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12/4/02
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Transportation
Outsourcing Decisions
by
Erik Kruse, SCRC
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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.
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