Great Partnerships: 3PLs and Shippers
Many companies have traded old-style transactional relationships with 3PLs for collaborative partnerships that stand the test of time.
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If you don't have a green thumb, you might hire someone to mow your lawn, trim the shrubs, water the flowers, and ward off Japanese beetles.
Or you might find an expert who helps you choose plants tough enough to thrive in your difficult climate and turf that takes abuse from kids and dogs. He recommends flowers that the deer won't eat, and teaches you to attract the kinds of birds that eat the bugs that kill tomatoes.
He does such a good job, eventually it takes him fewer hours to handle everyday maintenance. And that might hurt him in the wallet, except that the two of you keep thinking up new projects to work on together.
What's true for your yard might also be true for your supply chain. Like the homeowner and traditional lawn and garden service, many shippers and their third-party logistics providers (3PLs) engage in purely transactional relationships: the shipper buys a service, the 3PL provides it, and money changes hands.
But a growing number of shippers and providers are forming more collaborative partnerships, focused not just on delivering service for a fee, but on shaping a shipper's long-term success.
"At some point, you say to your service provider, 'Here are my needs. What is the best way to meet them?' instead of, 'Give me a price for this service,'" says Craig Boroughf, senior director, indirect sourcing and transportation at Chicago-based USG Corporation.
Mike Marlowe, vice president of operations at Kane is Able, a 3PL in Scranton, Pa., cites a concept called vested outsourcing, developed at the University of Tennessee by a team of researchers led by Kate Vitasek. "Vested outsourcing tries to break down the walls of the typical relationship between a 3PL and a buyer, moving away from the transactional approach to look at the bigger picture, then determine how to work together to take cost out of the network," he explains.
Call it what you will, some shippers and 3PLs are working closely to create a lusher landscape for everyone concerned. Here's a look three such partnerships.
Kimberly-Clark & Kane Is Able: Collaboration is Nothing to Sneeze At
Kimberly-Clark North America, the producer of popular consumer packaged goods (CPG) brands such as Kleenex, Scott, and Huggies, has started to explore the collaborative approach with Kane is Able. Kane provides distribution and contract packaging services for Kimberly-Clark's Consumer Products and KC Professional divisions from three regional facilities. It also provides regional transportation support.
Kimberly-Clark's supply chain team has determined that collaborating with service providers helps the company gain better service and higher-quality, lower-cost solutions for the entire supply chain. "If we don't take advantage of our partners' capabilities and insights, we'll continue to sub-optimize the supply chain, as each individual focuses only on their own best interest," says Todd Armstrong, director of distribution operations for Kimberly-Clark North America.
Kane and Kimberly-Clark are still working out the details of their budding partnership. But they have already worked together to change the process for designing the packaging that Kane assembles.
A Package Deal
Traditionally, CPG manufacturers have created packaging in stages, with each stage performed in its own organizational silo. The marketing department determined how the packaging should look and feel. The packaging group then sourced the materials, choosing products that would get the job done at the best possible price. Then a contract packager such as Kane assembled the units and stored them in the distribution center (DC).
Standing at the end of the process, Kane often ran into problems that had their origins farther up the line. "Sometimes packaging was not designed to optimize storage space, so we saw more damage and less cube utilization in the DC," Marlowe says.
That was bad enough, but the impact could be even worse when it came to the assembly process. "The designers may have created a great-looking container that was fairly inexpensive, but the cost to assemble it in the contract packaging operation was excessive," he adds.
Kimberly-Clark was spending too much on package assembly because it didn't seek Kane's advice on design. Collaboration changed all that. "Once we engaged Kane, and asked them to come back with an end-to-end solution, we found ways to design and manage the base supply so they could assemble it more efficiently," says Armstrong. The packaging materials might cost a bit more, but the savings on assembly make up for that expense.
One tactic that helped in the effort to reduce package assembly cost was a workshop that Kimberly-Clark convened, focused on three product displays. Members of the manufacturer's sales, packaging design, and distribution teams met with the vendor that builds the company's in-store displays and with Kane, the contract packager. Then the entire team started to redesign each display unit.
"They were able to pull unnecessary materials out of the display," Armstrong says. Carrying the new designs into a mobile workshop parked outside, the display vendor created some prototypes. Trying them out, the team found that those new units were indeed easier to assemble than the original versions.
"During the single-day event, the team was able to modify the displays to achieve double-digit cost reductions, while still delivering on marketing and sales expectations," Armstrong says.
Moving Forward Together
As Kimberly-Clark makes decisions on the design of future packaging, Kane expects one of its own engineers to be involved. Marlowe would also like an executive from Kane to participate in key discussions at Kimberly-Clark on strategic issues that affect the supply chain.
Those decisions might include how to design the distribution network, and what kind of technology to deploy. Technology is a big concern, because many large CPG companies have been working to install the same technology at all their sites for the sake of consistency.
But trying to do the same thing in the same way at every location also may pose problems. "If you're too consistent, you're not allowing the 3PL to push ideas, technology, and innovation," Marlowe notes.
As they work out further details of their partnership, one major question that Kimberly-Clark and Kane must resolve is how to design the right kinds of incentives for the 3PL. In a traditional, transactional relationship, the more work a 3PL does for a shipper, the more money it earns. But what happens when a 3PL's good ideas streamline a process so much that the service partner actually has less work to do?
"In a purely transactional relationship, the 3PL gets paid when it finishes specific work," says Marlowe. "There's not a lot of incentive to offer savings and innovations, or to make investments in engineering and resources to try to slim operations."
