Reasons Why Companies Aren’t Outsourcing to 3PLs

Back in November, I conducted a series of think tanks at The Logistics & Supply Chain Forum, organized by Richmond Events, on maximizing the value of 3PL-customer relationships. Forty-three logistics and supply chain executives, from various manufacturing and retail companies, participated in these sessions. ARC also conducted a web survey, with the support of Richmond Events, on the same topic. More than 100 logistics and supply chain executives responded to the survey. Next month, we will publish a report for ARC clients highlighting the key findings from the think tank sessions and the survey results. I also plan to present the findings at our seminar next month on Performance-based Outsourcing (aka “Vested Outsourcing”).

I’m not going to steal the thunder of the report or my presentation here today. Instead, I’m going to focus on an area I didn’t address in the report: the reasons why some companies are not working with third party logistics providers.

Of the 102 survey respondents, 23 percent were currently not working with a 3PL. The chart below shows some of the reasons why.

Reasons Why Companies Are Not Outsourcing to 3PLs (Source: ARC Advisory Group; click to enlarge)

The sample size is not big enough to draw statistically-significant conclusions, but the data is informative nonetheless. The reasons companies aren’t outsourcing their logistics operations to 3PLs boil down into two high-level categories:

  • Companies believe that they can do a better job than 3PLs in terms of cost, quality, and service
  • Companies have not explored the outsourcing option

The latter point accounts for almost half of the “Other” responses, which includes “We have yet to investigate,” “We haven’t reviewed the option,” and “We haven’t spent the time to investigate 3PL benefits.”

This finding represents both an opportunity and a threat to the 3PL industry. In many cases, if companies explore the outsourcing option, and if 3PLs can present them with a compelling and differentiated value proposition, they may decide to outsource. However, the fact that some existing 3PL customers are re-evaluating their outsourcing decision and opting to bring their logistics operations back in-house should be an area of concern for 3PLs. I first wrote about this trend in 2008, and although in-sourcing is still the exception, it isn’t going away either (see “Is Logistics Outsourcing Still a One-Way Street?”).

There’s also the question of what supply chain and logistics processes companies are willing to outsource. I didn’t explore this topic in the think tanks or the survey, but I as I wrote about a few months ago in “Drawing the Line on Logistics Outsourcing,” despite the efforts of logistics service providers to move up the value chain and become strategic partners, customers continue to draw the line between transactional/tactical activities and strategic responsibilities.

What are your thoughts on this whole topic? Post a comment and share your viewpoint. Better yet, join us in Orlando February 9-11 at our PBO seminar. Visit the website for the current agenda and registration information. Space is still available, but the slots are filling fast.

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  1. Adrian;
    This is a very interesting topic and one that has many variables, business segmentation considerations and certainly can be dissected, dialed down into a deeper dive before we can truly identify this as an opportunity or threat.

    For example; we should understand the size of the company’s responding. Smaller sized companies; and let’s use annual sales figures as the bench mark; may be more inclined to use or consider a 3PL due to their finance and accounting strategy to either spend capitol, lease assets or outsource. The financial picture of a company is one consideration, but we must also take into account the company’s ability to attract, hire, retain and develop talent. A smaller sized company is in a better position to share or filter down their corporate strategy with their 3PL due to less levels in the organization then their larger peers. Therefore, the success of a 3PL meeting their customers requirements are greater, because they are more engrained in the business and understand the ultimate goals and growth of the business to build a plan for any changes or variables that would impact the operation.

    We could apply the same thinking to medium sized organizations and begin to dive deeper into the levels between the managers managing the 3PL and the senior leaders making short and long term strategic plans. Just how much of the strategic planning makes it’s way down to the 3PL? Probably still a successful model given the size of the company, talent within the organization and how engrained is the 3PL within the business.

    As a side bar; let’s talk about “how engrained within the organziation” is the 3PL. Who takes responsibility for this critical actionable plan? In an effort to save space and time, it should be a mutual living and actionable plan. If the organziation limits the flow of information, does not include the 3PL in meetings around planning, growth and future business models and focuses solely on just running the 3PL business; then one would become stagnate and not provide true value and possibly fail when the business or market conditions change. Being a “Change Agent” not only ensures continuous process improvement opportunities, but also prepares both parties to be in position to capitalize on any changes in the market; and will not be viewed as being behind in driving the business forward. Once behind, the stress levels build and mount for both parties and ultimately, the 3PL is the “fall guy” in the supply chain. The responsibility for ensuring proper communication and information flow begins and starts with the “The Company”, not the 3PL provider.

    Shifting back into the size of an organization and whether there are opportunties to use 3PL’s versus shifting the responsbility back within the organization provides a lot more debate for those companies that are large in scale. In today’s economy, real estate is cheap, cost of capital is low (if you have it) and there is an abdunance of talent for larger companies to attract and retain to manage the Supply Chain. We could analyze the larger companies into more detail, but we all know the value prop.

    So in summary, my initial thoughts to your article are provided above. We didn’t even discuss market segmentation, retail versus consumer goods, beverage or food etc; or which sections of the supply chain make sense to outsource to a 3PL; that would take another 30 minutes to craft a response. I believe the success of a 3PL greatly depends on the size and levels within an organization, how engrained within the business does the company allow the 3PL, the talent managing the operation and the ability to be a change agent with the partner.

    It’s difficult to analyze if 3PL’s are in a growth stage or threatened, as I believe organizations managing their supply chain have a lot to consider before making this decision and the success rests with both parties.

    Steve Foster
    sfoster6@insight.rr.com