LOGISTICS OUTSOURCING IN BRAZIL

This article aims to present a small overview of logistics outsourcing in Brazil. The results were extracted from the survey “Panorama Outsourcing Logistics in Brazil 2009”, carried out in 2008 with 118 companies from different sectors of the group of the largest in revenue in the country.

In recent years, around the world, many companies have restructured to conduct their logistics operations more efficiently, and one of the alternatives found was outsourcing. Today, it can be said that the outsourcing of logistics activities in Brazil is a reality. Several industries have chosen to outsource their logistics activities, delivering to logistics service providers (PSLs) from operational activities to the most strategic and management ones.

In this scenario, it did not take long for more specialized PSLs to appear in Brazil in search of shippers interested in outsourcing their activities. In addition, many international PSLs came to the country looking for opportunities. This movement stimulated the development of national logistics operators, providing Brazilian logistics with greater professionalism and improvements in efficiency, operation and management.

With the domestic market booming in recent years, the average revenue per PSL increased considerably, rising from R$32 million in 2000 to R$203 million in 2007. During this period, therefore, an annual growth of almost 30% was achieved. . This indicator can be explained both by some mergers and acquisitions, as well as by the growth of the economy, which made the volume of outsourced services increase naturally. Furthermore, over time, several PSLs were able to interpret the needs of their customers, increasing their portfolio and, consequently, their revenues.

The potential Brazilian market can also be seen through the total expenditure on logistics by large companies, in which logistics costs represent an average of 9% of revenue.

In Brazil, annually, approximately R$ 192 billion, or 11,7% of the national GDP, are spent on logistics. Of this amount, approximately 63% is used to pay third parties, that is, to providers of logistics services. This level is similar to the European (65%) and Asian (62%) outsourcing index, and higher than the North American (47%).

REASONS TO OUTSOURCE

The high share of logistical costs in billing has led many companies to seek opportunities to reduce costs by outsourcing services in this area. In fact, when asked about the main reasons that led them to outsource, 81% of companies stated that "cost reduction" would be the priority reason.

In this regard, Brazil follows the trend of both the US and Europe. In these regions, companies also seek to reduce logistical costs by outsourcing their activities. In China, the main driver of outsourcing would be “improving the level of customer service”. For the Chinese, “cost reduction” only comes in eighth place, which is understandable given the low costs involved in their operations.

Many shippers believe that, by handing over their logistics activities to LSPs, these companies, because they are focused on logistics, could, with greater skill and knowledge, improve their operations and, with that, generate some savings. For example, by outsourcing the distribution activity, shippers hope that their LSPs, by grouping their cargo with other companies, will be able to reduce the cost per ton transported. In fact, this can happen, especially when the operation without the PSL involved is idle. In other cases, such as warehousing outsourcing, companies hope to transform what was previously a fixed cost into a variable cost and, in this way, spend more only when necessary, in periods of high demand or high inventory.

With 73% of citations, another reason often mentioned by companies for outsourcing logistics activities was “focusing on the core business”. Many industries believe that they should focus exclusively on their core business, thus outsourcing everything else, including logistics.

Comparing the research carried out in 2003 with the one in 2008, a reason that became more important among the industries was “bringing the company greater efficiency in the execution of operational activities”. For shippers, the perception grew that PSLs must be efficient in what they set out to do. In 2003, 44% of companies cited this as a top driver for outsourcing. In 2008, 73% of shippers mentioned this item.

“Expanding markets” was the reason least cited by shippers as relevant when deciding whether to outsource or not. Companies still do not see the fact of having a PSL with a strong market presence as an opportunity.

It is also worth mentioning the low expectations of companies regarding the reason “to bring more know-how to generate new logistics solutions”. Just over half of the survey participants cited this reason as one of the main ones. However, when comparing the result of the research carried out in 2003 with that of 2008, it is verified that this item also grew considerably, going from 35% to 53% of citations. This proves that the national market for logistics services has matured in recent years. Practically half of the contracting companies trust third parties with more complex activities.

The reasons to outsource, however, are different for each sector of the economy. For companies in the chemical and petrochemical segment, for example, the most important thing would be “cost reduction”. Among companies in the beverage, pulp and paper, and construction and decoration material sectors, as important as reducing costs would also be “increasing the levels of logistical service”. The reason “reduction in investment in assets” is relevant for several sectors, mainly those where the vehicle used is more specific and, therefore, more expensive.

