Outsourcing Logistics Services

Times of crisis in particular offer ideal conditions for improving the cost position. “Slaughtering sacred cows” is naturally easier to implement in difficult times than in times when gold bars were practically being “thrown out of the window”. In earlier crises, such as the financial and economic crisis of 2009, it was above all the overhead functions that were significantly slimmed down. In the meantime, some fat has been put back on here, too, and it urgently needs to go on a diet.

A look at a company's core competencies opens up new perspectives and potential here. Not only since the publications of Prahalad and Hamel in the 1990s has the management of core competencies repeatedly been a focus of corporate leadership. According to them, core competencies are the capabilities that enable a company to deliver essential customer value. Conversely, services that cannot be described as core competencies can be sourced externally – provided they are delivered externally and the company can thereby realize advantages. Many services, such as technical and commercial services, are sourced from the external market today. In the process, entire value chains are relocated – often to locations with lower factor costs, for example in Eastern Europe.

Outsourcing Warehouse Logistics Opens Up Major Savings Potential

Warehouse logistics is a major lever with significant potential for outsourcing. Annual savings potential of 20 percent and more can be realized here. Even though some companies have already taken this path successfully, the question remains why this lever is not used more often. One reason is certainly the high visibility within the company. Just as Germany has 80 million national football coaches, everyone in a company feels like a logistics expert. Added to this is the perception of logistics performance: when things go well, nobody notices. When things go badly, everyone complains about logistics.

But how is logistics set up in larger Mittelstand companies? In most cases, warehouse and logistics structures have grown historically. Only as much is invested as ongoing operations require. The degree of innovation is generally low, and logistics is often not exactly “state of the art”.

Those Who Do Not Invest Continuously Quickly Lose Touch

Companies that understand their logistics as a core competency, by contrast, invest in this area and can thus keep pace with competitors and external providers. Companies that keep their logistics alive “just barely” inevitably lose touch sooner or later. Performance – measured, for example, by delivery reliability – falls to a worrying level, while customer complaints rise exponentially. The result is often short-term capacity expansions that rarely improve performance sufficiently but always drive up costs. At some point, the question arises: “How should we go on from here?” An essential starting point is then outsourcing warehouse logistics to a service provider.

A service provider masters the processes, often works with more favorable collective agreements, uses location-based factor cost advantages, has synergies on the purchasing and administrative side, and continuously works on innovations and process improvements.

Pay Attention to These Points During Preparation

But how is a logistics outsourcing project best approached? First, it is important to reach a consensus that logistics is not a core competency for the company. Then a business case must be calculated in which the costs of the company's own structures are compared with the costs of the service provider. At its core, this is a “target costing” exercise for the service provider, in which a comparison is calculated on the basis of productivity and cost assumptions for personnel, space and material costs. The transition logic is also important. Here it is advisable to learn on less complex scopes and – where possible – to switch over successively.

In the next step, the knowledge of the logistics service providers should be used for the process of detailing the concept. Here, a high hurdle has to be overcome – namely, establishing tender readiness. Only what is sufficiently specified and documented can be tendered and evaluated. It is precisely here that there are often deficits in transparency, documentation and traceable performance indicators. If the processes, services and volume structures are not sufficiently transparent, this always opens up opportunities for the service provider to file claims during later service delivery.

Concept Competition and Tender Determine Later Success

Once the services are sufficiently specified, a two-stage award process is recommended. The first stage (concept competition) is about gaining as many conceptual starting points as possible for the future logistics structure and, within a “best practice” review, detailing the outsourcing approach. This concerns, among other things, the location, target capacities, warehouse layout, equipment used and the IT concept. The cost indications from the individual providers then show at a very early stage of the project whether the goals of the business case can be met. Experience shows that it is advisable to start the concept competition with a sufficient number of service providers. Providers that qualify after this pre-qualification are included in the subsequent tender. The compilation of the documents for the concept competition and tender is in itself a key success factor. The more detailed the information and requirements are specified, the better and more meaningful the concept will be. It makes sense to give each service provider the opportunity to present its concept approach.

In the second round of the award process, the actual tender takes place. On the basis of further detailed information and process documentation, the commercial and technical offers are prepared. It is important to develop standardized price data sheets in order to ensure that the offers are comparable from the start. After the offers have been received and evaluated, a site visit to the service providers is advisable in order to get an impression of their capabilities on the basis of reference projects. After the price negotiations, contract negotiations are held with about three to five providers. With the selected service provider, the next step is to draw up the usually complex contracts, followed by implementation.

Depending on the availability of suitable properties, 18 to 24 months should be allowed for the period from idea to implementation. As in any outsourcing project, HR should be involved from the start in order to develop viable solutions with employee representatives and service providers. Fairness in dealing with employees and professional accompanying communication are further important success factors for smooth implementation and relocation.