Survey offers insight to outsourced DC operations

The top three reasons for outsourcing distribution center (DC) operations include the need to add peak season or overflow capacity, gain flexibility to manage growth or changing requirements, and improve customer service, according to a recent Supply Chain Consortium survey. But of the 100 companies surveyed, only one-third actually outsource a portion of their DC functions—and the majority of those aren't very happy. Dissatisfaction may spring from the type of contract they sign with their third-party logistics (3PL) providers.

"Most go with a negotiated rate based on fixed metrics when they first start. It's a protective risk-avoidance measure," says Steve Simonson, a principal with Raleigh, N.C.-based supply chain consulting firm Tompkins Associates, and author of the report. "They want to know what they'll pay. But in terms of establishing a good relationship with your 3PLs, we recommend a cost-plus contract that allows them to operate more freely to do what's needed, and provide the level of satisfaction the customer wants. With a negotiated rate, the metrics might be wrong, causing 3PLs to lose money immediately—and souring the relationship on both sides."