A New model for „Partnership’ based Outsourcing: The growing emphasis on efficiency and integration between customers (shippers) and third-party outsourcing firms, has given rise to a unique collaborative model of Logistics outsourcing. Principle: “The focus on end-to-end supply chain effectiveness and optimization will lead to lower unit costs, which in turn will lead to lowest total costs”. Instead of an inward-looking focus on ownership of hard assets and „do-myself‟ approach; we need to focus on total supply chain effectiveness and process optimization by utilizing the extended value-proposition of the „logistics partner‟.Rajat Wanchoo Logistic Outsourcing ISB Business Model

Wanchoo, Rajat

English

Research Papers in Economics

White Paper 
 
 
 
 
Logistics Outsourcing: 
Change from a service-provider to a business partner – Leveraging partnership 
models to create sustainable bottomline. 
 
 
 
Team name :           BroadKen 
Institute        :        Indian School of Business (ISB) 
By: 
 
Rajat Wanchoo 
Student (MBA) 
Indian School of Business (ISB) 
Gachibowli, Hyderabad,  
INDIA – 500032. 
Tel: +919666407139 
Email: rajat_wanchoo2010@pgp.isb.edu   
 
 Logistics Outsourcing: 
Change from a service-provider to a business partner – Leveraging partnership models to 
create sustainable bottomline. 
 
 
Introduction 
 
  According,  to  Cap  Gemini  Ernst  &  Young  US  LLC  8th  annual  report,  more  than  78%  North-
American, 79% Western European and 58% of Asia-Pacific respondents indicate that they outsource 
3PL (third party logistics) services. However, more than 70% of all respondents view their 3PL as a 
"resource provider," whereas only 24% of Western Europeans (and 43% North Americans) view them 
as a "resource manager" [1].  
 
The debate then comes down to figuring out whether today‟s  logistic outsourcing industry is just a 
third-party service provider or is it actually moving up the value-chain and transforming itself into a 
successful „business-partner‟. 
 
Logistics outsourcing is an increasingly complex discipline, which 
must be optimized and synchronized as an extended supply chain 
system  within  the  main  business-line.  Contrary  to  the  popular 
belief, the key here is not optimization but „synchronization‟, which 
requires  a  strategically-fit  design,  along  with  deep  logistic 
capabilities and a streamlined infrastructure to offer low cost and 
excellent  service.  If  it  is  not,  then  companies  will  face  excess 
inventories, cost increases, variability in supply and poor customer 
service. 
I N S I D E  T H I S  P A P E R 
1  Industry Structure 
     1.1 Two-sided network effects 
2  Drivers for Logistic Outsourcing 
3  Transition from service providers 
to ‘Business Partners’ 
4  Evolution model 
5  Challenges 
 
 Industry Structure - Logistics Outsourcing  
Depending upon the segmentation of customer needs, the logistic outsourcing industry can divided 
into 4 parts: 
1.  Insourcers: The companies (customers) which have an in-house transportation and warehousing 
service and hence do not outsource their logistics, come under „Insourcers‟ segment. 
2.  Foundational Outsourcers: They focus on outsourcing the „bare-minimum‟ logistic activities – 
transportation, warehousing and freight forwarding only. They are primarily based on cost-of-
service and are fast switchers from one service provider to another. 
3.  Lead Logistic Outsourcers: They demand higher integration and seek wider range of services 
including – packaging, retail preparation, shelf-stacking and removal of data complexities. They 
are more of process oriented than objective driven. 
4.  Full Spectrum Outsourcers: They are widest range of service providers taking care of complete 
planning, control, execution and technology. They obey high process conformance and exuberate 
economies of scale.  
 
 
Figure 1: Segmentation of Logistics outsourcing industry  Two way Network-Effects 
The most important characteristic of the Logistics-outsourcing industry that it carries is the two-
sided-network effects. Any „logistics-outsourcing‟ decision always consist of two parties – Supply 
Side  (outsourcing  solution  provider)  and  Demand  Side  (Client).  The  success  of  the  project  is 
dependent upon the „balance‟ between the Supply-side and the Demand-side.  
 
 
Figure 2: Supply Side and Demand Side for logistics outsourcing industry. 
Only if the supply-side is able to meet and exceed the demand-side‟s expectations, can the deal be 
struck. 
 
 
Drivers for Logistics outsourcing 
With the growth of Logistics outsourcing industry, the criteria of choosing the correct partner for 
outsourcing has also become more complex. There is no Single factor for selection, rather a huge set 
of factors to choose from.   
Figure 3: Key decision factors for outsourcing the logistics [1] 
Deductions [1]: 
From the above data, it becomes clear that the two biggest „drivers‟ in choosing logistics outsourcing 
are - reducing costs and increasing customer satisfaction. This confirms that shippers continue to 
predominantly view 3PLs as tools for reducing costs and improving their basic logistics services. 
On  the  other  hand,  new  factors  like  “improving  supply  chain  management”  and  “need  to 
concentrate on core competencies” have also started to make their way in the list of popular criteria 
for taking up logistic outsourcing.  
 
