| One area that the world's most successful companies | | | | outsourcing implementations. |
| attribute their success to is outsourcing their logistics | | | | 6. ABSENCE OF SPECIFIC PERFORMANCE |
| and supply chain activities/operations to a third party | | | | MEASUREMENT SYSTEM. Absence of an efficient |
| logistics provider (3PL). Faced with increasing | | | | performance measurement system is a direct |
| competition in the global marketplace of the | | | | contributor to the failure of outsourcing initiatives. |
| twenty-first century, many companies world wide are | | | | Despite the fact that logistics competency is |
| turning to logistics outsourcing as a way to increase | | | | commonly viewed as a competitive differentiator and |
| profitability and gain sustainable competitive edge. 3PL | | | | a key strategic resource for any firm, most firms do |
| companies offer services that can allow businesses to | | | | not comprehensively measure, and more importantly, |
| outsource part of their routine logistics and supply chain | | | | fail to realise their productivity and service potential |
| management functions. The growth of 3PL companies | | | | available from performance measurement. |
| has been driven by the need for organisations to | | | | Common strategies that should be used in outsourcing |
| become leaner, reduce costs and focus on core | | | | A successful transition to outsourcing with a 3PL is a |
| competencies. Many organisations are increasingly | | | | process that depends on a variety of factors that |
| identifying the non-core functions within the organisation | | | | differ from business to business. The decision to |
| and outsourcing them to increase flexibility and | | | | outsource will depend on the company's operation |
| operational efficiency and improve customer service | | | | plans, goals, product lines, expansion, acquisitions, etc. |
| levels. | | | | Before making this decision, it is necessary to conduct |
| In responding to global outsourcing needs, 3PL | | | | a comprehensive study and document the |
| companies have been transitioning from basic | | | | advantages, challenges and cost benefits of |
| commodity-service (transportation and warehousing) | | | | outsourcing. |
| to a more comprehensive service offering. There is a | | | | Once a decision has been made to outsource, the |
| growing trend for 3PL companies to expand their | | | | next step is to adopt a scientific selection process and |
| global networks and diversify by offering various | | | | appoint a team of consultants who are specialist in this |
| services and ensuring various activities in order to | | | | area to assist in short listing and recommending the |
| meet the requirements of their customers. Services | | | | suitable 3PL that fits all your requirements at the best |
| provided by 3PL companies have improved | | | | possible price. Evaluating and selecting the right 3PL |
| productivity and significantly reduced costs in many | | | | partner is a challenging and risky process for even the |
| instances. That is why sixty percent of Fortune 500 | | | | most experienced companies. While this process can |
| companies have outsourced logistics relationships. | | | | be challenging, a systematic approach and a well |
| Outsourcing a company's supply chain is a big step. If | | | | developed outsourcing strategy will clarify your needs |
| your company has always managed its own logistics, | | | | and alternatives and positively impact the final decision. |
| outsourcing with a 3PL for the first time can be | | | | The following strategy can be used for selecting a |
| daunting, but if you find the 3PL partner that works for | | | | 3PL for your company: |
| you, your company will benefit from a 3PL to create a | | | | |
| higher performing supply chain and allow you and your | | | | 1. SET OBJECTIVES. Clear business objectives for |
| people to focus on what you do best. | | | | choosing a 3PL provider should be developed and |
| The benefits and risks of outsourcing | | | | prioritised. This will guide the selection process and |
| Before any organisation embarks on the 3PL selection | | | | assist in evaluating the success. The type of provider |
| process it is necessary to take care of certain risks in | | | | relationship that will be needed should also be |
| order to make the benefits of outsourcing a reality. | | | | determined. |
| The potential risks associated with outsourcing are: | | | | 2. DETERMINE CUSTOMER SERVICE |
| - Finding and attracting partners of the right quality | | | | REQUIREMENTS. Conduct upfront research to identify |
| - Downsizing of operations creating extra capacity | | | | a select list of preliminary 3PL candidates. All eligible |
| - Deteriorating quality of service | | | | 3PL companies should be surveyed to determine |
| - Cultural differences between home and host | | | | facility locations, warehousing and distribution strengths |
| markets | | | | and weaknesses as well as their service areas. This |
| - IT systems - dependency on 3rd parties | | | | will help in eliminating companies that cannot |
| - Rising wages | | | | adequately address your functional specifications. |
| The outcome of outsourcing arrangements with a 3PL | | | | Developing a detailed method for critically evaluating |
