A New Day Dawns for 3PL Partnerships
Most logistics outsourcers today use an RFQ to select their 3PLs. But that model is outdated and ineffective. A handful of forward-thinking shippers and logistics providers are instead embracing a collaborative outsourcing method – with powerful results.
More to the Story:
Today’s logistics outsourcing landscape is populated by a variety of global, regional, and local third-party logistics providers (3PLs), all professing to do the same thing for their clients: cut costs, boost productivity, and improve performance. Companies looking to outsource some or all of their logistics functions to a 3PL must navigate this crowded field and attempt to find the logistics provider best suited to help them gain the agility, flexibility, and innovation needed to survive in today’s uncertain economic environment.
That task, however, is easier said than done.
Logistics outsourcers are often laser-focused on finding the lowest-cost provider, while 3PLs are hoping to present their capabilities in a way that helps them stand out in a crowded field.
This disconnect does not make for a great starting point. In addition, it is difficult, under the constraints of the typical logistics outsourcing process, to determine just what value a potential logistics partner can bring to the table.
“Quality information about the true strengths and capabilities of service providers is hard to find,” explains Adrian Gonzalez, director, logistics viewpoints for research firm ARC Advisory Group. “Many 3PLs say they can do it all, but when you peel back the onion, you discover they have good capabilities only in certain segments of the end-to-end logistics process, or they have experience in some industries and not others.”
Though outsourcing logistics functions to a 3PL is commonplace today, and has transformed many supply chains, dissatisfaction with the outsourcing process is widespread. A 2008 Deloitte survey, for example, found 39 percent of 300 respondents had terminated at least one outsourcing contract and transferred it to a different vendor because they were “dissatisfied” or “very dissatisfied” with the contract. In many cases, this dissatisfaction can be traced to the origin of the outsourced relationship.
“3PLs need to implement and execute a supply chain plan that brings value to the client. To do that, they must take the time before signing a contract to understand the company’s industry, culture, and customers, and be able to identify solutions to address its pain points,” says Stephen Dean, senior vice president of sales and marketing for Ryder Supply Chain Solutions, a Miami-based 3PL. Dean is a proponent of moving away from the traditional outsourcing arrangement and toward a more collaborative way of selling logistics services.
RFQ: A Range of Pitfalls
Though this approach sounds like an obvious way to start a logistics outsourcing relationship, it actually counters the prevailing culture. Typically, finding a 3PL whose capabilities meet a shipper’s needs and budget is done through a Request for Quote (RFQ) process, where the outsourcer invites a number of logistics providers to bid on its services.
While the RFQ process is intended to help logistics outsourcers compare potential providers to find the one best suited to manage their supply chain, the methodology can be fraught with inefficiencies. Comparing “apples to apples” is a stated goal for many RFQ users, but it often misses the point of really understanding the capabilities each provider can offer.
“The RFP process has two drawbacks,” Gonzalez notes. “First, companies are often blind to the broader opportunities available. Second, if procurement takes the lead in the evaluation/selection process, the conversation quickly becomes one dimensional— it’s all about cost.”
“Once implemented, the traditional RFQ process typically yields relatively short-term reductions that do not contribute to a company’s long-term vision,” adds Darcee Scavone, vice president of finance at Ryder Supply Chain Solutions. “Freeing up capital that is otherwise tied to inventories, while maximizing flexibility to fulfill demand, is where companies want to see bottom-line impact. They are not interested in one-time, quick-hit cost savings, such as freight cost reductions that cannot be sustained or contribute to long-term goals.”
When shippers focus on picking providers based on cost, they might overlook the strategic impact logistics services have on business operations. “Logistics is not a commodity, it is a big-ticket intangible,” Dean explains. “Providing end-to-end, integrated supply chain solutions can drive savings and improve results as much as an ERP system can.”
In addition, the RFQ’s narrow focus on standardized requirements and performance expectations can trap outsourcers into a cage of their own making, because the questions and metrics outlined in the RFQ do not always correlate with the company’s long-term supply chain goals and needs. Companies seeking a 3PL often develop the “scope of work” portion of the RFQ based on a perceived area of need within the supply chain, so they may overlook opportunities to improve other portions of the supply chain not included in the scope of work.
“In a procurement-driven RFQ process, the main focus is on the statement of work,” explains Kate Vitasek, a faculty member at the University of Tennessee’s Center for Executive Education, and author of the book, Vested Outsourcing: Five Rules That Will Transform All Outsourcing Relationships. “Companies create a spreadsheet with the different suppliers across the top and their prices down the side and they are, in effect, buying a task at a certain price.
“But if you have a problem to solve, you don’t want to merely buy tasks,” she adds. “If you have a $40-million damage issue or retail compliance problem, you need brainpower to come up with solutions, not a ‘butt in a seat’ to perform a task.”
