In-house or outsource your logistics operations

Roger OakdenLogistics ManagementLeave a Comment

In-house solution for delivery.

Amazon is reported to be trialling an in-house solution for deliveries of items direct to consumers in America and the UK – should we be surprised?
The move is reported due to major logistics service providers (LSPs) not being able to consistently meet the criteria for customer service set by Amazon.
Also Amazon has stated that it is growing faster than its major LSPs, therefore it cannot continue to rely on traditional LSPs as they will “limit growth, increase costs and impede innovation in delivery capabilities”.

Is this a reasonable approach? If you compare costs of warehouses and trucks in the same location, between a shipper and a 3PL, then many have to be similar – land, buildings and equipment. But, to remain in business a LSP must add on its profit margin, therefore a well managed in-house solution should cost less than outsourcing.

In Amazon’s case they have extensive experience in owning and operating distribution centres and have purchased a company designing and producing automated guided vehicles and robots for use in warehouses.

Extending their operations to cross dock facilities in smaller regional areas where bulk shipments are broken into consumer specific orders is not such a big step. The final delivery to consumers can be by Amazon vehicles and when demand exceeds this capacity, local delivery companies can be contracted on a job basis.

Outsourcing decision is more than costs

Costs should not be the main reason to outsource a function. Outsourcing must be a strategic, not operational, decision that considers the value to the business of the four levels of activity in logistics:

  1. Strategic: such as the supply network design
  2. Planning: procurement, inventory, production and distribution
  3. Value add: packaging and some make to order (MTO) production activities
  4. Execution: such as storage and transport

The more that an activity contains supply chain knowledge that enables your business to exploit opportunities or neutralise potential threats then these core activities should not be outsourced.

Likewise, where there is the capability to develop strategic elements of your business, they should also not be outsourced.

For those activities considered for outsourcing, analyse such aspects as:

  • Improved asset utilisation by the LSP (hopefully translated into lower fees), as it is in their interest to maximise return on investment. Conversely, a principal company may not be able to obtain equal levels of utilisation, however well managed
  • Increased flexibility within a LSP to adjust capacity and so meet variations in demand by your customers
  • Transferring some of the risks associated with the function to the LSP, including employment, compliance OH&S and industrial disputes
  • Like Amazon, you may identify functions that would often be a candidate for outsourcing that can be more effectively managed internally.
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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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