90% of Fortune 500 companies can’t be wrong.

 

That’s the estimated percentage of America’s largest companies who outsource their logistics and supply chain functions, according to research from Armstrong & Associates, Inc.

$63 billion

As it stands, the 2023 global logistics outsourcing market was valued at around $63 billion dollars. It’s only expected to grow, reaching $79 billion by 2028.

Given all the benefits of logistics outsourcing, its increasing popularity is no surprise. Outsourcing allows an organization to scale fast, increase efficiencies, and access cutting-edge expertise, among many other benefits.

 

In this article, we’ll show you exactly what it means to outsource your logistics—and exactly how it can benefit your business. We’ll also offer you examples so you can begin to imagine what outsourcing might look like within your operation. Finally, we’ll also show you the drawbacks so you can avoid these pitfalls and position your logistics operations for success.

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What Is Logistics Outsourcing?

Logistics outsourcing occurs when an organization chooses to use an external company to handle their logistics and/or supply chain operations. The logistics company is a third party to the transaction, so the companies that handle the outsourcing are often known as 3PLs or 3rd party logistics providers.

What Are the Logistics Services Most Frequently Outsourced?

According to data from Statista, domestic transportation and warehousing are the most commonly outsourced services by those who use 3PL providers. Other commonly outsourced services include customs brokerage, international transportation, and freight forwarding.

 

Most Frequently Outsourced Services by 3PL Users Worldwide

Service Percentage of Respondents Outsourcing
Domestic transportation 67.5%
Warehousing 63.5%
Customs brokerage 46.0%
International transportation 44.5%
Freight forwarding 44.5%

(Source)

 

Many 3PL providers offer a full range of services that go beyond these popular ones. Companies can outsource a number of their logistics and supply chain operations to a 3PL, including:

Warehousing

  • Receiving goods or supplies
  • Short-term or long-term storage

Fulfillment Services
Picking and packing orders

Shipping & Distribution

Arranging shipping to move items to their final destination through a variety of carriers

Additional services, such as:

  • Coordinating reverse logistics, including returns and recycling
  • Instituting an inventory management system to ensure there’s enough stock on hand to fulfill orders and to track items through their lifecycles
  • Delivering transportation management services to uncover new efficiencies and reduce expenses
  • Offering customer support to assist with shipping problems, process returns, and other customer inquiries as needed

What’s an Example of Logistics Outsourcing?

Retail Operations

First, let’s take a look at how a retail business might benefit from outsourcing their logistics. Imagine a company with a distribution center in California and several storefronts in Hawaii.

If you were handling the logistics to keep these stores stocked, you’d have to:

  • Use your own truck or hire an over-the-road carrier to pick up your inventory at your distribution center.
  • Arrange for a steamship line to load that inventory on a boat to Honolulu, the main distribution point for much of the island’s inbound cargo.
  • Use your Oahu fleet or find a trucking company to pick up the shipment at the port in Honolulu, and then deliver it to your warehouse.
  • Ask your team on Oahu to deconsolidate the shipment and separate out each store’s inventory.
  • Assign your truck or hire another trucking company to drop the appropriate inventory at your Oahu stores, and then drop the rest of the shipments at the port for distribution to neighbor islands.

Or, you could outsource the entire operation. Your team could still pull the correct inventory at your distribution center and prepare documentation showing where everything needed to go, and a 3PL could take care of it all from there.

 

Of course, there are also options in between. You could outsource everything from the ocean freight forward. Or, you could just outsource the trucking in Hawaii. It all depends on your current capacities—and your desire to coordinate your own logistics.

 

Let’s take a look at another example.

 

Direct-to-Consumer Operations

Imagine you operate a website that sells widgets directly to your customers. You could:

  • Order widgets from your supplier, and arrange for them to be shipped to you.
  • Have your warehouse team receive, unpack, label, and shelve them in your warehouse.
  • Hire a fulfillment team that picks and packs widgets as orders come in from your online storefront.
  • Arrange for shipping with a small parcel carrier, like the USPS, FedEx, or UPS.
  • Manage all returns in house, including customer service, receiving, and evaluating returns for reuse, recycling, or disposal.

You could also outsource this entire cycle to a 3PL provider. Rather than delivering the widgets to your warehouse, you could have them delivered to your 3PL’s warehouse. Then, they would handle all of the warehousing, storage, picking, packing, shipping, and reverse logistics.

 

Again, as with the above example, there are also in-between solutions. Maybe you choose to keep the reverse logistics in house, but outsource everything else. At the end of the day, it comes down to what’s best for your operation.

 

What Is the Primary Reason for Outsourcing Logistics?

Companies that outsource their logistics do so for a number of reasons. Primary among them include a reluctance to make large investments in their own logistics resources (warehouse, staff, fleet, etc.), a desire to access cutting-edge expertise without hiring in-house staff, and the ability to scale easily as the business grows.

The beauty of outsourcing your logistics is that, no matter your original intention, you’ll still get access to the full range of benefits.

What Are the Benefits of Logistics Outsourcing?

Companies that outsource their logistics and supply chain functions enjoy a number of different benefits, including:

The Ability to Focus on What They Do Best

As legendary management consultant Peter Drucker once said, “Do what you do best, and outsource the rest.”

Outsourcing logistics gives an organization the ability to concentrate on the areas in which they excel. Research and development, for example. If your company has an excellent track record of coming up with products that people love, why spend your staff’s time and energy on logistics? Outsource it, and let the pros handle it.

