Spotlight on: Outsourcing transport and warehousing

Mal Walker

Over the last 20-25 years, outsourcing of logistics activities to third-party logistics service providers has become increasingly popular.
Key findings of the 2016 Third-Party Logistics Study: The State of Logistics Outsourcing (J Langley and Cap Gemini) indicate the following:

  • Although economic conditions vary significantly among countries and regions of the world, modest improvements have been experienced in many key areas. Armstrong & Associates reported aggregate global revenues for the 3PL sector growing by 9.9% from 2011 to 2012, 2.7% from 2012 to 2013, and by 6.5% from 2013 to 2014.
  • Users of 3PL services report an average of 50% of their total logistics expenditures are related to outsourcing compared to an average of 36% reported last year. This increase helps explain how improving economic conditions have impacted aggregate shipper spending on 3PL services as a percentage of total logistics expenditures.
  • This year’s Annual Third-Party Logistics Study reports that 73% of the shippers surveyed are increasing their use of outsourced logistics services, while 35% report a return to insourcing many of their logistics activities.

With an expanding sector, and increased expenditure on third-party logistics, why is that 35% are returning to insourcing? What have they discovered, or struggled with, to the extent that its driven them back to insourcing?

“Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm.”

In this article I will outline, firstly, the reasons why organisations outsource logistics activities, and secondly, what the key drivers are for outsourcing success.
Why do organisations outsource logistics operations?
There are many apparent motives why companies outsource, but from my experience there are four principal reasons:

  1. Warehousing and distribution management is not a ‘core’ skill.

Peters and Waterman in their best seller In Search for Excellence identify one of the eight factors of organisational success as ‘sticking to the knitting’. They warn that companies that stray from their core business risk their employees’ attention being diverted from that business to the point where they lose focus.
Many enterprises have taken heed and determined that inbound and outbound transport and warehousing are ‘consequential’ processes of their business, rather than ‘fundamental’ or ‘core’ processes. This has fuelled growth of the third-party outsourcing industry and expansion of scores of logistics service providers.
While many logistics service providers commenced as transport companies, they have diversified to engage in contract warehousing logistics, freight forwarding plus many other value adding services. On a world scale there are thousands of providers offering third-party services, yet there are only a handful of very large ones with the ability, network, systems and infrastructure needed for multinational customers. The top ten are:

Company USD Millions
DHL Supply Chain 17,748
CEVA 4,933
Kuehne + Nagel 4,047
Wincanton 3,794
CAT Logistics 3,744
Penske Logistics 3,282
UPS Supply Chain Services 2,990
FIEGE Logistik 2,684
DB Schenker Logistics 2,338
Ryder System 2,318

Source: Transport Intelligence
Choosing the right provider to use typically depends on the local and/or international scale of the customers, and alignment with the size and geographic spread of the logistic service provider.

  1. Performance is sub-optimal

Related to the ‘core skill’ issue, often organisations that have a strategic focus, other than in transport or warehousing, cannot attain the desired performance levels and key performance indicators (KPI) required by their customers. For example, companies that have their own in-house vehicle fleets often struggle to deliver products on time.
For instance, a service ratio of less than 98% of deliveries delivered on time is a major issue for modern consumers as they have become far more demanding. Merely dealing with the complexity of transport networks, contractors, inventories, industrial unions, and cost control is tough enough for many enterprises, so achieving 98% on-time performance is, for some, just a dream.
On the warehousing front, checking performance against just a few industry KPI can quickly help managers determine how effective their operations are. Telling signs are low levels of inventory accuracy, low stock turns and low order output ratios per labour hour, high levels of unexplainable losses or damage to goods, high operating costs, customer performance complaints and high employee turnover. When these signs are evident firms often choose to outsource rather than waste time developing their own remedies.

  1. Reduction in asset capital

Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm. Consequently, there is a trend for firms to remove warehouse assets from the balance sheet and redirect capital gained from the sale of assets to working capital and/or core asset investments. In choosing to outsource, firms can therefore transfer all the costs of distribution to their profit and loss account. This is a blessing for third-party logistics providers that have won large amounts of new business for this reason alone.

