Outsorced vs Internal Logistics

The objective of the set of activities that involve logistics is, in the most efficient and economical manner possible, with the minimum shrinkage and excess, transfer products from the area where they are manufactured to the local where will be consumed. When we think about logistics as a chain, retail is an important part of it.

In retail, the main objectives of logistics are: inventory optimization; shrinkage reduction; out of stock avoidance and cost control.

The existing models in use are:

1.    Direct delivery (manufacturer to the store);
2.    Cross-Docking (manufacturer to a Cross Docking unit/point and, then, to the store): order is placed by the store or consolidated and placed by the Cross Docking unit. A version of this model is the use of a preferential transport company that collects the products from the manufacturer, store and consolidate the deliveries).
3.    Distribution Center (manufacturer to the DC, store places the order to the DC);
4.    Direct Delivery to the End consumer (manufacturer or DC delivers directly to the store`s customer).

Which are the impacts in adopting either Cross Docking or Distribution Center?

(1)    Cross Docking model eliminates (bypasses) minimum orders;
(2)    Distribution Center model changes ordering (store places order to DC);
(3)    Both models increase frequency and reduce the number of deliveries;
(4)    Both models transform the area from a cost center to a profit center  generator (as long as income collected from suppliers are higher than the cost of the activities);
(5)    Both models demand administrative activities (necessary to create a support area);

As to the organization, the choices involve Outsourcing or Internalization:

The outsourced model demands lower investment and take advantage of the specialization (of the third party). In this model the organization retains only the areas associated to intelligence and evaluation while the physical activities (transport-storage-picking) are outsourced.
In the internalized model there is a need of investment; of developing competencies internally; and of controlling as all activities involving management /intelligence as well as physical will be bore by the organization.

In my own experience, we have always opted for the outsourced solution. Important, however, when opting for this solution, observe:

1)    The selected partner, its experience, installations and financial capacity;
2)    The contract in which is defined responsibilities, conditions, business rules, KPIs and service level agreements; and
3)    The warehouse system (WMS) that must be integrated to the hiring company, including invoicing and pricing.

In the most recent years, a selective strategy is observed: small and medium sized companies tend to outsourcing, while large companies tend to take responsibility also over storage and transportation.

In fact, there is a demand and pressure for more efficiency from the part of transport companies and “only in name” logistics operators that did not have developed the necessary competencies.

The logistic operators fail in well serve their customers for the following reasons:

(1)    Lack of clarity in regard to responsibilities and to the expectations of the customer. Logistic Operators tend to over promise in order to get the contract;
(2)    The project takeover is not well planned nor organized;
(3)    Logistic operators tend to assume the customers’ problems (“special” demands, goods returns not negotiated with the suppliers);
(4)    Lack of training. When demand increases, personnel attrition also increases;
(5)    The managerial level is not very sophisticated; and
(6)    Logistic operators tend to be more responsive than proactive (including in the design of new services).


The main performance indicators in use are divided into three categories: Cost, Efficiency, and Quality. Some examples:

i.    Cost: total cost per ton transported;
ii.    Efficiency: tonnage and value transported (received and expedited), stock days, lead-time replenishment;
iii.    Quality: OTIF (On time in full), shrinkage (stock taking accuracy).

In the end, there is not a sole right answer but instead the need to conduct a self-assessment considering available resources and competencies and, then, based on that, deciding!

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