Immediate Access to Expertise

If you choose your 3PL partner right, you’ll outsource your logistics to a company with cutting-edge expertise in the arena. Rather than having to find, recruit, and hire someone with the logistics knowledge you need, you can access it with a few phone calls—and leverage it as needed.

Additionally, you simply might find it hard to hire for the expertise you’re looking for. What if you bring on a domestic logistics expert, but your company decides to expand internationally? Will your in-house hire have the know-how you need? With the right 3PL, you’ll connect yourself with several different areas of expertise via one phone call.

The Possibility to Leverage an Existing Infrastructure: Warehouse Space, Systems, and More

If you’re just getting started, outsourcing your logistics allows you to use an existing set of assets, rather than investing in your own. For example, you may not need any warehousing space if you choose to use your 3PL provider’s.

Additionally, many 3PLs have made significant investments in the latest technology for tracking, transportation, inventory, and more. Instead of purchasing your own systems, you can leverage theirs to monitor your logistics and analyze your data.

Of course, at the end of the day, you’re still “paying” for those assets when you pay your 3PL’s invoices. However, you’re essentially “sharing” those costs with the 3PL’s other customers. And, in many cases, you’re spending less than if you made those investments on your own.

The Capacity to Scale Quickly, as Needed

If you manage your logistics in house, scaling your operation can get tricky. It may require significant investments—more team members, bigger warehouse space, and additional vehicles, if you run your own fleet.

However, if you’ve chosen to outsource your logistics, you’ll be able to scale without significant capital investments. Additionally, depending on how your provider is set up, they may be able to help you scale fast by adding capacity as needed. This can make it much easier for you to meet rising demand on a dime.

Increased Negotiation Power

The U.S.’s largest businesses—like Amazon, Costco, Home Depot, and Walmart—ship enough freight that they have significant negotiating power with the carriers they work with. Small to mid-sized businesses, though, don’t often have that luxury.

Therein lies another benefit of outsourcing: When you work with a company that does steady freight business, you can benefit from any volume discounts they’ve negotiated. In other words, you may get access to better rates than if you were negotiating on your own.

The Potential to Simplify Your Operations

When you choose to keep your logistics operations in house, you and your staff may find yourself coordinating multiple providers, including trucking companies, steamship lines, air cargo carriers, and more.

In contrast, some 3PLs/logistics partners can be a one-stop shop for all of your needs. They’ll handle all of that coordination for you, which can significantly simplify your in-house operations.

Discover Inefficiencies and Save Money

As we mentioned earlier, outsourcing your logistics and supply chain activities connects you with experts who manage these activities day in and day out.

As a result, they know exactly where to look to uncover new efficiencies and, in turn, create cost savings.

 

For example, a 3PL or a freight forwarder may point out that air freight won’t cost you much more for a particular shipment, but it would shorten your transit time by a few weeks. Or, they may recommend changing the trailer size for your over-the-road goods to reduce your number of deliveries and decrease expenses.

Ultimately, while hiring a company to coordinate your logistics is technically an expense, it’s an activity that can also save you money.

What Are the Disadvantages of Outsourcing Your Logistics?

Although the benefits to outsourcing your logistics are significant, there’s always another side to the story. Outsourcing does have a few drawbacks, including:

Lack of Control

When you’re orchestrating your logistics in house, it’s easy to oversee those activities.

However, if you’re outsourcing to a logistics provider like a 3PL, you don’t have the luxury of simply walking down to the warehouse and observing what’s going on.

Of course, there are plenty of ways to carefully manage an outsourcing partner, including requesting regular reports, analyzing available data, and monitoring customer feedback. However, you’ll have to work a little harder to maintain proper oversight.

Potential Strategic Misalignment

When your internal team is aligned in terms of your company’s mission and vision, they know how to make the right decisions. For example, if you have a customer-first policy, your internal team might be happy to replace a missing shipment as soon as it’s reported, rather than waiting a few days for it to be found.

 

However, if your logistics partner isn’t aware of your company’s priorities, their team might not make the same decisions that your internal team would make. Instead, they may leave that customer waiting while the carrier locates the package.

 

Ultimately, it’s up to you to make sure you and your logistics partners are on the same page with you and your team so their actions line up with your company’s priorities.

Higher Cost for Logistics & Transportation Activities

Outsourcing your logistics is often accompanied by cost savings, thanks to things like creating new efficiencies and getting access to preferential rates with certain carriers.

However, at the end of the day, you may end up paying a bit more to outsource your logistics than if you had an efficient and effective operation in house.

 

There’s a tipping point at which it makes sense to build an in-house logistics team that leverages in-house resources. At that juncture, it might actually be cheaper to make those capital investments in things like warehouse space and delivery trucks.

 

If you’re already outsourcing, stay on top of those expenses and run a cost-benefit analysis on the alternative, in-house scenario. By keeping a close eye on the math, you’ll know when it’s time to make a move.

 

Making the Right Choice for Your Organization

 

As you’ve seen, outsourcing your logistics and/or supply chain operations comes with plenty of upsides. Ultimately, you’ll have to make your own decision about whether to outsource—and how much to outsource. By understanding the potential benefits as well as the drawbacks, you’ll have the foundation you need to make the right choice for your organization.

 

Looking for a long-term logistics partner? We’ve been helping our customers uncover new efficiencies and streamline their operations since 1991, and we’d be happy to help you! Schedule a complimentary consultation with one of our supply chain experts today.

 

 

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