  1. Flexibility and scalability

With the advent of e-commerce, increasing globalisation and rationalisation of industries, today’s Australian market place demands fast, flexible and efficient supply chains. Coupled with shorter strategic planning horizons, the use of logistics service providers gives organisations flexibility to expand or change their method to market and volumes handled with almost immediate effect. Enterprises will typically negotiate one- to two-year agreements with Termination for Convenience exit clauses in case they wish to change their short- to medium-term strategy to market. It is simply not possible to respond quickly to market changes if there is a fully owned or leased network of warehouse and transport assets in place.

But what about cost of service?
Surprisingly cost of service, although important, is seldom a deciding factor, or driver for outsourcing decisions.
Why? Very rarely do companies save money through merely ‘outsourcing’ warehousing and transport. They may attain savings over a period e.g. 3-5 years, but not simply from the ‘act’ of outsourcing. The reason is elementary. Third-party logistics companies must pay almost the same operating costs as other organisations (sometimes more). While they do develop purchasing power and discount rates with transport sub-contractors and other vendors, there is often little disparity between the costs of a logistics service provider and would be customers. Why? The provider must add a margin to their costs to be profitable. In my experience the profit margin can range from 7-15%. This means that if a firm is seeking to bank savings after outsourcing they may well be disappointed. As a rule of thumb, companies can expect to pay from 10-20% more than current costs for outsourcing. You will recall the four reasons for outsourcing, to which cost is subservient. However, cost is a critical factor in judging the value proposition of potential providers who are quoting to do the work and in their ultimate appointment. So, to be clear, cost is not a reason to outsource, but a means to assist the decision as to whom to outsource.

“As a rule of thumb, no more than six KPI should be used. But make sure you choose the ones that are most meaningful to your business.”

What are the key drivers for success in establishing a good customer and 3PL relationship?

  1. Strategic alignment

The outsourcing decision must align with the company’s strategic direction. This is a ‘common-sense’ statement, but unfortunately not well practiced. Amazingly, many companies have suffered after outsourcing decisions were made at an operational level, without due regard to the board’s supply chain strategy.
Alas, in some cases, there is no supply chain strategy to speak of. This can cause organisational stress and is a nightmare to remedy after contracts are established. These days, third-party providers are aware that their clients may be deficient in strategy formulation, so they include clauses in contracts that enable them to change pricing and performance mechanisms if a change in company strategy or method to market occurs.

  1. Attention to detail

When seeking third-party quotations and contracts, there is no room for intuition, or best guesses on order velocities, volumes, processes and service requirements. Very detailed specifications must be prepared by enterprises with full disclosure of all available data before a quotation from service providers is attained. There is rarely too much information that you can gather. But where there is an absence of sensible interpretation of data, this can cause major issues in the outsourcing relationship.
Surprisingly, some companies agree to pricing mechanisms that are based on Customer Cost of Goods Sold, Volume Sold or Percent of Revenue. On the surface these appear to be simple pricing gauges, but often they force one party, either the customer or logistics service provider to prosper or lose unfairly. The supply chain interactions of physical movement and electronic information is complex and overly simple charging mechanisms deserve scrutiny as they can lead to disputes if one or the other party decides that they are being ripped off.

  1. Resource wisely

Both during implementation and the ongoing partnership a competent team is essential. Both the customer and the third-party logistics company must create an open and trusting working relationship. Each company’s team should include senior relationship managers from across the organisations, who meet regularly to discuss and monitor progress and performance.
Too often, once an agreement is signed implementation is left under the stewardship of the logistics service provider. This is a mistake. It must be a joint exercise. The best implementations are those that have a key member of the customer on the team to lead, organise and develop the relationship to full implementation with the provider. Such implementations are usually augmented by robust project management methods to ensure that all milestones are achieved.

  1. Raise potential issues early

From my experience, issues that are not dealt with proactively and in good time can fester into ‘relationship breakers’ and end in disaster. Therefore both parties should take a long-term perspective and be mature in their outlook and approach, always avoiding disrespectful behaviour to the other party. It never helps if one party is kicking the other. During implementation planning phases representatives from each company should meet weekly to discuss implementation tasks. Some may argue that this is too often, but in my experience the regularity maintains momentum and full attention to successful outcomes.

