The objectives of outsourcing

We regularly hear that logistics outsourcing continues to grow. A key driver in this respect has been the increasing globalisation of manufacturing, which has created longer and more complex supply chains, and which has increased the risks inherent in these significantly longer supply chains.

There are, of course, a wide variety of reasons why companies are outsourcing their logistics activities. The benefits include a reduction in fixed assets, the ability to concentrate on core competence, leveraging greater supply chain expertise, and gaining economic return through the purchasing power of logistics companies. However, it is critical that both parties fully understand the relationship that is being entered into and the relevant commitment of each party.

There are effectively three levels of outsourcing:

Transactional outsourcing

This is based on individual transactions or possibly specific trade lanes, with no long term contracts and no real integration between the logistics company and the outsourcing company.

Tactical outsourcing

This is a longer term relationship based on a contract and with some integration of systems to facilitate an exchange of information in order to create some visibility within the supply chain.

Strategic outsourcing

This is based on long term relationships with real cooperation and collaboration whereby the logistics company becomes a true partner with open sharing of information focused on achieving the most efficient and effective supply chain.

It is interesting to note that reports suggest that less than 50% of outsourced contracts are renewed. There are a wide variety of reasons why the relationship has not worked, but often it is due to the fact that the preparatory work failed to clearly define the actual situation on entering into the outsourcing arrangement.

Outsourcing because the current supply chain is not working properly is fraught with problems from the start and the logistics company taking on such an outsourcing contract will have many difficulties right from the beginning of the contract. It is therefore imperative to carry out a detailed due diligence before entering into a tactical or strategic outsourcing contract.

Successful outsourcing at the tactical and strategic level requires both parties to enter into a collaborative partnership where information is shared openly, warts and all. The key requirement is to create visibility across the supply chain for both parties in order that issues arising can be highlighted and dealt with. In addition, clear and agreed measurements must be put in place and the focus must be on factual measurement. Too often issues which arise are dealt with on an emotional basis rather than on the specific facts. It is important within this relationship that the outsourcing company retains core skills inhouse to ensure a professional dialogue with the logistics company.

The ultimate objective is to develop a "silent supply chain". This is where the goods are delivered to the customer's expectation in the right quantity and in the right condition with no complaints and no issues arising.

Michael Proffitt is the CEO of Dubai Logistics City (DLC). If you would like to comment on this column, please email This email address is being protected from spam bots, you need Javascript enabled to view it .

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