Freight volume growth forecasts of recent years have proved either too optimistic or too conservative; transport rate increase projections too aggressive or not in touch with reality – forecasting about anything during this slow and uneven economic recovery has been a gamble. But there is one thing you can safely bet on: shippers’ unwavering focus on the need to reduce costs. That requirement has topped our charts in several of our research efforts over the past few years, including our newest one, our Survey of Canadian Third Party Logistics.
Slightly more than half (51%) of survey respondents cited the need to reduce costs as their major supply chain challenge. The need to enhance customer service received the second highest number of nods from our survey respondents but it was a distant second, chosen by only 13% of our sample.
Is outsourcing playing a positive role in addressing cost reduction and other shipper challenges? To find out, Canadian Shipper launched its Survey of Canadian Third-Party Logistics. The nation-wide survey, completed in January and February of this year, involves the participation of buyers of 3PL services across Canada representing companies ranging from small firms earning less than $15 million in annual revenue to corporate giants with annual sales topping $2 billion; companies which spend 10% or less of their supply chain expenditures on outsourcing to companies which dedicate 80% or more of their supply chain budgets to outsourcing.
This ground-breaking project is sponsored by Ryder Canada. Insights from this leading 3PL provider are included at the end of the survey.
So what role is outsourcing playing in helping Canadian supply chain managers meet their challenges? A substantial one, our survey results reveal.
Two thirds of survey respondents reported currently outsourcing some or all logistics functions and plan on continuing to do so. Another 8% had outsourced in the past and are considering doing so again while 7% had no prior outsourcing experience but are considering making the move. The survey results indicate a scenario where 80% of Canadian companies outsourcing at least some of their supply chain functions is quite feasible.
The majority (45%) described their outsourcing strategy being driven by a review of costs between ownership and outsourcing before making decisions. About a third (34%) indicated they prefer to own or control supply chain functions in-house but will sometimes outsource. Only about a fifth (22%) were so totally committed to outsourcing that their strategy was focused on outsourcing non-core business activities wherever possible.
While 21% of respondents were light users of 3PL services with just 10% of their current logistics expenditures directed to outsourcing, 45% reported that more than half of their total logistics expenditures were tied up with outsourcing. More than a fifth (22%) of respondents were heavy users of outsourcing, reporting that between 80% and 100% of their total logistics expenditures are currently directed towards outsourcing.
A small part of our sample (13%) had never outsourced supply chain functions and had no immediate plans to do so. Another 7% had outsourced in the past but had no plans to outsource in the future. For those not using outsourcing services, concerns over the loss of control of their supply chain functions was the main reason given (42%), followed by a belief that costs would not be reduced through outsourcing (31%) and that service levels would be jeopardized (26%). Among the activities outsourced most frequently, transportation stands at the top of the list with 75% of respondents outsourcing outbound transportation and 66% outsourcing inbound transportation. Customs brokerage (65%), Customs clearance (58%) and warehousing (37%) round out the top five. Less than 10% are making use of 3PL services such as product returns and repair; product marking and labeling; customer service; inventory management; and product assembly. The vast majority of survey respondents (81%) are using multiple 3PL providers when outsourcing supply chain activities. The main reason given for using multiple 3PL providers is the ability to serve different geographic areas (41%); followed by the ability to utilize a greater range of expertise (21%) and the ability to gain greater leverage on pricing (19%).
Clearly use of outsourcing is a key supply chain strategy for Canadian shippers. But is it providing results? Thirty percent report their logistics costs have declined as a result. The majority (31%) report logistics costs declines of 10% or less but 36% report cost improvements in the 11-50% range. In addition, 34% report their service levels have improved while 7% report improvement in their logistics asset costs.
Still, there is work to be done on the outsourcing relationship. The survey asked respondents to rate the performance of their top outsourcing provider on a number of key metrics, using a scale of 1 to 5. Although there were many solid B grades, there were no A grades given. Managing and servicing the account (3.77) and being price competitive (3.76) received the best grades, followed by meeting promises on execution and performance (3.69); reacting quickly to changes or problems (3.58) and understanding the intricacies of the customer’s business (3.57). Of considerable importance, considering the value placed on cost reduction, is that being proactive in seeking ways to reduce costs was given the lowest grade: 2.97. Just as important to note is that a follow-up question on top concerns with their outsourcing contracts revealed that “cost creep and price increases once the outsourcing relationship had commenced” was top of mind, mentioned by 29% of the sample.
This is indicative of a dual reality in terms of the state of outsourcing of supply chain activities in the Canadian market. On the one hand, there is wide-ranging reliance on outsourcing to help companies meet their supply chain challenges, cost containment being a chief priority. On the other hand, as companies come to increasingly rely on 3PL services, their expectations can only rise and 3PL providers will have to work hard to ensure they close any gaps between promises made and results delivered. Over the coming years we aim to measure the growth and development of the client-3PL relationship, set benchmarks for performance, and identify new trends and issues.