A 10-point checklist for warehouse outsourcing
When starting to outsource your warehousing activities, be aware that this can have a direct impact on your customer service. Here are ten points to carefully consider when outsourcing your warehousing and fulfilment processes. This list is based on experiences from customers, logistics service providers and supply chain experts.
1. See outsourcing as an ongoing journey, not an instant cure for all warehousing processes
Think of outsourcing warehousing functions as a journey from solution design and testing, to implementation and start-up. Every stage comes with a learning curve for the third-party logistics provider (3PL) as well as for your company. Some processes are beyond the control span of your logistics provider, but have a fundamental impact on overall operations (e.g. labels on inbound material, your own IT infrastructure and order consolidation processes) and need to be managed in parallel to the outsourcing project.
“Warehouse outsourcing is not a one-off solution, but a journey that needs to be managed.”
2. Involve all stakeholders early, rather than too late
Outsourcing logistics activities is a strategic decision that has a functional and sometimes emotional impact on a wide range of functions in your company. Sometimes, the supply chain manager has done everything right in terms of identifying savings potential, initiating the project, selecting the right supplier, making a convincing business case and designing the optimal logistics solution. Nevertheless, many project proposals get stuck in the boardroom.
“It’s not just a supply chain party. To avoid last-minute vetoes on previously unaddressed objections, get involvement and commitment at each stage in the process from all cross-functional stakeholders.”
3. Ensure sufficient IT testing
A structured, well-thought out IT test plan is vital for successful implementation. Test the interfaces between your own systems and the logistics provider’s warehouse management system and transport management system – extensively. Under time pressure, test plans sometimes do not cover all processes and possible exceptions in particular. Furthermore, these processes are often only tested per individual step and not in a complete end-to-end test.
“The devil is in the details. To reduce go-live errors, test the IT interfaces and systems across the full cycle from order entry to delivery, including picking, packing and shipping.”
4. Ensure consistent data quality
During the proposal phase, your data is shared with the logistics service provider as a basis for a quote. Often, data such as units of measure, weight, dimensions and units sold, turn out to be unreliable in an operational context. For the purpose of the proposal, data is usually modelled and taken out of various source data systems. During implementation, IT problems occur as the data does not have the same quality as presented in the proposal. Operational and costing issues can arise as the inconsistent data generates more exceptions and manual work.
“Avoid garbage in, garbage out. Pay attention to data quality to ensure a reliable quote from your logistics provider and to make the implementation a lot easier.”
5. Include non-documented processes
Over the years, your supply chain organisation has developed knowledge that is not necessarily stored in systems or process documentation. Not capturing customer-specific stacking patterns or non-documented special packaging requirements, for example, can lead to serious service issues during outsourcing implementation.
“If it’s not on paper, that does not mean it doesn’t exist. Take into account all crucial, non-documented process knowledge from employees at all levels of your supply chain.”
6. Don’t let the exception become the rule
Most of your standard operational processes are usually well-described and quantified during the proposal stage. The exceptions to the standard processes, however, are often not included in the proposal and therefore not quoted for. If exceptional processes are identified at all, their frequency is often underestimated in the proposal phase and not managed during go-live. The additional costs of exceptions to the standard process are usually not taken into the logistics budget and can lead to surprises when you receive the first invoice.
“Deal with the exceptions, the earlier the better. During negotiations, agree in detail on the exceptions to the standard process and the frequency of these exceptions. Have a solid issue resolution methodology and escalation procedure during implementation to deal with exceptions at the right level.”
7. Be realistic about the project management skills of the organisation
A logistics outsourcing implementation project is a steep learning curve for a company’s logistics professionals and management. The project-based nature and working methodology of the implementation is often unfamiliar territory for people working in logistics line management. The project manager’s counterparts should be experienced and on the same level in terms of project management methodology.
“Project management is a specialist skill. Create one integrated project team and avoid two teams working in parallel.”
8. Don’t manage a 3PL like an owned warehouse
Managing your logistics process through a 3PL requires different competencies compared to an owned warehouse. You need to think about negotiating the service level agreement, measuring performance on unambiguous data, steering on predefined key performance indicators, implementing continuous improvement or Gainshare initiatives or managing a bonus/malus arrangement. All this is fundamentally different from the typical line management of an owned warehouse.
“Prepare to change. Set clear business objectives and hold periodical meetings between management with the mandate to make structural changes to the service level agreement. Apart from that, let your logistics provider do the work.”
9. Measure performance, but measure effectively
After the implementation phase and a certain learning curve period, most companies are eager to assess the logistics service provider and determine potential problems or improvements. When measuring performance, it is often problematic trying to compare like with like. For example, it might take one hour for operators in your own warehouse to await delivery of the goods and make a manual entry in the system, compared with three hours to make inbound goods available in the system as sellable stock. While the second option takes longer, this needs to be set-off against the multi-user synergies you have with the logistics service provider, which allow for greater efficiencies in the long run. Understand where your company is coming from and create a baseline of relevant KPIs. Together with your logistics provider, you want to steer operations and drive performance up fast.
“Without KPIs, you are blind. Jointly agree on performance measurement with your stakeholders and share successes with them, to build confidence in the operations.”
10. Keep ‘nice to have’ IT improvements outside implementation
The implementation phase will often involve an important IT component where your enterprise resource planning (ERP) system is linked to the warehouse management system of your logistics service provider. When defining the electronic data interfaces (EDI), project participants sometimes seize the opportunity to introduce new, nice-to-have features such as customised label printing, additional messages and scans, extra traceability etc. These requests often lead to so-called ‘scope creep’ which results in more discussions and delays. Remember that your project proposal has been based on the current process and information requirements. Additional features mean extra costs for IT development.
“Don’t have too much of a good thing. Introduce requests for additional IT features or process adjustments based on a solid cost-benefit analysis and make them part of the proposal or design phase rather than during implementation.”
Now ready to start outsourcing your warehousing and supply chain management? Our experts have years of solid experience and will find the right solutions for your needs.
About the authors
Thomas van Vliet is Director of Business Analytics at DSV Solutions. He has been active in the 3PL industry for 20 years in a variety of commercial roles. He is part of the Global Business Development Group of DSV Solutions where he has held various roles including business development and account management for accounts in the industrial sector.
Jack Pool is Managing Director of Districon Management Consultants. He has been active in the supply chain industry for over 22 years in various management and consulting roles. He is currently leading the supply chain practice of Districon which also includes 3PL supplier selection and supplier management.
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