Taking a set of work, tasks, responsibilities, and functions and transferring them to an outside service provider is called outsourcing. A service provider brings a different perspective, knowledge, experience, and technology to the existing function and can work with the shipper to re-engineer processes. Shippers can realize good results by transferring part of the business to a specialized company. Organizations free up money and human resources to invest in their core business. Specialized service providers use best practices and up-to-date technology to identify issues and fix them, provide access to new markets, and scale up or down the capacity fast. They gather data and analyze these to gain insights for improvements. With outsourcing, the focus is on leveraging the relationship by exploiting the capabilities of both partners. They work together, provide visibility in their processes, and discuss improvement opportunities to complement each other’s core competencies to provide more value to the customer. In transportation, most business is outsourced to a so-called 3PL or 4PL company, where “PL” stands for “Party Logistics.”
The commonly used PL types are:
• 1PL: First Party Logistics. The shipper has not outsourced its logis- tics activities, transportation, and/or warehousing to a third party and has its own logistics management department for all logistics activities. The advantages of being an asset-based shipper can be
the great control and the related flexibility to change priority fast and adapt to special customer requirements easier. Being the owner of the goods can bring also a more customer-focused approach.
A steady and optimized transportation network can be also cheaper than outsourcing.
• 2PL: Second Party Logistics. The shipper has outsourced the day-to-day asset-based operational logistics activities to a third party, but the man- agement activities are still executed by its own logistics department.
The shipper-service provider relationship focuses on cost control. This way of working can free up resources to focus on improving the pur- chasing processes, reports, performances, and other key transportation management processes.
• 3PL: Third Party Logistics. The shipper has outsourced the logistics activities, but also other activities such as inventory management and customs clearance, to a third-party service provider, which can hire other third parties for specific activities. These subcontractors are used for jobs for which the service provider does not have the capabilities. The 3PL acts as an intermediary between the shipper and these subcontractors and measures, analyses, and improves their performances. The logistics management activities are still executed by the shipper’s logistics department. The shipper-service provider relationship focuses on installing a long-term cooperative partnership.
• 4PL: Fourth Party Logistics. The shipper has outsourced the supply chain activities, such as sourcing, manufacturing, and distribution of products to the market, and their management to a non-asset third party. These lead logistics providers are specialized in logistics, trans- portation, and supply chain management. The third party is neutral and manages logistics processes, regardless of what carriers are used, including existing 3PLs that the carrier already has. Preferred 4PL companies are non-asset-based to prevent conflicts of interest. The shipper-service provider relationship focuses on installing a long- term cooperative partnership covering all the supply chain topics and share risks and benefits.
• 5PL: Fifth Party Logistics. These are 4PL companies broadening the scope further to e-commerce. They provide innovative logistics solu- tions and concepts to increase sales and can do order desk-types of activities.
Another way to categorize carriers is by tiers (tier management):
• Tier 1: actual carrier is the owner of the contracts with its sub-contractors.
• Tier 2: in case tier 1 carriers cannot provide the service, tier 2 carriers are used. The tier 1 carriers manage the tier 2 carriers on behalf of the shipper. A tier 2 carrier is a carrier whose contractual ownership remains with the shipper, but who agrees to be managed by the tier 1 carrier to provide the services.
• Tier 3: carriers contracted and managed by the shipper.
In such a relationship with a logistics provider, a set of KPIs needs to be agreed upon, measured, published, reviewed, and used as a starting point for improvement actions. These activities are taken care of by the CT, which is a central department with the tools and processes to capture transportation end-to-end data and visibility enabling them to respond and act on changing environment. They manage and cooperate with the multi-tier partners to improve efficiency. Service providers are requested to share shipment information with the CT. Carrier performance man- agement is transferred to the CT, which is also responsible for shipment delays. Common KPIs used in such a business relationship are:
• Delivery performance: a shipment is on time when the actual trans- portation lead-times are met. This performance (%) is defined as the number of shipments delivered on time divided by the total number of shipments. The starting position is to measure this performance on carrier level; however, it is recommended to dig a bit deeper to find issues on lane, modality, service, and pick-up level. Do not allow carri- ers to hide themselves behind their performance on total level, as this mostly meets the target. It is possible that a carrier is under performing on country, state, region, city, customer, lane, or any other level, which requires improvement actions. To prevent any resistance from the car- riers, it is preferred to include in the contract terms and conditions on what levels the performance will be measured, and what root cause analyses and countermeasures are expected. A customer who is expe- riencing delivery problems will not accept the feedback that the total carriers’ performance is above target.
• Cost performance: this KPI is measured as the % of deviation from the budget. At the beginning of each financial year, a transportation
budget is created based on historical spend and planned events. A carrier is expected to operate within this budget by continuously monitoring the cost development and set out improvement actions to come back on track when the actual cost trend does not develop in the right direction. Cost trends can be measured by spend per car- rier, mode, service level, volume, and destination mix.
• Quality performance: the number of shipments delivered without any damage, under- or over-delivery, correct delivery location, and documentation.
Performance targets can differ per business, country, service level, carrier, and more criteria, but these are the commonly used carrier targets:
• Green: >98%. Performance is under control, but try to reach the entitlement performance.
• Yellow: 98%–95%. Performance is below target. Immediate root cause analyses and improvement actions are needed to meet the 98%
target. Actions can be a combination of temporary mitigation and structural process improvements.
• Red: <95%. Performance is out of control. Set up a dedicated kaizen event and report out on a daily basis the progress.
From the transportation management point of view, a perfect delivery is a shipment that is delivered on time, without errors (complete), undam- aged, and with the right documentation. From the customer point of view, the perfect delivery definition is wider as transportation is only one part where things can go wrong. Potential customer-facing mistakes in the ordering and warehouse processing activities can be wrong number of products, non-visual inside damage, and incorrect goods invoice. The per- fect delivery measurement is introduced to prevent sub-optimization and strive for end-to-end supply chain improvement. This perfect delivery KPI is defined as the number of orders that are delivered on time, in full, with- out damage, and with the complete and correct documentation, as per- centage of the total number of orders. Striving for the perfect performance is the only way to maintain the continuous improvement culture and get as close as possible to the perfect situation. The carrier should therefore be stimulated to come up on daily basis with improvement ideas to make the next step towards this perfect situation. The number of improvement ideas can measure this activity, but as these are not implemented yet, it is better
to quantify and measure only the realized savings, performance improve- ments, customer satisfaction increases, and lead-time reductions. Many companies hesitate to outsource, as they believe they can manage it them- selves. Especially when results are needed urgently, and there is no internal expertise to make things happen, outsourcing can be a good option as it can take years of time and a significant amount of money to hire and train own people before they can add value to the company. By outsourcing the function to a partner, a company gets immediate access to sophisticated IT systems and expert knowledge enabling the shipper to move fast. An outsourced party offers a rate for its service upon successful delivery of work within the agreed time, which makes the shipper agile due to this variable cost structure. Outsourcing brings also risks with it. The shipper wants to reduce costs, while the outsourced party wants to increase sales.
The outsourcing party has more business experience than the outsourced party does. Not being the owner of the goods can bring less ownership leading to less sense of urgency and delayed responsiveness. Outsourced parties stick to the agreed scope, way of working, and work instructions, which can lead to inflexibility. The outsourcing party is frequently con- sulted in case of non-standard situations. This can hamper the speed and productivity of helping customers. Language barriers can make commu- nication difficult. All these elements to manage outsourced parties are hidden wastes.