decision

Logistics outsourcing is a strategic level decision. Selecting the ideal service provider will be a result of a process involved some main factors such as organizational culture, scale and type of operations, capabilities and customer base.

Voortman (2004) has proposed a sequence by which a third party service provider, a public warehouse in particular should have been strategically chosen by senior management.

 Quantifying the exact need/ purpose for the company in terms of warehousing.

 Generating a set of options as per above needs.

 Assessing the options for suitability, pros and cons etc.

The mutual understanding between the outsourcer and the third party is the most crucial element for a long term relationship.

 Determining the level to which the service provider would commit towards the client’s operational excellence.

 The possibility for both parties to succeed simultaneously.

 Capability to deliver the expected performance level to client.

These initial evaluations are mandatory since inappropriate business relationships may not assist firms as a part of their supply chain strategy. Literature has discussed about leveling of the strategic directions of two companies in the context of supply chain and logistics in order to proceed to storage of goods owned by one party by the other.

The risk and costs

Firms essentially need to make a simulation of the public warehouse provider’s operation in terms of capacity, labor, and location. But most importantly total cost of outsourcing, per unit rate and level of risk must be given attention over others. The risk factor associated with outsourcing cannot be eliminated but can be mitigated. There has to be a surplus with the company compared to the risk undertaken. Besides a public warehouse is expected to share the risk with clients (Rizal,

Service providers must be willing to change and innovate for clients with collaboration.

Skills and capabilities of employees, current clientele, turnover, correspondence to customer’s quality standards, productivity level, security aspects, and the overall financial position will have a collective impact on the selection decision.

Location

This criterion is again related to supply chain strategy of the company to be responsive or efficient. The ability to offer number of small shipments will be based on the location factor i.e Centralization and decentralization of warehouses and the volume of goods transported between factories and warehouses at a given time period. It is important that at least the warehouse has access for two modes of transport (Catalano, 2009).

An added advantage would be selecting a partner who has a network of warehouses so that products could be moved efficiently based on geographical demands and as a contingency beyond over volume situations. This will be strategically important when companies try to expand operations in to new regions/ countries. The global coverage will save resources for the company.