OUTSOURCED ACTIVITIES

Outsourced activities can be classified into three groups: basic, intermediate and sophisticated.

Basic activities are those with the highest outsourcing rate in the country. These activities require greater operational effort, which is perhaps why they are the most delegated to third parties. They are transport (distribution, transfer and supply) and customs clearance. All have outsourcing rates greater than 85%. It is worth mentioning that, as many PSLs operating in the Brazilian market are considered transporters, it is natural, therefore, that the transport activity is among the most outsourced. Another relevant factor for the greater outsourcing of transport in Brazil is the huge contingent of self-employed truck drivers in practice. However, when analyzing the potential for growth of basic activities, it appears that these have the lowest rates of intention to increase outsourcing for the next three years.

Among the activities classified as intermediary are: reverse logistics, storage, intermodal transport management, milk run, cross-docking and freight audit. On average, the outsourcing rate for this group is 50%.

Activities classified as sophisticated include those that require a higher level of management within companies, usually involving greater complexity. An example is the integrated management of logistics operations. The outsourcing rate for this group of activities is 38%. Although they are the least outsourced, sophisticated activities are the ones with the greatest potential for growth in the coming years.

This outsourcing profile of the Brazilian market, that is, basic activities are outsourced more and sophisticated activities are less outsourced, can be explained both due to the fear of many companies in handing over the management of the logistics operation to LSPs, as well as the experience of the market, which many sometimes does not have the adequate expertise to absorb more complex tasks.

When analyzing the outsourcing of the three activities that characterize a logistics operator, which are transport, storage and inventory management, it is noticed that only 9% of the companies claim to outsource all of them simultaneously. Most companies do not use their PSLs as integrated logistics managers, but as simple service providers.

An activity with a high degree of outsourcing, despite being classified as sophisticated, is “risk management in transport”. Almost 80% of those surveyed state that they outsource this activity. In part, this can be explained by the high rates of theft on Brazilian roads, forcing many industries to hire this service.

The activity “inventory management is the least outsourced”. This reflects the fear of many industries in sharing strategic information with their partners.

Comparing outsourced activities in Brazil with other countries, there are similarities and differences. For example, both here and in North America, Europe and Asia-Pacific, the transport activity is the most outsourced. Customs clearance in Brazil has a much higher than average outsourcing rate. One of the reasons that explain this characteristic of the national market is the numerous legislations and exceptions in force for import and export operations. Meanwhile, storage and kitting activities in the country are lower than the international average.

Between 2003 and 2008, the activities in which outsourcing increased the most were milk run, project development and logistics solutions, and multimodal transport management. The activity of developing projects and logistical solutions, for example, went from 29% of outsourcing in 2003 to 48% in 2008. Although this activity is not the most outsourced, this variation in the level of outsourcing points to a greater maturity of the market and combines with the increased expectations of companies for innovative logistics solutions by their partners.

When evaluating the sectors of the economy separately, it can be seen that the behavior of outsourced activities varies according to the sector. Among basic activities, companies in the mechanics sector are the ones with the lowest outsourcing rates. Transfer transport, for example, is not outsourced by half of the companies surveyed in this sector. The beverages, electronics and plastics and rubber segments have almost all of their basic activities outsourced.

Some activities are more common in certain sectors, such as reverse logistics, for example, which is completely outsourced in the beverage sector. It is worth remembering that, in this segment, many packages go back to the production line, which is, therefore, a consolidated and highly representative activity.

As for storage, the electronics and paper and cellulose sectors have the highest outsourcing rates, both with 83%. On the other hand, the construction material and decoration segment is the one that outsources this activity the least. Of the surveyed companies in this sector, 40% stated that they use PSLs for storage.

Among the activities with the greatest potential for growth in the coming years are the development of projects and logistics and storage solutions.

Incidentally, it is in the first activity that the greatest gaps in perception and opinion between shippers and LSPs are found. Many companies say they do not outsource this activity because they still do not trust the technical capacity of their service providers; others feel that strategic projects cannot be exposed to their PSLs. On the side of logistics operators, a constant complaint is that some shippers, after carrying out an RFP (Request for Proposal), end up implementing their projects with other PSLs. Another point addressed by the PSLs is that, in many selection processes, shipping companies already clearly determine in their proposals how many and which equipment should be used, thus curbing any improvement initiative.

