Chris Good: Don’t Try to Improve Weak Areas; Outsource Them – CFO.com
Chris Good wrote an article for CFO.com titled “Don’t Try to Improve Weak Areas; Outsource Them.”
Many companies are ill-advised to run their own warehouses and logistics. Hiring a 3PL provider may be a great option.
When I was a young Navy officer I was taught two guiding principles about leadership: (1) leave things better than you found them; and (2) incorporate best practices of managers you encounter during your career, adapting them to your own style to become a stronger leader.
Both were about not only making things better but also, in accordance with traditional management teachings, eliminating weaknesses.
In recent years there’s been a slowdown in the long-accepted practice of concentrating on the elimination of performance weaknesses. Today there’s greater focus on coaching that emphasizes and further develops leaders’ and organizations’ strengths.
But some companies still spend years doing things they’re not good at, following the old-school approach of trying to overcome the weaknesses. What they should do instead is seriously consider what their core competencies are, excel at them, and enlist assistance in areas that are not strengths.
An example that applies to many companies involves warehousing and logistics. The massive explosion in that field has led to new warehouses popping up all around major airports, ports, and highway intersections.
Additionally, the massive influence internet retailers have had on consumers, who now expect their packages to arrive quickly with up-to-date tracking, has raised the bar for corporate warehousing and logistics performance. And almost all manufacturing companies procure a large portion of the materials needed to create their products.
All of those dynamics result in more and more companies being involved in warehousing and distribution to some degree, even when it isn’t a strength.
Companies experiencing operational shortcomings must decide whether they can realistically eliminate internal weaknesses or should look to outside experts for improvement. Making this decision is in keeping with management’s main role: to overcome difficult situations and ensure the company’s survival in an ever-changing world of new competitors, products, and technology.
When faced with weaknesses, there are three main approaches to mitigation:
- Develop measurements, track them, and take actions to eliminate the weaknesses.
- Bring in new talent with the right experience to overcome the weaknesses.
- Bring in new technology to improve performance.
In the world of warehousing and logistics, any of these can often be best achieved by outsourcing to a 3PL provider.
A third-party logistics (3PL) provider can take over a portion or all of a company’s distribution, warehousing, and fulfillment needs.
A recent study placed North American 3PL revenue at $220 billion, with a compound annual growth rate of 4.6%. Only the Asia-Pacific region is growing faster. Cleary, the 3PL approach is successful, well, received, and growing.
Before making a judgment whether to hire a 3PL provider, note that it doesn’t have to completely take over inbound shipping, warehousing, and distribution. A company can carve out the pieces that best match its needs. Perhaps it serves as the company’s outbound fleet only.
Here are some of the advantages of utilizing 3PLs:
- They operate numerous warehouses and have standard operating procedures and KPIs built upon decades of operations.
- If you are planning or already preparing for a new warehouse or distribution network, they have planned and implemented numerous new operations and have the past experience to minimize mistakes.
- They have sources for all warehousing and distribution equipment needed for operations and, due to their level of spend, they can likely procure it at a lower cost and in a shorter time frame than your company could.
- They have IT solutions that your company may not have implemented that can deliver quickly improved performance.
- They can procure the equipment for your operations, which can be amortized over time as part of their fee structure. It’s not free money, but it’s an option.
Among the potential hurdles that must be overcome to successfully implement a 3PL:
- Some current management and workers will most likely be displaced, potentially impacting morale beyond the function being outsourced.
- Identifying the right 3PL provider can be challenging.
- So can negotiating a fair and proper contract.
Each of these issues can be managed if given the proper focus. The most important thing to remember is to have one person in charge of the change. If you can’t point to a single person in charge, then no one is in charge.
Potential displacement of employees is something every organization faces with every change it makes. Here, pain points can be overcome with communication and extensive planning. Knowing who you want to keep based on their strengths, and ensuring they are informed at the proper time, will minimize the loss of talent you want to retain.
Locating the proper 3PL provider requires a well-crafted request for information (RFI), combined with a follow-on request for proposal (RFP).
Here are some final thoughts on the most important factors when teaming up with a 3PL:
- Find a provider with expertise in your space. They don’t all have the same level of experience in all industries and with all business models.
- Forge a strong contract that contains performance metrics, which will provide operational benchmarks for the improved performance you are seeking with a 3PL provider.
- If possible, co-locate in an existing 3PL warehouse to share overhead and lower costs.
Big benefits can be achieved with big change, but sometimes the change cannot happen from within. A 3PL provider can serve as a mighty resource to positively affect the operational improvements and customer service necessary to survive and thrive in an increasingly challenging marketplace.
Chris Good is managing director of Conway MacKenzie, a division of business advisory firm Riveron Consulting that offers a specialized suite of operational and strategic services for solving complex business challenges.