What are the main aspects a company looks at before deciding to outsource their logistics operation?

If logistics is a company's core competency, then it would be a bad idea to outsource it.
But, if its not, then the company would look at the inventory costs, holding costs, transportation costs, cost of the movable and immovable assets required for the logistics operation, including trucks and warehouses and also the labour costs.
If the company saves on the above mentioned costs by outsourcing its logistics operations, then its a safe bet

Successful LOGISTIC Outsourcing : Finding the Right Partner

The below is a part of my term paper in SCM MBA course.
1        Drivers and Challenges of outsourcing logistics operations There are a large number of advantages and disadvantages claimed for and against both third party and in-house Logistics operations.
The major drivers that companies normally pursue with logistics outsourcing can be split into4 different categories which are set out below: 1.1     Drivers – Benefits   1.1.1   Organizational          i. 
         Focus on their core business or core competence:One of the prime reasons quoted for outsourcing is the opportunity for companies to focus on their core business or core competence.
This provides the opportunity for companies to streamline their organizations and particularly to concentrate their own management expertise in their core business areas, while enables them to allocate their resources from activities that are not strategic to other activities that generate added value for the final customer.
      ii. 
         Access to wider knowledge, latest techniques and experience:When a company detects that its internal abilities for carrying out a function are not adequate for competing in a changing market, it outsources the activity to a highly competent third party with well-trained staff, which uses its industry’s best practices.
These are related to the dimensions of technologies, skills and services/innovative ideas which the company would not be able to have access to except through a third party. 
For example, this may give to the company the opportunity to use leading edge technology such as RFID (Radio Frequency Identification), track and trace abilities, GIS (Geographic Information Systems), or provide with a broader management experience and knowledge beyond that of their own industry, since the specialists of the sector are able to find solutions to changes in the market in the face of technological advances,  resulting to an overall enhancement of the company’s opportunities to improve its operations.
Finally, Lau et al.
[4] showed that thanks to technological abilities acquired through logistics service providers, outsourcing companies’ competitive advantages improved on the back of better levels of cost savings, customer service and innovation.
  1.1.2   Financial          i. 
         Capital cost advantages: Companies choose to use third party distribution, because they don’t want to invest so much money and recourses in facilities such as distribution centers and vehicles as it would do for its own operations.
Thus, the capital can be invested in more profitable areas of the business, such as new production machinery, retail stores, etc.
      ii. 
         Improved cash flow: This can occur when the service provider pays for existing assets that are owned by the client company but are transferred to the service provider at the start of the contract.
The client can then use this cash input to help in other parts of the business.
    iii. 
         Converting fixed cost to variable:When a company outsources an activity there is a shift in the fixed costs produced by that activity to a cost variable that is settled with the supplier depending on the volume of work done by the supplier during a set [5].
Reducing fixed costs to the benefit of variable costs is therefore one of this objective’s fundamental dimensions.
When the transport function is outsourced, for example, the maintenance expenses for the fleet of vehicles, the cost of drivers, etc.
become a variable cost that depends on the volume of work outsourced.
Furthermore the reduction of ownership and responsibility for plant, property and equipment means that these items can be taken off the balance sheet.
     iv. 
         Economies of scale: Many own account operations are too small to be run economically in their own right.
If a number of operations are run together by a third party company, the larger system that results will be more economic because a single large distribution center may replace the three or four sites used by the different smaller companies.
      v. 
         Clearer picture of actual operating costs: Payments need to be made on a regular basis, usually every month, and this makes the actual distribution costs very visible.
Reporting systems are generally more transparent than for own account operations.
     vi. 
         Operating Cost savings.
Companies choose to outsource the logistics operations (part or all) when it is more efficient to purchase it externally than to operate internally.
As we know, the objective that appears most for logistics is a reduction of overall costs, having the right materials, at the right place at the right time [6].
As a result from previous points, there might be a significant decrease in the operational costs since the various labour and equipment resources are outsourced.
Lau and Zhang [4] relate the following dimensions to cost savings with respect to outsourcing in general: improved profitability, improved operational efficiency, value added to product, improved cash flow and greater efficiency.
  1.1.3   Service         i. 
         Greater flexibility: This is apparent when a company seeks to develop new products and services, and new markets.
A company that intends to launch its products into a new geographic area will find it far more economical to use a3PL provider rather than developing an expensive new logistics infrastructure.
      ii. 
         Value added services: These may provide a significant added attraction to user companies.
For example, the use of a track and trace facility may be a competitive advantage that has a very positive impact for key customers.
    iii. 
         Logistics service improvements:  Improvements can be easier to be initiated via a3PL provider rather by the own company’s operations.
     iv. 
         Improved Customer Service: A company decides to outsource a service if it thinks that the3PL provider is capable of carrying out said service in a more effective way than by its own.
In logistics these improvements in the service are translated into the following dimensions: reduced delivery-time, on-time deliveries, and fulfilling customer expectations for quality of service [7].
  1.1.4   Physical         i. 
         Complexity: The complexity of the supply chain, in the context of both global sources and global markets, may be best planned and managed by a3PL that has a broad international experience of the many different logistics elements.
This may involve longer travel distances, many different modes of transport, customs procedures, varied depot types and cultural diversity.
      ii. 
         Industrial relations problems: This may be otherwise difficult or costly to eradicate, can be solved my moving to a3PL.
    iii. 
         Vehicle characteristics: Theymay be required for some products and product ranges and these may not be available in some multi-user operations.
Vehicle size, body quality, equipment and unit load specifications may all be affected dependent on weight/volume ratios and any ‘special’ product features.
However, the use of a specialist third party company could be appropriate.
     iv. 
         Delivery characteristics or requirements of some products may be incompatible with those offered by the company’s operations.
This may, for example, relate to the frequency of deliveries that are required (i.e.
a frequent number of small drops for high value items compared to occasional deliveries for low value items) or the nature of the product itself (heavy products may require special unloading equipment).
        v. 
         Product incompatibility: a particular problem being the danger of contamination caused by one product to another.
If some food products are carried next to a product with a very strong smell then they will easily absorb the smell and be spoiled.
Many third party companies solve the problem by the use of special sections in vehicles.