  1. Use KPI to manage

The contract and agreement should be subject to regular reviews of KPI. Data speaks volumes in terms of performance. For both warehousing and transport, KPI should be agreed at the outset. Typical measures include delivery in full on time, goods lost in transit, stock damage, ullage (unexplained loss or damage), inventory accuracy, time to receive goods, and time to dispatch goods.
As a rule of thumb, no more than six KPI should be used. But make sure you choose the ones that are most meaningful to your business. In this way, a focus on the ‘facts’ can help remove ‘emotionally charged’ opinions or feelings by either party.
Whether you are an organisation seeking to outsource, or a third-party logistics provider, by following these tips you will be equipped to enter into an outsourcing agreement that is ‘fertile for growth, and well placed to build into a mature and successful partnership.
In my next article I will be covering the different types of outsourcing relationships and issues to be aware of when entering contracts.
Mal Walker is manager, consulting with Logistics Bureau where he works with local and international organisations to guide them in specification preparation, establishment and review of outsourcing contracts. For more information contact Mal on 0412 271 503 or email

Amazon launches 3PL service in Oz

Amazon’s third-party logistics (3PL) service that goes by the name of Fulfilment by Amazon is now available to its Australian suppliers.
“The thousands of businesses registered to sell on Amazon’s Australian Marketplace will be able to access Fulfilment by Amazon (FBA),” Amazon said in a statement. “Businesses can now benefit from Amazon’s logistics capabilities, helping them quickly and efficiently reach customers across Australia.”
Instead of warehousing, picking and packing, and dispatching themselves, businesses selling via Amazon send the products they wish to ship through FBA to Amazon’s distribution centre and when a customer places an order, Amazon will pick, pack and ship the product on behalf of the business. This is said to save time and money for businesses as they will no longer need to individually purchase shipping materials, individually pack orders, and make multiple trips to the post office. They will also access Amazon’s much lower freight rate structure, and Amazon will also handle all customer returns.
The service is not restricted by company size. Businesses of all sizes, or even individuals selling out of their home, can make use of the service.
“Size doesn’t matter in the digital economy and Amazon Marketplace helps to level the playing field when it comes to starting or growing a business,” said Amit Mahto, head of FBA in Australia. “We are focused on helping Australian businesses of all sizes succeed by inventing on their behalf and making our technology available to them and FBA is a fantastic example of this. Customers shopping on will be able to access an ever growing and more unique range of products accompanied by the convenience of fast delivery and Amazon’s world-class customer service.”
FBA gives customers free delivery on eligible orders above $49, and with Prime set to launch in mid-2018, all FBA orders will also be eligible for the Prime shipping discounts.
Australian businesses pay a monthly fee of $49.95 for the right to sell their products on Amazon, on top of which comes a commission on sales of between 6 per cent and 15 per cent.
Amazon charges third-party sellers from $1.76 up to $25.48 for a bulky order weighing up to 30 kilograms to pick-and-pack an order.
On top of that, Amazon charges $7.76 to send an order weighing up to three kilograms.

WiseTech Global announces ninth acquisition for 2017

Sydney-based logistics software company, WiseTech Global, has acquired Warehouse Management System (WMS) provider, Microlistics, for $40 million, expanding its e-commerce capabilities.
“With the impact of e-commerce and advances in automation, warehouse management is an increasingly complex and specialised part of the international supply chain,” said WiseTech Global CEO, Richard White.
“The combined strength of WiseTech’s global innovation capabilities and our CargoWise One supply chain execution platform integrated with Microlistics’ powerful warehouse solutions for enterprise, express, third party logistics and cold storage will provide significant benefit to logistics providers.
“WiseTech is uniquely well-placed to deliver the technology convergence and deep integration necessary to facilitate omnichannel, multimodal movements across the supply chain ¬– of which warehousing is a critical component,” he said.
Microlistics Founder and Managing Director, Mark Dawson, said that joining the WiseTech Global Group is a key part of its evolution.
“With the global strength and powerful innovation capability of WiseTech, and our WMS expertise, together we will accelerate development of high productivity WMS to bring significant new benefits to the logistics industry,” said Dawson.
“Microlistics will remained focused on warehouse management solutions and we can leverage WiseTech’s global reach, resources and the CargoWise One platform, which for our customers will mean the opportunity for end-to-end execution, control and visibility of the supply chain,” he said.
Microlistics will reportedly continue to develop and deliver its warehouse management solutions with Dawson at the helm to its worldwide customers, and potentially to the 7,000 logistics providers across 125 countries that use WiseTech’s integrated supply chain execution solutions.
According to the Australian Financial Review, Microlistics made $6.8 million revenue in 2016-17, and WiseTech reported $153.8 million in revenue for the same period – spending $50.4 million on research and development.