This  seems  to  suggest  that  the 
opportunity  to  improve  overall  supply 
chain  management  systems  and  allow 
clients  to  concentrate  on  the  non-
logistics  related  aspects  of  their 
business, is slowly catching up with the 
shippers. 
Hence, logistic-outsourcing industry is 
increasingly transforming from just 
being ‘service providers’ to becoming 
‘supply chain partners’. 
 
Figure 4: Service Provider vs. Supply chain partner [1] From Service providers to Business Partners   
Over the past 10 years, we have seen huge changes in the Logistics outsourcing business model.  
Third-Party-Logistics (3PLs) have long led the way in logistics outsourcing using their core business 
- forwarding, trucking and warehousing. However, today this offering has become a commodity-
service and does not provide any competitive advantage.  
Customers,  anxious to  increase their  competitiveness,  want  improved  and  more  integrated  value 
propositions. 
This has led to an altogether new „partnership‟ based business model wherein the outsourcing 
company brings to table - its own perspective, knowledge, experience and technology to undertake a 
full-spectrum of activities from planning, controlling, executing and organizing the whole logistic 
process.  
 
Outsourcing Model  Relationship & Pricing  Key Attributes 
4PL 
(Fourth Party Logistics) 
 
  Partnership Based 
  Strategic Relationship 
  Risk  Sharing  (and  Revenue 
Sharing) 
•  Complete Planning and Control. 
•  Knowledge- and information-based 
•  Process Conformance 
•  Adaptive, flexible, and 
collaborative 
LLP 
(Lead Logistics 
Providers) 
  Contractual 
  Some risk sharing 
•  Project management/contract 
management 
•  Single point of contact 
•  3PL technology integration 
3PL 
(Third Party Logistics) 
  Contractual 
  Fixed and Variable 
•  Enhanced capabilities 
•  Broader service offerings 
Basic Service 
Providers 
  Contractual 
  Transactional only 
•  Focused cost reduction 
•  Niche services 
Figure 5: Emerging business propositions for Logistics outsourcing industry. 
 
I
n
c
rea
si
n
g 
Tren
d
 Table 1: Analytical data trends for Logistic outsourcing industry 
 
 
 
Figure 6: Estimated Logistic Outsourcing 
customer segments (by 2015) [2]. 
 
 
Figure 7: Trends in Logistics outsourcing business model 
 
 
 
A New model for „Partnership’ based Outsourcing   
The growing emphasis on efficiency and integration between customers (shippers) and third-party 
outsourcing firms, has given rise to a unique collaborative model of Logistics outsourcing. 
Principle 
 “The focus on end-to-end supply chain effectiveness and optimization will lead to lower unit costs, 
which in turn will lead to lowest total costs”.  
Instead of an inward-looking focus on ownership of hard assets and „do-myself‟ approach; we need 
to focus on total supply chain effectiveness and process optimization by utilizing the extended value-
proposition of the „logistics partner‟.  
  
 Table 2: Internal boundaries within Logistics outsourcing 
 
 
Previously, manufacturers and retailers used limited outsourcing of “non-core” processes including 
only Transactional and Tactical activities. 
 
But to achieve greater efficiencies, we propose the need for additional supply chain integration and 
creation of “collaborative” models upto as much as Strategic level. Specifically, providers that can 
add multiple service capabilities up the value chain into planning and control activities by leveraging 
the use of operational knowledge, logistics information, supply chain integration and user-provider 
relationships are of critical importance. 
 
 
Challenges   
However, there are many challenges in the use of such Strategic-partnership outsourcing models.  
Adding capabilities at strategic levels requires an altogether different management priorities and 
styles. To collaborate and maintain supply chains that are complex, large, and rapidly changing 
needs a high level of process standardization and conformance.  
 
But,  looking  at  the  profitability  and  competitiveness  such  a system  would  bring,  it  is  worth  to 
investigate and research on creating a robust formulation of „shared‟ supply-chain strategy. References 
 
 [1] Laura Goddard (2005), “Outsourcing Logistics – The latest trends in using 3PL providersThe Future Of Outsourcing”, 
Outsourcing Logistics report, January, 2005. 
[2] IBM Institute for business Value (2005), “Building value in logistics Outsourcing”, IBM Business Consulting Services, 2005. 
 
 

Logistics Outsourcing: Change from a service-provider to a business partner and Leveraging partnership models to create sustainable bottomline

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