3PL is now widely used in the field of logistics and supply chain management. There are plenty of both success stories and examples of where the process failed to live up to its promise.
The Logistics Business believes that good relationship management is the key to a successful outsourcing practice. If you are either considering a partnership with a logistics service provider or are already in such a relationship, then the following will take you through the typical 3PL relationship life cycle step-by-step, and discuss the key points which could potentially save you and your business both time and money.
The outsourcing market in the UK is now a well-established strategic option for many companies to consider when assessing their logistics planning and future needs. The outsourced logistics market falls into the following, very general groupings:
- Network providers, where by definition, a shared user model works and the volumes attracted should drive economies of scale that benefit both the services provider and its customers.
- Dedicated, contract-backed solutions, generally larger and customer-specific operations for several years. Sometimes, several customers might be served from a single site, operating often in dedicated areas so effectively warehouses within a warehouse
The outsourcing market has witnessed significant changes over the past decade or so, with the number of providers reducing and the larger players growing through acquisition of competitors. The overall market though remains generally constant, with more companies still operating in-house than choosing to outsource. The outsourcing industry has also witnessed margin dilution, especially following contract renewals and as the cost of capital has fallen meaning many customers choose to finance such investments themselves.
From the outsourcing industry perspective, the margins enjoyed from its increasingly fickle and challenging customer base means that investment in new technologies and solutions has to be very selective. This can lead to a vicious circle, with many customers critical of the 3PL sector in terms of their lack of innovation, sharing of good practice and investment to drive continual improvement.
From the customers’ perspective, many feel that their 3PL partner(s) are failing to address their wider business needs. They expect high quality warehousing and transport services on a daily basis, which they rightly see as justifying the management fees being paid. What they now also seek is the application of wider business sector experience and wider skills to explore more diverse supply chain solutions that drive down total operating costs and improve end customer service. Working capital reduction, through better planning, better inventory deployment and better-informed decision-making is one such example of what customers are expecting to see from their providers and partners.
As always, the exception arguably proves the rule. There are, of course, examples of innovation and wider supply chain approaches, but arguably not enough and not sufficiently resourced or planned to drive the paradigm shift in cost and service that is sought. Why is this?
The diagram below summarizes a typical evolutionary relationship between a buyer and a provider of outsourced services, including logistics or supply chain:
The decision to outsource or not is a very important one and usually based on what is deemed to be core to the business, the need for logistics expertise and often linked with the need for a changed or new operational network. Clearly, the overall benefits, both quantitatively and qualitatively, need to outweigh the additional management fees.
Once the decision to outsource has been made, the selection of an appropriate partner or partners requires a very considered evaluation of options. Agreeing the key selection criteria should be linked strongly to the real business needs and the long-term relationship required – this requires an alignment and joint understanding of the expectations of both parties involved – a seemingly obvious step that is too often overlooked, with strong implications in the future.
Traditional contractual agreements fell into open book (cost plus), closed book (rate per transaction with volume caveats) or a hybrid of these two. Increasingly, some form of value-share model is also incorporated to encourage continual improvement during the term of the contract. In addition, certain contractual clauses that were once unacceptable, such as consequential loss, are being included albeit with some form of financial cap or other limitations. Selecting the most appropriate contract type and shaping it accordingly, is critical to how the relationship will need to be managed and evolve during the relationship and again should reflect the expectations of both parties.
Start up operations is a critical phase of any new relationship. Transitioning from in-house to outsourced or even from one outsourcing company to another is fraught with risk, especially as service levels and costs must be maintained during the changeover. Relatively obvious issues such as timely stock transfers, systems integration and training can all become root causes of operating performance dilution that can not only damage end-customer service but also tarnish the working relationship for a long time ahead.
Both parties therefore have important roles to play in order to ensure a smooth transition and it is essential that this period is, if anything, over-managed. All too often it is under-resourced and driven by incorrect and inappropriate deadlines. Testing is a key area here, be that user-acceptance testing, integration testing or scenario testing – all are important elements and should be planned for with sufficient time built in to correct any issues that may arise.
Contracts that are signed for several years need sufficient flexibility to accommodate business changes, some of which cannot be foreseen. Growth, mix, range and other changes, including acquisitions or other strategic changes, will all test the original assumptions and the relationship. Proper governance is required to manage such changes and their implications, which should be reviewed frequently. Monthly operational reviews should be supported by quarterly and annual health-checks that are open, honest and constructive, which all serve to strengthen the chances of a long-term, successful relationship and the fulfilment of expectations for both parties. Positive management of such change will build resilience into the relationship, which is good for all concerned.
Contractual renewal should be planned or, if possible, through excellent working relationships, be avoided as it is a costly and time-consuming process for everyone. That said, if the relationship is under-performing, it is absolutely the correct choice to test the market, learn from the past and move into a new deal, either with a new provider or with the incumbent. Too often, contractors and customers leave it too late and the whole process is rushed and leaves both parties dissatisfied.
At each stage of this lifecycle, it is important that common ground and a shared appreciation and understanding of each party’s expectations from the relationship is met. This requires honesty, transparency and priority setting by both organisations. If done properly, this can be a powerful and valuable exchange of expectations and their delivery planned appropriately; if done poorly or, more often, not at all, it can result in frustration, disappointment and a serious dilution of service and cost performance.
If you are interested to know more about logistics outsourcing and supplier relationship management, please do not hesitate to give The Logistics Business a call. We have a highly experienced team of consultants on hand to discuss your 3PL needs further.