3PL revenues to hit USD 1.1 trillion by 2022

E-commerce and continued outsourcing is fuelling global third-party logistics market growth, driving 3pl revenues to over $1.1 trillion by 2022.
Armstrong & Associates has developed global logistics cost and third-party logistics (3PL) revenue estimates with projections through fiscal year 2022. The global 3PL market estimates cover seven major regions comprising 190 countries.
In 2016, the global third-party logistics market reached $802 billion and is on track to exceed $1.1 trillion in 2022. Global logistics costs were $8.2 trillion in 2016 and should surpass $11.1 trillion in 2022. Overall, the Asia Pacific region is the largest logistics market, accounting for 39% of total global logistics costs and 38% of total global 3PL revenues.
Globally, modern industrially developed and post-industrial countries have the lowest relative logistics costs as a percent of GDP. For example, in 2016, North America’s logistics cost as a percent of GDP was 8.6% and Europe’s was 9.5%. Asia Pacific’s estimate was 12.7% and South America’s was 12.0%. This is a function of logistics (road/rail/port) infrastructure, the lifecycle deployment of leading logistics practices, and influence of ongoing process improvements including eliminating unnecessary governmental, bureaucratic obstacles.
For a single country, Greater China’s logistics cost (including Hong Kong, Taiwan, and Macao) is the highest in the world at $1.7 trillion and equivalent to more than half of the Asia Pacific region’s logistics cost. (In comparison, US logistics cost is $1.5 trillion.)
In addition to global 3PL revenue and logistics spending estimates covering years 2010-2022, A&A’s Global and Regional Infrastructure, Logistics Costs, and Third-Party Logistics Market Trends and Analysis also covers infrastructure’s role with a focus on Brazil, India and China; Fortune 500 Global 3PL revenues and growth by industry; e-commerce logistics costs, 3PL revenues and growth rates; 3PL market segment revenues by country and region; and logistics spending by country and region and by mode and function. Global ‘Top 3PL’ lists are also included.
The complete report, complimentary for a limited time, and other A&A market research can be found here.

3PL revenues to surpass $1.4 trillion by 2022

Research recently released by supply-chain market research firm Armstrong & Associates reveals that the global third-party logistics market is on track to exceed US$1.1 trillion ($1.4 billion) in 2022, having reach US$802 billion ($1.03 billion) in 2016.
The research, which covered seven major regions comprising 190 countries, found that global logistics costs were $8.2 trillion ($10.6 trillion) in 2016 and should surpass $11.1 trillion in 2022 ($14.3 trillion). Globally, the Asia Pacific region is the largest logistics market accounting for 39 per cent of total global logistics costs and 38 per cent of total global 3PL revenues.
The complete report can be found here.

Clorox outsources supply chain to DHL

Family supplies brand Clorox has chosen to outsource distribution of its products around Australia to DHL Supply Chain.
According to a statement, the partnership reflects Clorox’s focus on customer service, innovation and consistency.
Clorox’s decided to outsource its warehousing operation to achieve a more standardised and customer-centric approach, allowing the company to meet customer demands while removing the stress of distribution.
“We were looking for a partner who understands its customers’ business and responds quickly,” said Mike Fraser, Regional Logistics Manager, Clorox. “DHL Supply Chain has enabled us to maintain high levels of speed, reliability and quality control in our logistics processes, allowing us to stay competitive in the industry and help transform our end-to-end logistics operations.
“Our goal is that when a customer reaches for a product at the supermarket, it’s there. With DHL Supply Chain, we are confident that all of our products will be delivered on time and in full. We continue to look to them as a logistics partner of choice for future growth.”
DHL Supply Chain implemented a range of warehouse and supply chain improvements to Clorox’s operations across Australia, including warehousing, value-added services and inventory reduction, helping Clorox improve productivity by developing a more flexible operating model.
“The implementation of the 3PL (third-party logistics) service provided to Clorox has been achieved in just over three months, a process that would traditionally take six,” said Saul Resnick, CEO, DHL Supply Chain Australia and New Zealand.
“For fast moving consumer goods (FMCG) businesses, the logistics process is critical as consumer purchasing decisions are largely based on availability. We ensure all stock is delivered to stores when promised and with as little manual intervention as possible,” he concluded.

