Leveraging Outsourcing in Shipping & Logistics Industry to Increase Profit Margin

Leveraging Outsourcing in Shipping & Logistics Industry

The complexity of global supply chains and the challenges in a constantly evolving environment will continue to push global freight forwarders and logistics providers to strive for operational improvements with a focus on efficiency. In general shipping & logistics industry has relatively low profit margins compared to other industries, due to the high costs of operations in the sector and the intense competition. While it is true that operating costs in the shipping and logistics industry are often closely tied to the revenue, it is possible to optimize the operational costs to achieve improved profit margin. This can be achieved by focusing more on the core asset light model by NVOCC’s, freight forwarders and 3PL providers, while outsourcing the non-core business. Kuehne+Nagel has set a goal for average long term conversion rate (EBIT as percentage of gross profit) of 16% by focusing on new value chain services and selective acquisitions while outsourcing the non-core operations.

The non-core businesses in shipping & logistics industry that are commonly outsourced are warehousing, freight & transportation, custom handling, documentation & compliance, technology support, etc. Global companies like DHL, DB Schenker, Kuehne Nagel, etc. have rapidly increased their footprint in India by occupying the warehouses on lease basis, which worked favourably in optimization of warehousing operations during disruptive events like COVID. Similarly in 2016, Maersk Line, a subsidiary in the Maersk Group and one of the largest container shipping companies in the world, decided to sell its fleet of oil and gas tankers and refocus its effort on container shipping and logistics. Most of the sea, road and air logistics companies outsource their fleet requirement to third-party providers. DHL Global Forwarding, a division of global logistics company DHL, often collaborates with various air and ocean carriers to meet specific shipping needs, especially in long-haul international flights.

The constant and unpredictable pressures that have recently been placed on the industry and global supply chains, have greatly accelerated the need of digital transformations. A key supply chain management software provider surveyed (in 2023) 480 logistics and supply chain professional to understand how technology will play in achieving higher productivity. 45% of the participants voted in favour of investment in technology, followed by investment in process improvements (34%). An overwhelming 82% of the participants reported increasing their technology spending post 2020. Supply chain management systems (64%), digital documentation (48%), and warehouse automation (39%) were among the key areas attracting investments. Today, in-house Transport Management System, documentation, invoicing process, custom handling, etc. are getting replaced by the sophisticated cloud-based platforms provided by the new age supply chain management software providers and digitally enabled custom brokerage companies.

Recently, shipping & logistics industry worldwide has been affected due to global turmoil, energy crises, container shortages, trade restrictions, inflation, etc. This has a direct impact on the topline of the company. Such outsourcing of the non-core operations creates sustainable growth in gross profit margin while the management can focus on new value chain services and selective acquisitions to leverage synergies and expertise.