Before I answer you, you should ask yourself three important questions:1 - Why outsource?2 - What logistics functions should be outsourced?3 - How to manage satisfaction within a3PL partnership? Why outsource?1.
Cost or revenue related (Cost reduction)2.
Service related ( Provides more “specialist services" - Improve service levels)3.
Operational flexibility related ( Provides more flexible system)4.
Business focus related ( Outsourcing non-core business)5.
Asset utilization or efficiency related6.
Change management related (Re-design or re-engineering the supply chain) - Overall improvement of distribution)7.3PL expertise related8.
Problem related What logistics functions should be outsourced? - All five studies found that certain aspects of transport are outsourced to a large degree.
- There are considerable differences in the level that third parties are used on warehousing.
- Information systems have a low priority in outsourcing.
This is in sharp contrast with the fact that many3PL wish to provide IT related services and have made large-scale investments in information technology.
- Almost any logistics activity can be outsourced.
For any logistics activity that researchers have included in their surveys,there has always been at least one company outsourcing that function.
Areas to be outsourced : - Transport and shipment.
- Warehousing and inventory.
- Information systems.
- Other (related to value added services) How to manage satisfaction within a3PL partnership? - Users of third party logistics services are usually satisfied with their3PLs.
However, most studies do not address the details of their satisfaction.
and discuss satisfaction with specific aspects of the3PL relationship.
- Exchange of information between the logistics service provider and user, clarity of contracts and the monitoring and measuring of3PL performance are common themes in most studies analysing the success factors in3PL partnerships.
Ideally, the set of performance measures should cover a full range of angles: cost, service, productivity, asset management, and customer and employee satisfaction.
Most studies stress the importance of performance measurement, yet it remains often unspecified which KPIs are or should be used.
- The main reasons for3PL relationships to fail relate to cost and poor communication.
However, it must be said that previous research has primarily focused on the success factors rather than the reasons for failure of3PL partnerships.

Logistics outsourcing has started as a trend in the early90s and has today converged into a trillion dollar business worldwide.
For a company, the need to outsource logistics depends the value drivers.
The primary theory behind this premise is towards addressing your core competency.
If your company is a manufacturing concern or a retail enterprise, then according to the management guru C.K.Prahlad you must concentrate on doing things which you know best i.e manufacturing or retail and therefore contract other companies that are experts in logistics to get you the best value for money.
Till date there are several reports available that give you access to the ideas/reasons for outsourcing logistics as well as accomplished case studies to highlight the benefits.
The major top reasons include -1.
Per unit logistics cost reduction (through better throughout/handling of goods through the supply chain)2.
Resource optimization through relocation of internal staff to other productive areas3.
Better service levels and delivery times through improved speed and coordination through the transportation and warehousing activities in the supply chain4.
Customer service orientation where you supply the goods fastest/cheapest5.
Competitive advantage where you become the best in your category through improvements in logistics process and automation6.
IT sourced through state of the art systems operated by logistics service providers to derive real time visibility, better decision making and therefore have another competitive advantages There are many reasons, but these have to be thought from your company perspective on what your strategic goals and actions are and how they can be aligned to a logistics strategy.

only the costs

Cost and efficiency.

For so short and simple , logistics operation has no boundary if any organization ought to operate its activities throughout a simple name and became a brand and fly over the sky of whole world that is logistics company , regarding a question on decisions making process while outsourcing , one should focus more in time rather than other things . cause logistics operation is a time relative operation other than other operation .so other aspects can easily be managed with certain strategic effort .

the organization must compere between the cost of own transportation, or having3rd party, constructing stores or renting stores.

When Company doesn't have core competency and want to reduce its cost