To outsource or not to outsource?

For a warehousing professional, that question is every bit as profound as Hamlet's contemplation of life, according to Clifford F. Lynch, principal, C.F. Lynch & Associates (901-415-6800, www.cflynch.com) and author of 'Logistics Outsourcing – A Management Guide.'

That's because done well, outsourcing can have a profound impact on a company's bottom line. Done poorly, and it can turn a hero into a zero.

That's why there are a number of issues every company should consider before making the decision to outsource or not to outsource.

The first is whether warehousing is or should be a core competency. 'If you're exceptionally good at distribution, like an Amazon.com, you should stick to it,' Lynch advises, especially if you have critical product or customer service requirements.

The reason is financial: while logistics service providers argue that they can lower distribution costs, that's often not the case, especially for companies already running an efficient shop. 'There really is no evidence that a 3PL (third-party logistics provider) can do it cheaper, especially if you're in the same market competing for the same labor and warehouse space,' says Lynch.

Instead, companies should consider whether it makes sense to outsource specific segments of the supply chain, like crossdocking, or operations outside a company's usual geographic boundaries. 'If you're moving into a new market, outsourcing gives you flexibility because the contracts are relatively short term,' says Lynch.

If the competition is outsourcing, there may be a competitive advantage for you to outsource as well, says Lynch. Using a 3PL with experience and customers in your vertical space may allow you to leverage their experience and even your competitors' business. 'There may be opportunities to consolidate like shipments to get truckloads out of less than truckloads,' says Lynch. 'There are a lot of synergies that can't be done internally.'

Could your own employees be more productive if you stick to your core competency? Logistics is a low margin business. A company can often get more bang for its buck by sticking to its knitting. That may not save much on operations, but the company may make more money—and have more productive workers—by investing those funds in an area that delivers a better return.

Is everyone on board? That's an important question, because without a mandate from top management, outsourcing will fail. You should also evaluate whether your people have the skills to manage an outsourced relationship, which is very different from managing a warehouse. 'Good warehouse managers are not necessarily good at managing 3PL relationships,' says Lynch. 'If you don't have the talent, you're going to have to hire it.'

The final question a company should ask is whether it is outsourcing for the right reasons. 'Too often, companies outsource to get rid of a warehousing problem,' Lynch says. That rarely works because the problem is usually caused by an unidentified flaw in the underlying business processes that needs to be fixed. 'If you outsource to the right company, they may be able to help you identify the problem and they will have some ideas on how to solve it,' says Lynch. 'But you're going to have to participate in that solution. You can't just forget about the warehouse.'

Click on the icon to read about outsourcing at Hershey Foods. (Sweet success - June 2003)