Nominations now open for Mercury Awards 2017

The Mercury Awards are back in 2017 with a new list of categories acknowledging excellence in supply chain management.
The long-standing event recognises the achievements of the small and large businesses that demonstrate ‘best practice’, excellence and innovation in Australia’s logistics, supply chain and materials handling industry.
Awards categories for the Mercury Awards 2017:

  • Materials Handling Solution Award
  • Supply Chain Innovation Award
  • Excellence in Safety Award
  • Best Technology Application Award
  • Sustainability Initiative Award
  • Transport Solution of the Year Award: Road
  • Transport Solution of the Year Award: Rail, Sea and Air
  • Outstanding Third Party Logistics Provider Award
  • Outstanding Graduate Program Award
  • Best Warehouse and/or Storage Solution Award

To nominate an exceptional company, head to the Mercury Awards website.
Winners will be decided by an independent panel of industry experts and announced at the Mercury Awards Gala Dinner to be held at 6.30pm in the Jim Stynes Room at the Melbourne Cricket Ground on Wednesday 27 September.
Tickets for the event can be purchased online – Early Bird tickets cost $165 + GST, and you can get a table of 10 for $1,500 + GST.
For a night of great entertainment and delicious food in a fantastic venue buy your tickets now, and for a chance of being honoured on the night get your nominations in.
The 2017 Mercury Awards are sponsored by European manufacturer SEW-Eurodrive. SEW are passionate about celebrating industry excellence and also provide their support manufacturing excellence at the Endeavour Awards and mining progress at the Prospect Awards.

Global 3PL industry worth $1.2 trillion by 2020

According to’ Global and China Third-party Logistics Industry Report, 2016-2020, published on 10 February, the global third-party logistics industry will be worth US$900 million ($1.2 trillion) by 2020.
The market research firm reports that the global third-party logistics market hit US$721 billion in 2015 ($940 billion), occupying 8.2 per cent of the logistics market size and a year-on-year increase of 4.5 per cent. In 2016, the value of the market increased to US$757 billion (987 billion).
“In the future, by virtue of high efficiency and highly standardised operation, the third-party logistics market size will grow steadily, expectedly outstripping USD900 billion in 2020, with a share of nearly 10.0% in the logistics market size,” the company said.

UK court case could kill off 3PL industry

A new legal precedent means that small mistakes in the complicated high-end manufacturing supply chain can send third-party logistics operators to the wall – through no fault of their own.
The UK-based International Freighting Weekly has reported on a frightening prospect for shippers and shoppers alike. In a worrying development for international trade, a British High Court ruling has found a freight company liable for the theft of products that had been delivered to its warehouse in error by a client, with its insurance policy being declared void due to the clerical error.
It all started when GBP 345,000 (AUD 700,000) worth of Bluetooth mobile phone devices which were meant to have been flown to Hong Kong, were mistakenly delivered to Uniserve’s local warehousing facility in Manchester. While the goods were at the warehouse, a robbery occurred and the devices disappeared into the criminal underworld.
Uniserve, which would have charged just $6 for moving and storing a pallet of that size, relied upon its limited liability insurance to cover any damage or theft of products. However, because the goods had been delivered by mistake – regardless of the fact that the mistake was not Uniserve’s – the insurance company voided its policy. Uniserve now faces a total bill – including legal costs – of nearly $4 million.
On May 11, Judge Mackie QC ruled at the high court that, as the goods had been delivered in error, no limited liability insurance contract could apply.
Iain Liddell, CEO at Uniserve told IFW that: “This is going to change the way everything is done through the whole transport chain. Under this new regime, not only will moving a pallet become extremely expensive, but we will have to have far more information about what we handle for other people.
“We would have charged $6 for moving that pallet,” explains Liddell. “The increased insurance liability alone would bring costs up to $4,700. Can you imagine that effect on a $2,000 shipping cost? This isn’t pie in the sky. It’s now case law. Unlimited liability claims can be made and insurers can revisit six years of claims to establish if an error has been made, and then demand full payment from anyone in the supply chain who can be held responsible.”
Gavin van Marle, editor of IFW agrees. “We are now in a situation where freight service providers operating under limited liability terms and conditions may find themselves uninsured and with unlimited liability in the event of a supply chain error – even if it is caused by a third party or the principal. It puts freight operators in a terrible situation: at best they will have to develop a system of paperwork and checks that will cost a fortune to administer. At worst, they face unlimited liability if an error is made, even when it is not their fault.”
Could it happen in Australia? Click here to send your comments to the editor.

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