Benefits of Logistics Outsourcing

In a logistics operation considerable quantities of materials are required to be transported and stored at various locations. Raw materials and components are to be moved over long distances from vendor supply points to production centres. Starting from outsourcing of IT and HR functions, Indian corporations have come a long way and understood the value and benefits they get from outsourcing such functions, wherein they feel they do not have the required expertise. Logistics is one of the operations in which the majority of Indian business corporations do not have expertise. Hence, after the liberalization of Indian economy in 1991, when the heat of competition was being felt, outsourcing became a corporate mantra for building competitiveness. In the developed coun­tries, logistics outsourcing is treated as a strategic solution to improve quality of service and reduce the cost of important non-core processes. Therefore, such processes are outsourced to logistic service providers having a core competency in their area of logistics. The storage service relates to materials that have to be stored for some time as raw materials and later as finished goods.

Finished goods have to be transported to the point of consumption. As the production and consumption cycles never match, storage becomes inevitable. But the stored inventories have to be judiciously controlled for their carrying cost that is a drain on the company’s profits. In such cases, the logistics service provider takes care of all hassles and ensures the availability of right product at the right place and at the right time. Logistics operation is a specialized functional area and the majority of marketing and manufacturing organizations have no expertise in it. Hence, the need to outsource operations to the expert in the field has to be taken seriously. The opportunity cost, which the traditional distribution system carries due to lost time in dealing with multiple ven­dors, transporters, C&F agents, freight forwarders, octroi authority and customs agents, is a major hurdle in the company’s overall competence. To overcome this hurdle and bring effectiveness and efficiency to the distribution system, outsourcing becomes necessary. The critical reasons why com­panies outsource logistics activities are:

• To focus on core competencies
• Resource constraints
• Cost saving resulting from better management of the supply chain
• Cross-pollination of better available practices
• Wider geographical coverage

In highly competitive markets, logistics outsourcing provides the operational flexibilities to meet the changing needs of the customers. Logistics services can also be customized for major markets or key accounts. As organizing the logistics infrastructure is the service provider’s respon­sibility, the outsourcers need not have to worry about the assets becoming outdated. The switching over to a new logistics partner is possible due to the changing needs of customers. The require­ment of funds for investment in transportation fleet, warehouses, handling equipment and storage arrangement is absolutely eliminated and the responsibility falls on the service provider to create infrastructure. The human resource requirement is minimized and is limited only to coordinat­ing and monitoring the service provider’s activities. Therefore, leading firms hire the services of experts using best practices in the outsourced area, and there hired services are available at lesser cost.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.