Tuesday, January 20, 2015

Outsourcing? Well, It’s Not So Easy Anymore
by David P. Carlisle

In 2015, we will be probing deeply into third party logistics (3PL), based on NAPB and EPB steering committee desires. We will be launching two 3PL surveys to the OEMs, conducting two different sessions at the conferences, and looking into the future with the Crystal Ball. Here’s a glimpse at some fundamental issues.


Twenty years ago, or so, was the heyday of parts outsourcing. Originally, an OEM’s most compelling reason for outsourcing was to support entry into new markets – e.g., Chrysler into Europe and Asia in the early 1990s. New markets were quickly eclipsed by new costs. Many who outsourced did so to reduce costs; variable labor cost reductions, headcount reductions, fixed facility cost reductions, technology investment reductions, and transportation cost reductions. If you started with bloated and inefficient warehouse operations, then it was easy to sit at a desk, and make outsourcing pencil. The big decision for OEMs was – “who” to outsource to.


The “outsourcers” (3PLs) were great marketers, but mostly had middling facilities and/or know-how. Greatness wasn’t essential for them to succeed back then; it was more about the razzle-dazzle. Mediocre warehouse operations could outperform the client’s operations and make the critical, original business case work. Once the parts operations had transitioned to the 3PL, it was essential for 3PLs to erase all the ways their clients could make comparisons. The 3PLs did not want to be held up to established standards. Razzle-dazzle.


  A lot has changed since then. First off, OEMs quite often found that life after outsourcing was not better. In a recent survey, only 46% of OEMs felt that costs were “better”; only 23% felt service was better. In fact, 31% felt service was worse. Well, that will wake you up in the morning.


OEMs found that continuous improvement of their own operations, as well as what they could see of the entire industry, was better. This is demonstrated in the 2004-2013 bar charts showing productivity and quality for over 100 OEM parts warehouses (insourced operations and outsourced). Over time, new methods, new technology, and new culture resulted in very significant improvements in productivity and cost. In many cases, the performance resulting from these improvements was better than the cost and productivity of 3PL operations.


Examining benchmark productivity for Europe, the numbers suggest that 3PLs have actually been losing ground in productivity; compare 2009-2014 to 2003-2013. In North America, outsourcing productivity gains seems to be on par with that of insourced operations. But, that’s not good enough. The real issues have to do with the rapidity of evolution, and the “big delta” one should get from outsourcing. OEMs are asking themselves, “Why bother?”


Decade-long 3PL contracts started to feel like the early days of a bad marriage.


Worse yet, the quality of internal operations has vastly improved, leaving 3PLs as high cost … and low quality.


Bottom Line: The razzle-dazzle doesn’t work anymore. Something else has to change. Over the past two decades, the OEMs have made plenty of changes … to such an extent that 3PLs and outsourcing simply do not pencil any more. The change needs to come from the 3PLs, if they are to survive. They need to leapfrog the evolution in practices adopted and experienced by their customers and potential customers. They need to offer “upper first quintile” cost performance and quality. They need to be measured, and measure up. They need to structure contracts that are unambiguous. They need to razzle-dazzle themselves for a change.


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