Transportation Outsourcing Decisions

According to a KPMG survey, almost 77% of survey respondents outsource at least 10% of their transportation functions. In addition, almost 55% of respondents outsource 91% or more of their transportation-related supply chain activities (1).

43% of manufacturers regarded cost to be the number one factor in all of their supply chain management (SCM) outsourcing decisions. Moreover, 77% rated it “most important” or “second most important (2).”

Generally, outsourcing can help companies gain competitive advantage. Companies who outsource gain the ability to focus on their core competencies. A study by ARC Advisory Group explained why companies specifically outsource transportation-related IT services:

• These services fall outside their core competencies.
• They require hard-to-find human expertise and resources.

• Companies want to eliminate assets and free up working capital (3). Their survey found that over 70% of large companies (>$1 billion revenues) prefer to outsource transportation-related IT functions including importing/exporting, warehouse management, transportation execution, transportation planning, and network design (4).

Findings from a KPMG study show that many manufacturers believe “cost” to be the number one factor in an SCM outsourcing decision. It has been found that companies that outsource transportation have been taking advantage of economies of scale within the motor carrier industry. Motor carrier rates have come down considerably since the Interstate Commerce Commission opened up the industry to more competition. Prior to the Motor Carrier Act of 1980, there were only about 18,000 carriers. Today, there are almost 50,000 carriers. According to Dr. C.G. Bereskin, “…in many ways, the motor carrier industry resembles the economic model of a perfectly competitive industry in which competition, market entries and exits, and a generally homogeneous product works together to force rates toward the minimum, long-run average variable cost (5).”

In other words, companies that do not specialize in the transportation function are more likely to be less efficient than the firms that do specialize in transportation. Relative to transportation service providers, these firms have trouble adding value to their supply chain through the possession of assets required for the transportation of goods or the related IT functions. Consequently, many companies are exploring a plethora of transportation related services. They desire the control of in-house transportation and the price of the low cost carrier.

The KPMG study concluded that the number two factor for SCM outsourcing decisions was “flexibility to increase or decrease capacity (6).” In some cases, this also drives a manufacturer’s decision to keep transportation in-house. Manufacturers with their own transportation services have increased control over inventory shipments and customer delivery (7). This, in turn, gives them the ability to reduce costs by increasing productivity (8).

“Quality improvements” were cited in the KPMG study as the third most important factor in an SCM outsourcing decision (9). This is also very important for transportation outsourcing in today’s competitive environment. The customer’s perception of quality can be preserved or enhanced with effective transportation. However, if executed poorly, the transportation function can damage a company’s reputation for making a quality product. A company that makes a quality product but can’t get it to market on-time will miss opportunities. Companies who can get their products to the customer on-time increase the likelihood that the customer will perceive their product as superior to the competitor’s (10).

Rounding out the top five in the KPMG study were “technological capability” and “workforce flexibility,” respectively (11). Both factors are critical in a transportation outsourcing decision. Companies that outsource transportation need to know that there must be excellent coordination between purchasing and transportation. This will give the outsourcers an opportunity to take advantage of low priced carriers and retain control over other logistical aspects of their supply chain. To gain a competitive edge, they will need to keep up with the speed of technology and be ready to adapt to change (12).

References:

(1) KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

(2) KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

(3) The Rise of the 3PL TOTALsupplychain.com.(4) The Rise of the 3PL TOTALsupplychain.com.

(5) Bereskin, C.G.(2001 June). Regulation, Deregulation, and Reregulation in the Surface Transportation Industry The National Academies.

(6) KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

(7) Milligan. (2000 January). Transportation can provide a competitive edge-or take it away. Purchasing.

(8) Brox, J., Fader, C. (2002 August). The set of just-in-time management strategies: an assessment of their impact on plant-level productivity and input-factor substitutability using variable cost function estimates. International Journal of Production Research.

(9) KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

(10) Milligan. (2000 January). Transportation can provide a competitive edge-or a take it away. Purchasing.

(11) KPMG. (1999 September). Global Supply Chain Benchmarking and Best Practices Study: Phase II Stores Online.

(12) Milligan. (2000 January). Transportation can provide a competitive edge-or a take it away. Purchasing.