By now, you probably don’t need any more convincing. Plenty has been written about the reasons to outsource all or part of your company’s supply chain to third-party logistics (3PL) providers. Experts are also ready with tips about finding the right 3PL partners. What you don’t hear a lot about is what happens after the ink dries on the outsourcing contract.
Relationships with 3PL providers are a little like marriage: Once you’ve tied the knot, the hard work really begins. Logistics collaboration takes effort from many functions – it’s not just a case of handing over keys to the supply chain and wishing the 3PL provider good luck. Though 3PL providers are paid to manage supply-chain services, the client’s ongoing responsibility is to manage the 3PL relationship.
I believe that there are five keys to effectively managing the 3PL relationship from the client side – five ways to ensure that logistics partners deliver the cost benefits and higher-quality services they promise:
Make 3PL management a strategic organizational priority.
A recent AMR Research study of Fortune 500 C-level executives found that – although 90 percent claimed that collaboration with supply-chain partners was a “strategic necessity” – only 27 percent saw it as their responsibility to lead the collaboration effort. Considering that logistics costs can represent a significant portion of a company’s budget – nearly a third of a manufacturer’s budget, in fact – you’d think that forging closer relationships with 3PL providers would be a bigger priority.
It should be. In order to ensure that support comes from the top down, the person responsible for managing 3PL relationships should optimally report to either the CEO or another C-level executive. This is a strategic job because a company’s supply chain impacts so many parts of the business, including the end customer. So the person who occupies this position should not only have logistics experience but also have a full understanding of big-picture corporate goals and customer needs.
As I’ve said before, companies in the future will be competing less on products and more on which ones can orchestrate the best supply chains. This in turn will lead to improved service levels as end customers benefit from supply chain efficiencies. That’s why choosing the right person to manage 3PL is so important.
Clearly lay out expectations, responsibilities and performance metrics.
A study by investment banking firm Lazard Freres found that the biggest cause of dissatisfaction among companies that had contracted with 3PL providers was that providers had “over promised service capabilities.” The key to minimizing performance surprises is to clearly define – up front, in writing – the responsibilities of each party and the performance metrics by which the 3PL provider will be judged. Metrics should go beyond general goals like “cut costs” to include specific business objectives such as “double inventory turns,” “reduce order fulfilment errors by 30 percent” and “improve customer satisfaction levels by 25 percent.”
Contracts are valuable in that they ensure that both sides are on the same page. However, with a clear understanding of expectations up front, companies and 3PL providers should be able to move beyond the fine print and begin to build a relationship based on trust and mutual benefits. A 3PL relationship that constantly refers back to contractual requirements is one that’s probably doomed. In fact, contracts should be flexible enough to allow renegotiated terms if and when conditions change. Both sides should also define ahead of time the resolution process that will kick in should any disputes arise.
Manage the relationship, not the service.
Outsourcing isn’t outsourcing if clients don’t let go. Micromanaging a logistics partner – dictating precisely how the partner goes about meeting the contractual objectives – dilutes many of the benefits of outsourcing. The client’s responsibility is to manage the relationship, not the services being delivered. Once the objectives are laid out, it’s up to the 3PL provider to leverage its expertise and infrastructure to achieve those objectives. For instance, UPS helps manage the global supply chain of National Semiconductor, including sorting, storing and shipping chips from National Semiconductor’s plants in Asia to 3,800 customers worldwide. Thanks to highly automated systems and a relationship built on trust, UPS can go for days without talking to National Semiconductor about workflow and process issues unless there’s a special shipping concern.
The most successful logistics partnerships are those in which the client views the 3PL provider as an extension of the staff, not merely as a vendor.
Let the 3PL lead on IT.
It might be tempting for the client to hang on to old IT platforms, such as warehouse management systems, that have worked fine for years. But clients need to resist that temptation and instead let the 3PL take the lead on IT. After all, a third-party provider is in business to provide better technology and services than a company could provide in-house. Clients should research potential 3PL providers and select ones with the latest, best-of-breed capabilities that most closely match the needs and cultural environment of the client.
Once the decision is made, it’s time to give up control over legacy systems that might be outdated and demand better processes and better performance from the logistics partner. If the client has to adapt its internal systems to interface with the outsourced systems, fine. It’s all a part of letting the 3PL provider do what it does best.
Manage the supply chain holistically.
Traditionally, different functions along the supply chain – procurement, manufacturing, finance, sales and distribution – have operated as independent silos, each making their own business decisions, each striving for their own particular business objectives. Problem is, what’s good for one function might not be best for the rest of the supply chain. A tightening of the manufacturing schedule might, for instance, put a strain on the procurement network. Clients need to choreograph the supply chain – and 3PL partners – in a holistic fashion, so individual members are always working toward the bigger goal.
You see, choosing a logistics partner is the easy part. Keeping the relationship going – managing the logistics managers – requires a whole other set of skills.
reproduce with permission from http://www.eyefortransport.com