Among the sectors with the greatest potential for growth in outsourced activities are beverages, pulp and paper and food. Beverage companies see opportunities for growth in transport-related activities. In part, this can be attributed to the continued growth in volumes, year after year, as increased demand points to an increased need for transportation. In the pulp and paper sector, the most sophisticated activities, freight auditing and transport risk management, appear to be the most promising. Finally, in food companies, the greatest chances are found in storage, milk run and cross-docking.

In addition to the activities themselves, there are several logistical assets that companies use and are owned by third parties. On average, 92% of the freight vehicle fleet belongs to LSPs. Among the warehouses used by industries, around 27% are outsourced, as well as 32% of storage equipment.

REPLACEMENT OF PSLS

After outsourcing their activities, many companies realize that, even with structured selection processes, the chosen PSL does not always perform the service as desired. When this occurs, industries are forced to replace their PSLs. On average, around 2/3 of those surveyed have already had to change operators.

The main reason given by shipping companies when replacing a PSL is “poor quality of services”, with 90% of citations. That is, if hiring is based on “Price”, replacement is based on “Quality”.

It is a fact that, without having all the necessary information during a BID, several LSPs participate in bids having an unrealistic perception of the operation to be performed. Thus, they promise service levels that are incompatible with the future reality of the operation. Failure to meet the desired service level and, consequently, the contract, can happen due to several factors such as, for example, lack of experience, training or even financial unavailability. Many logistics operators defend themselves by claiming that very low prices represent a drop in the level of service. As a precaution, industries, in turn, try – through increasingly “tied” contracts – to establish which performance indicators will be met by their partners. Many companies still stipulate deadlines in the contract for the PSLs to be able to solve possible problems and, at the end of the term, as a penalty, the contract can be terminated without cost to the contractor.

The second reason most cited by shippers for changing logistics partners is the “low ability to propose new logistics solutions”. There is, on the part of contracting companies, an expectation associated with know-how, that the PSL can add value to the operation. When this does not happen, it also serves as a reason to look for new partners. However, it is worth remembering that as, on average, the length of a contract in Brazil is 2,1 years, many PSLs hesitate to invest in differentiated solutions with longer-term return on investments.

It is a fact that the reasons for changing a third party also vary according to the analyzed sector. For companies in the pharmaceutical, hygiene and cosmetics and construction and decoration material segments, for example, it is just as important as quality that the PSLs have their own assets available. As for the agro-industrial sector, issues such as little flexibility, low technological capacity and few proposals for innovative solutions form the main motivations for replacing PSLs. In turn, for electronics companies, security issues were pointed out as relevant to the exchange of their partners.

Among the least cited reasons are the relationship difficulties with PSLs and ethical problems, which were mentioned mainly by companies in the textile, leather and clothing and electronics segments, respectively.

The lack of technological training was mentioned by 44% of the companies as one of the main reasons for replacing PSLs, although it appeared in third to last place among the main reasons for a company to outsource. In other words, if IT is not so important when hiring, it can influence when replacing a partner.

A major and pertinent concern in this item is who will be the technology to be implemented and/or used after outsourcing. For the shipper, the fact that the IT property belongs to the PSL may represent a future risk when changing it. On the other hand, not letting you use your technologies may imply a loss of opportunity to reduce costs. A solution widely applied in the market is the use of both systems in parallel. Each one has its WMS, for example, but they “communicate” and stay updated.

The reality is that, although for part of the shippers the tendency is for the responsibility for the technology applied to logistics to remain with the contracting company itself (47%), a very representative percentage believes that IT should be shared between LSPs and contractors (33 %), or exclusive to the PSL (20%).

CONCLUSION

Brazilian logistics moves an average of R$ 192 billion per year, with 63% of this total being directed to logistics service providers.

The main motivation for outsourcing is still the reduction of logistical costs, followed by a focus on the core-business.

Among the most outsourced activities are those classified as basic, which are those more focused on the operation, which require less management. On the other hand, it is the more sophisticated activities that present the greatest possibilities for growth in the next three years.

Among the reasons that lead to the replacement of PSLs, the most cited is the “poor quality of services provided”. In this case, the selection of the logistics partner, when done exclusively on the basis of price, can lead to problems in the short term in terms of the level of service provided.
The outsourcing of Brazilian logistics is already a reality, although there are still some perception gaps between the expectations of shippers versus logistics operators. These gaps must be minimized in order to guarantee a good and long partnership.

BIBLIOGRAPHY

Overview Outsourcing Logistics in Brazil 2009 – Coppead