| often depends on how the original contract is | | | | the capabilities of 3PL candidates can make or break |
| structured, how the customer/provider relationship is | | | | an outsourcing selection process. |
| managed and how the end results are measured. | | | | 3. SOLICIT REQUESTS FOR QUOTATION. The |
| When implemented correctly, outsourcing can bring | | | | request for information (RFI) or quotation (RFQ) is a |
| huge benefits and prove to be a win-win situation for | | | | tool to gather information and measure the strengths |
| both the customer and the outsourcer. Among the | | | | with respect to capabilities and cost effectiveness of |
| benefits of a successful outsourcing relationship are: | | | | outsourcing. When selecting a 3PL, the RFQ document |
| - Reduced costs | | | | should be as detailed as possible and it should be |
| - Improved service level and service offering | | | | accompanied by all relevant documents about the |
| - Strategic flexibility | | | | project and expectations. The RFQ should include a |
| - Greater focus on core competence | | | | detailed description of the areas to be outsourced |
| - Business continuity | | | | including: the scope of the contract, locations, facilities, |
| - Improved customer service levels | | | | departments; information on volumes involved, number |
| The benefits of outsourcing can truly be achieved by | | | | of deliveries, warehouse sizes, number of items, etc.; |
| putting aside fears over loss of control, visibility, internal | | | | the logistics tasks to be performed; the level of |
| competency, and of being too dependent on a 3PL. | | | | performance required. Furthermore, the RFQ should |
| Investing time and resources in the design and | | | | indicate a format for price quotation and a timeframe |
| deployment of a proven outsource process and | | | | for responses. |
| comprehensive service level agreements that balance | | | | 4. VISIT THE POTENTIAL PROVIDER'S FACILITIES. |
| costs and risks will help companies to experience the | | | | Facilitating tours of a potential 3PL provider's facilities |
| payoffs of working closely with a 3PL provider. | | | | and interviews with their existing clients is an important |
| IT capability gap | | | | next step. Experiencing the company's facilities gives |
| Logistics and IT are inextricably linked; the information | | | | you a chance to determine how flexible their operation |
| that IT systems provide is critical in supply chain | | | | is and their willingness to work to meet your needs as |
| planning and execution processes. IT-based logistics | | | | they change. |
| services are an essential part of the client-3PL | | | | 5. PREPARE LEGAL DOCUMENTATION. Contract |
| relationship. However, there is a gap between client's | | | | negotiation is a pivotal step in a 3PL relationship. It is |
| expectations for their provider's IT capabilities and their | | | | necessary to document what is agreed and what is |
| satisfaction with those services. Only a minority of | | | | disagreed clearly in order to avoid ambiguity in the |
| customers are satisfied with their 3PL providers' | | | | relationship. It is also necessary to determine if the 3PL |
| information technology capabilities. IT issues in | | | | is accountable for the level of accuracy and product |
| client-3PL relationships include: | | | | conditions and establish what party will finance |
| - Inadequate performance reports. A larger issue here | | | | improvements if system upgrades become necessary. |
| is the failure of current technology to deliver all of what | | | | The contract should address all possible friction points |
| shippers need. | | | | and address them with remedies. Exit strategies such |
| - Lack of sufficient project management processes | | | | as mediation and arbitration should also be part of a |
| and trained personnel. | | | | 3PL contract. |
| - Inability for some 3PL's to provide sufficient order | | | | 6. DEVELOP PROJECT IMPLEMENTATION PLAN. |
| shipment/inventory information. | | | | There should be a detailed logistics outsourcing project |
| Each of these issues stem from the need for 3PL's to | | | | implementation plan as well as periodic reviews in |
| modernise their internal systems and adopt industry | | | | place to make sure everything is on track and there |
| standards-based tools for integration to exchange | | | | are no drastic deviations in the scope of the project. |
| data, coordinate business processes and collaborate | | | | The project implementation is the process of |
| more effectively. | | | | translating thoughts into actions and it requires active |
| As a result of these IT issues, companies are | | | | co-operation and co-ordination on both sides of the |
| experiencing a lack of the key performance indicators, | | | | relationship. Project implementation includes IT |
| alerts and visibility required for an adaptive supply | | | | integration, operating procedures customisation, |
| chain. 3PL's face similar difficulties in getting their clients | | | | understanding the service measures, defining the |
| to provide the data and commitment they need. On | | | | escalation process etc. All these activities require |
| top of that there's an issue of trust and risk on both | | | | precise handling and a dedicated team. The 3PL |
