Critical Issues of Logistics Outsourcing

After liberalization of the Indian economy in 1991, entrepreneurial activities in India grew mani­fold. Many foreign companies began their trading activities on the Indian soil to get a share of the large, untapped Indian market. As a result, the heat of competition is being felt across all sectors of the economy. To counter competition, business organizations stared reviewing their business processes to deliver value to their customers and develop the competitive advantage. Many of them started outsourcing the non-core-competency areas to the experts who promised to do the job at reduced cost and simultaneously bring effectiveness and efficiency to the operations. As many of the Indian firms today are in the learning phase of outsourcing, they ignored certain critical issues and the result was the dissolution of the partnership with the logistics service supplier within a short time, forcing them to look for other options. The following are some of the major issues that need to be addressed and examined before deciding on 3PL or 4PL partners:

• Switching cost
• Degree of control
• Human and electronic interface
• Tuning logistics services to the needs of channel partners
• Degree of outsourcing
• Legal aspects

1. Switching Cost

Outsourcing the logistic service results in the reorganization of the existing assets (warehousing and transportation fleet, if any) of the company to get attuned to the working methodology of the service provider. This includes:

• Management of existing assets fully or partly by the service provider
• Deployment of the existing assets on lease to the service provider
• Divesting the existing assets and fully switching over to the usage of logistics infrastructure provided by the service provider

In each of the above cases, a high element of risk is involved. Although outsourcing of services reduces the logistical cost substantially, switching over to another service provider or to the original system, in case of a partnership breakup, will cause bigger losses in terms of time in stabilizing the new system, fall in customer service below the customers’ expectation level during the transition period and erosion of customer base due to an element of unreliability experienced in the service by clients.

2. Degree of Control

The outsourcing firm has to be particular about the degree of control that it has on the activities of service providers to get from them the service desired by the end user. Direct control over the activi­ties of the service provider’s employees is not possible, but the outsourcing firm should ensure the timely availability of information to monitor the activities. It is better to develop a system that enables the firm to have the required information without involvement of the service provider’s employees.

3. Human and Electronic Interface

For organizations in partnership, proper coordination through an intelligent interface is essential to work smoothly to achieve their common goal. As work culture differs in different organization, there is a mismatch in the degree of empowerment of employees, speed and flexibility in making decisions, precision in operations, technologies used and access to confidential information. There are numer­ous examples of failures in other areas such as acquisitions and mergers, because of a mismatch of culture and also due to some of the factors indicated above. Hence, a proper interface between the employees of two organizations is essential to resolve issues that crop up on account of miscommu- nication or misunderstandings. For example, empowering the service provider to make decisions (with proper guidelines) on damaged goods during transit shall reduce delays that would otherwise occur if the decisions were made through joint inspection by the customer and the manufacturer. Such prompt decisions help build the confidence of the customer in the service level of the supplier. However, the job of coordinators from both the organizations is very crucial in formulating the poli­cies and guidelines for efficient coordination between the outsourcing firm and the service provider to ensure smooth operations. The coordinator should be empowered to make on-the-spot decisions to resolve issues before they assume an ugly shape leading to a slew of customer complaints.

Then, a problem may arise out of the mismatch of technologies being used at the outsourcing firm and at the service provider’s end. For example, most third-party service providers of foreign origin in India have expertise in EDI, but unfortunately a majority of Indian firms (baring the MNCs and large business houses) do not have a proper interface to take advantage of the latest EDI technology. The result is a performance that is well below the outsourcing firm’s expectations at the time of the alliance agreement. Similarly, the differentials in technologies used in communications, material handling, storage arrangements and inventory management may create delays, errors and mistakes resulting in the performance that is far below the expected level.

4. Tuning Logistics Services to the Needs of Channel Partners

Logistics service standards need to be quantified according to the requirements of channel mem­bers, who in turn service the end users/consumers. For efficient channel management, logistics acts as a key enabler. In fact, channel and logistics management should go hand in hand for an effective and efficient physical distribution system. Meshing channel and logistics management requires good coordination and an intelligent interface. As pointed out by Rosenbloom (1999), there are four major areas of interface between channel and logistics management:

• Defining logistics standards as required by channel members
• Designing logistic programs as per the standards
• Implementation of programs
• Monitoring of programs

Any logistics program that is beyond the demand of channel members creates a mismatch in the system and invariably increases the cost of operations without any tangible benefits. Marketers or manufacturers should determine the type and level of logistic service required by each of their channel members such as wholesalers, distributors and retailers. For example, ITC, an Indian ciga­rette giant, serves the pan (betel) shop (1,00,000 nos.) twice a day through its wholesalers, consider­ing their daily sales and financial capacity to purchase goods against cash. As against this, the large distributors are served once a week with supplies from the factories by the truckload. The proper implementation of the designed logistic programs as per the standard required will enhance the confidence level of channel members to provide better services to their clients. For such programs to be efficiently implemented through logistics service providers, who are invariably not so conver­sant with the company’s channel culture and channel policy, an intelligent interface for the inte­gration of the service provider with the channel structure will be required. At last the monitoring of these programs through periodic audits becomes necessary for synchronizing the operations to achieve the common goal. A mismatch shall be a case for breaking the partnership.

5. Degree of Outsourcing

A business organization resorts to logistics outsourcing in totality or part depending on the following:

• Existing logistics infrastructure of the company
• Company’s product portfolio
• Management policy for third-party involvement
• The anticipated benefits

The limited involvement of the logistics service provider may be only for regional operation or for transportation or for warehousing, but it will come in the way of identifying the source of mistakes in the event of complaints at the customer end. In such cases, it is better to have an action plan for troubleshooting of anticipated problems. Areas of responsibilities and authority should be clearly demarked at both the outsourcer’s and the service provider’s end. Hence, with a greater degree of involvement of the service provider, he should be given a free hand in complaints reso­lution and curtailment decisions. He should be given access to the company’s knowledge pool, if required, even though the firm feels some information is secret and needs to be closely guarded. If this is not done, it will become a roadblock to customer satisfaction.

6. Legal Aspects

Reverse logistics policy guidelines have to be prepared to sort out the excise and sales tax prob­lems relating to rejected goods at the customer end during warranty period, or goods wrongly dispatched, or return of goods damaged during transit. The responsibility and authority of the persons (from both the organizations) who are required to deal with government authorities in such situations will have to be clearly demarked to avoid falling into a legal “trap.”

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