Look before you leap: Third-party logistics companies may be growing, but they’re not automatically the best solution
In recent years, third-party logistics companies (3PLs) have played a larger role across the supply chain, from warehousing to inventory management and transportation/delivery. Many of these 3PLs have grown and consolidated from their origins as small, specialized companies into giant global operators, serving some of the nation’s largest corporations. Even so, the landscape is still very fragmented: the 50 largest 3PLs in North America comprise only two-thirds of the market.
As they’ve become larger, many 3PLs have invested in highly sophisticated technology and infrastructure that give them an edge over the capabilities that many individual companies can afford to deploy or develop in-house. In pursuit of leaner operations, more and more companies are outsourcing all or some portions of their distribution operations to 3PLs.
However, the decision to insource or outsource your company’s logistics isn’t always an obvious one. My Savills colleagues and I have been focused on the industrial side of commercial real estate for more than two decades, and we have developed a consulting expertise in helping companies determine whether it makes more sense to outsource or insource. First, we ask a few basic questions about capabilities and needs, then we perform detailed analyses if the answer isn’t immediately clear.
In one recent case, we helped a major manufacturer, distributor and retailer identify about $100 million in savings over a 10-year period by bringing third-party fulfillment back in-house. In other cases, we have helped companies find a path through a strategic transition to outsourcing.
The 60-plus Savills brokers and consultants who focus on Industrial Services across North America tell me that clients are discussing the issue of whether to insource or to outsource more often as one of their biggest challenges. That’s especially true whenever there’s a real estate event on the horizon, such as a lease expiration or renewal coming up, or when a 3PL contract is expiring. Often the decision is driven by the launch of a new product line, a merger and acquisition, or a new geography.
So, where does a real estate advisor fit into the decision to insource or outsource logistics? While real estate isn’t usually the largest cost component – it typically trails labor, capital infrastructure, and technology investments – real estate can be one of the most high-risk obligations, given the long-term nature of leases. And it’s often overlooked by business consultants.
As workplace optimization advisors, we begin by developing an understanding of a client’s main business goals and expense/profit drivers. We have a front-row seat working with clients across different industries and who have taken different paths. We don’t have an incentive to steer clients to insource or outsource. We also have clients who are 3PLs. We recognize that real estate isn’t going to be the main driver of the decision to insource or outsource, so we look at the whole scope of cost, service and risk, gathering the data a company needs to support the decision.
Once we help clients identify the critical decision factors that matter in their situation, the decision to insource or outsource typically becomes obvious early on, except in those cases when the scale is fairly balanced. That’s when we develop pro forma financial scenarios – gathering quotes for space, projecting labor costs, transportation costs, etc., for each scenario including gathering proposals from 3PLs. We build out and compare budget for managing processes in-house, versus the costs of hiring a 3PL.
That way, clients can base their decision on concrete information and details, not a general intuition. Then, as tenant advocates, Savills can help with executing real estate solutions with attention to detail and extracting maximum flexibility for the clients.
We have performed these insourcing versus outsourcing analyses for hundreds of public and privately held companies, including some of the biggest companies in the world, as well as start-ups, across all sectors, from food to pharma to nuts and bolts manufacturing. We can tap into the experience and expertise of our Industrial Services specialists.: who invariably have relatable experience to every conceivable scenario. We have the tools and expertise to research new issues, using artificial intelligence tools like those embedded in our Knowledge Cubed data analysis platform, to manage an ever-expanding complexity of details.
Every decision comes down to a company’s particular circumstances and strengths. Our advice to companies facing this decision is to work with an advisor who has an extensive and deep background in logistics and who will take a methodical approach to assessing your individual situation. Work with the advisor to gather the most information about all the key variables, from real estate to transportation and technology systems. Keep an open mind, because the data might surprise you.