| sides of the relationship. But the good news is that all | | | | companies usually have their own project |
| these issues can be overcome through investment in | | | | implementation methodology. What is critical here is |
| open, cross-industry integration platforms that will allow | | | | customisation, to suit the specific requirements and |
| for functional flexibility while preserving existing IT | | | | deliver agreed service levels. |
| investments and limiting costs. | | | | 7. DESIGN EFFICIENT PERFORMANCE |
| Why do some outsourcing initiatives fail? | | | | MEASUREMENT SYSTEM. During the startup phase |
| Unfortunately 3PL relationships are always not | | | | of the outsourcing relationship the customer must take |
| successful. According to a recent Warehousing | | | | the initiative to develop performance measurements |
| Education and Research Council (WERC) survey, 55% | | | | and reporting methods that support the company's |
| of logistics outsourcing alliances are terminated after | | | | business goals for the outsourcing strategy. The 3PL's |
| 3-5 years. The most often cited reasons for failure | | | | performance should be measured on qualitative and |
| include: | | | | quantitative performance measures regularly. Ideally, |
| | | | financial, productivity, utilisation, quality and cycle time |
| 1. LACK OF CLEAR OUTSOURCING STRATEGY. | | | | measures should be considered. One of the objectives |
| Specifically, many companies fail to identify the | | | | of performance measurement is not just to measure |
| advantages, challenges, cost benefits and | | | | the performance but also initiate necessary corrective |
| organisational impacts of outsourcing. | | | | actions with regard to negative performance and |
| 2. ABSENCE OF A SCIENTIFIC SELECTION | | | | explore the possibility of gain sharing in the case of |
| PROCESS. Inability to document expectations, | | | | positive performance so as to encourage continuous |
| processes to be outsourced, current performance | | | | improvements. Regular performance measurement |
| standards and costing information in clear terms are | | | | presents the perfect opportunity for both the customer |
| critical, yet are often overlooked in the selection | | | | and the 3PL to communicate effectively to make the |
| process. | | | | outsourcing relationship a great success. |
| 3. INEFFICIENT COSTING METHODOLOGY. | | | | 8. TRUST AND COLLABORATION. The success of |
| Collecting detailed data on the true costs of receiving, | | | | an outsourcing relationship between a company and |
| storage, pick-n pack, value-added processing, special | | | | the 3PL provider requires a combination of trust and |
| packaging, staging and despatch is a challenging, yet | | | | collaboration. Trust determines the level of flexibility a |
| fundamental task to performance assessment for an | | | | company can allow the 3PL in managing the |
| organisation. Whilst Activity Based Costing (ABC) | | | | operations to the best of their capability. The |
| enables organisations to accurately align and establish | | | | outsourcing arrangement can be truly successful only |
| 'in-house' costs, many organisations rely on less | | | | when there is a high level of trust between both |
| detailed and therefore less accurate methods to track | | | | parties in the business relationship. Unless there is this |
| outsourcing costs. | | | | sense of trust and collaboration in the client-3PL |
| 4. UNCLEAR LEGAL DOCUMENTATION. Many | | | | relationship, it most certainly will fail. Companies who |
| companies overlook critical areas when they define | | | | have managed to build a healthy structure of trust |
| their contractual relationships. The aim of a legal | | | | within their organisations are able to create a healthy |
| document is to clearly articulate what is agreed and | | | | structure of trust with their 3PL providers. Key to this is |
| what is disagreed to avoid ambiguity in the relationship. | | | | the understanding within the client organisation that |
| All to often, in the absence of clarity, confusion prevails | | | | there is a single set of goals and there has to be a |
| and confusion leads to inefficiency and inefficiency | | | | commitment to support and live the goals. Once this |
| leads to a breakdown in the relationship. | | | | infrastructure of trust has been created, then the |
| 5. LACK OF PROJECT IMPLEMENTATION | | | | client-3PL relationship can start to produce magnified |
| STRATEGY. Lack of project implementation strategy | | | | value, and prove to be true win-win. In order to build |
| will negate advantages of outsourcing. Many | | | | trust in your relationship with a 3PL it is crucial to select |
| organisations believe that Project Management is the | | | | the right 3PL partner that can meet your particular |
| responsibility of the 3PL. Lack of project management | | | | requirements and with whom you can strengthen your |
| skills and dedicated resources (from both | | | | relationships. Thus, the key to a successful logistics |
| organisations), unrealistic timelines and expectations are | | | | outsourcing is a well-organised process of selecting |
| commonly cited as reasons for failure in 30% of all | | | | and communicating with the potential 3PL providers. |