The narrow, cost-focused RFQ approach also means companies don’t share enough data to allow prospective providers to truly understand how to bring benefit to the company. “During the RFQ process, the 3PL is analyzing data that, in most cases, is simply a shell of all the available data,” Dean says. “Companies don’t always get a well-rounded solution because the 3PLs can’t grasp the full range of processes and operations to be outsourced based on information provided in the RFP.”
Many times, the winning 3PL is also challenged to implement its proposed solutions because so much has changed in the client’s business since the inception of the RFQ process.
“By the time the decision is finalized, the outsourcer may have acquired another company or divested part of its business; launched new products; switched sourcing from a supplier in China to a supplier in Mexico; or opened one new plant and closed three others,” Dean says. “The supply chain has changed, so the outsourcer and the 3PL have to start over again and come up with new solutions,” Dean explains.
Being able to quickly address changing supply chain needs is one of the most important advantages a 3PL can provide its clients. When that ability is diminished from the start of the relationship because of improper planning and inaccurate information, it doesn’t bode well for the partnership’s success.
Finding A Better Way
The logistics outsourcing process need not be doomed to failure, however. Shippers, logistics providers, and industry experts are beginning to embrace an outsourcing mindset that shifts focus away from cost-driven RFQs and toward a more collaborative approach to building effective relationships.
Whether it’s called vested outsourcing, performance-based outsourcing, or solution-driven outsourcing, the premise is the same: shippers and 3PLs work together from the outset to determine what services are needed to improve supply chain performance and reduce costs, while allowing both parties to engage in a mutually beneficial business partnership.
To begin down this path, Vitasek recommends shippers use the following five-part structured framework to transform their existing outsourcing relationship and contract to a more productive performance-based approach:
- Lay the foundation.
- Understand the business.
- Align interests.
- Establish the contract.
- Govern the relationship.
Interestingly, Vitasek does not ban the use of RFQs in order to do this— instead, she advocates using them in an entirely different fashion.
“You can do an RFQ in a vested environment, but you can’t just dust off your old one and put it out to bid,” she explains. “Instead, think holistically about what problems you will solve and make that the basis of your RFQ.”
Companies should use the RFQ process as a way to outline their existing baseline, including current damage levels, retail compliance chargebacks, inventory levels, and profit-and-loss information, among other aspects. “Companies need to use the RFQ to articulate their current situation, which most companies don’t do,” she notes.
Vitasek also recommends limiting the number of 3PLs involved in the RFQ process to a select few whose culture and costs are aligned with what the outsourcer is looking for.
“After you get the RFQ information from these select providers, have them come in, do an analysis of your current situation, and develop a detailed proposal of how they will solve your problems,” she advises. “This way, instead of saying, ‘Here is my spreadsheet, fill in your price,’ you are asking potential providers to tell you how they will improve your supply chain.”
This vested approach is much more time-consuming, Vitasek admits, but the payoffs make it worthwhile. “Taking the time to understand your desired outcomes, articulate your problems, and get providers to come in and truly look at your business and develop solutions is harder and takes more time than the typical approach,” she says. “Often, companies are not comfortable with it because they’ve never done it before. But if you want transformation, you have to work at it.”
This type of strategic and collaborative relationship is what many 3PLS are striving to develop with customers. Though it terms its approach as “solution-driven outsourcing,” Ryder, for example, proactively approaches prospective clients with a well-researched, well-defined business plan and value proposition rather than waiting for an RFP.
“To develop targeted supply chain solutions for potential outsourcers, Ryder draws on industry experience and internal data to outline relevant industry benchmarks and best practices, define areas of a company’s supply chain that can be improved, and illustrate the financial impact of deploying the proposed solutions,” explains Dean.
Show what you know
“Walking into a potential outsourcer’s office with the required PowerPoint presentation about your history and capabilities doesn’t excite anyone and doesn’t show how a logistics provider can help,” adds Dean.
“A better approach is for a 3PL to show how it can drive supply chain solutions in specific areas because it has looked at industry sources and market intelligence; knows how your day’s sales outstanding compare to industry peers; knows about your raw material inventory, transport costs, and challenges in deploying your manufacturing model in China; and knows that you plan to open 17 warehouses in Canada five years from now to deploy your consumable goods,” he says.
By instead embracing a solution-based approach to outsourcing logistics services, companies in need of supply chain expertise can expect to reap from their 3PLs more clearly defined solutions, greater alignment of expectations, and faster implementation.
“This approach comprises a methodology around discovering and defining opportunities within an organization, then managing or executing services to capitalize on those opportunities,” Dean explains.
That should be music to the ears of forward thinkers on both sides of logistics outsourcing contracts.