One long-standing alternative is gainsharing, which rewards contractors by awarding them a portion of any savings they help customers achieve. Another option might be to give the 3PL a stake in the customer's business, so any success the customer attains becomes a success for the service provider as well.
Armstrong agrees that old compensation models won't work in a new collaborative relationship. "If we just keep doing the same thing, we're not going to incent the 3PL to help us be as efficient and effective as we could be," he says. "So we have to come up with some new key performance indicators that focus on not only whether we're thinking innovatively, but whether we're implementing and getting the results we expect."
Ebro North America & The Jacobson Companies: Communicate Early and Often
Kimberly-Clark's packaging experiments teach a vital lesson about collaborative outsourcing: engage your partner early. By taking part in decisions about package design, Kane is Able helped its customer find savings farther downstream in package assembly.
Another shipper, Ebro North America, also made gains by involving a logistics partner in supply chain decisions as early as possible.
A business unit of the Spanish company Ebro, Ebro North America manufactures pasta in Winchester, Va.; Fresno, Calif; St. Louis; and Montreal. It also makes rice products in Memphis. Before 2007, Ebro distributed through 16 public warehouses and one company-owned DC, with pasta and rice in separate facilities.
When Ebro decided to bring rice and pasta together in a smaller number of DCs run by 3PLs, it awarded its first contract to The Jacobson Companies, a Des Moines, Iowa-based 3PL. Jacobson's initial job was to consolidate some of Ebro's rice and pasta distribution into a DC in Mechanicsburg, Pa., close to Ebro's offices in Harrisburg.
Today, Ebro North America's distribution network comprises five DCs, three of them run by Jacobson and two by Saddle Creek Logistics Services.
The partnership between Ebro and Jacobson succeeds because of close, consistent communication. "We work together in terms of understanding Ebro's objectives, its acquisitions strategy, and the challenges it faces," says Stan Schrader, Jacobson's executive vice president of business development for contract logistics.
"When we have acquisition targets, or enter new businesses, we bring Jacobson into the loop early in the process," says Joe Marelli, vice president of supply chain for Ebro North America. Ebro also holds an annual business review with each of its 3PLs. The main topics at those meetings are the past year's performance and objectives for the coming year.
"We try to plan around both companies' budget cycles," Marelli says. "We incorporate strategic initiatives into the forward view, so we're prepared for them."
Filling in the Blanks
When Ebro has an acquisition in the works, it gives Jacobson basic data such as the size of the business and the product volume it ships. That information helps the 3PL craft strategies for handling the new volume. Jacobson also determines whether it can manage expansion with existing resources, or if it will need to add more capacity.
Logistics providers who serve as partners help companies gain greater insights into their own supply chains. "Jacobson brings a list of questions, which prompts our organization to investigate those points," says Marelli.
Such conversations help the manufacturer avoid costly mistakes as it expands operations. "The worst thing a company can do is take on a new business or launch a new product without thinking through logistics execution," he adds.
This kind of collaboration helped both partners in late 2011 as Ebro was relocating its largest DC and integrating the business of two companies it had recently acquired. It accomplished all that growth without any service interruptions and while shipping record volumes. "We were only able to achieve those results because both organizations were sharing information and providing project updates daily and weekly," Schrader says.
Focus on Fact Gathering
Shippers forging collaborative partnerships with 3PLs should gather as much operations information as possible, such as business size, metrics, and volume patterns. Both shipper and 3PL need that data before they can create a solution that delivers seamless service to customers. "If any of that information is wrong, it will create problems, and that's going to cause friction in the relationship," Marelli notes.
One way to ensure you're gathering all the critical data is to ask your 3PL partner what information it needs to make the solution work.
Communicating early and often is essential. "If the two sides share information and are honest about concerns and capabilities, and how each can leverage the other's strengths, the relationship and alignment can grow, and the shared objectives work together for both companies' success," Schrader says.
Shippers should also remember that the lowest-cost 3PL doesn't necessarily make the best partner. "A provider can bring to the table skills, services, and core competencies that require investment in systems or tools," Marelli says. "Those cost money and could add to the solution's total cost. If you choose your 3PL partners based on price, you're going to be disappointed."
USG & Transplace: Keeping Questions Open-ended
USG Corporation has had more than a decade to transform a traditional relationship with a 3PL into a deeper strategic partnership. As North America's leading producer of gypsum wallboard, joint compound, and other construction products, USG is well-known for its Sheetrock brand gypsum panels and Durock brand cement board. USG operates more than 75 production facilities around the world, posting annual revenues of more than $3 billion.
USG first contracted with Transplace for logistics services in 2001. "We collectively decided this relationship was important to both parties when we completed our first three-year term, and were renewing our master contract," says Matthew Menner, senior vice president at Transplace, a Frisco, Texas-based 3PL.
Once the two companies acknowledged the key role each played in the other's business, the terms of their engagement started to change. Transplace increased its staffing on the USG account and, for several years, located a general manager in USG's offices.
A traditional shipper-3PL relationship focuses on meeting contractual obligations, and each company looks out for Number One. "Both parties can be very good, even excellent partners," says USG's Boroughf. "But both are working at maximizing their interest in the relationship."
In a strategic partnership, the shipper and 3PL get together to review their goals. "Then the parties work to align those goals to provide the maximum benefit for both," Boroughf says. If they work well together, each gains greater benefits than it would if it were pursuing only its individual interests.
Collaboration begins when a shipper invites more open-ended conversations with the 3PL. Rather than hand the 3PL a list of services it must provide, the shipper states its higher-level needs, which gives the 3PL a chance to devise creative solutions. "Service providers can usually meet the need and offer more value when shippers don't give them both the question and the answer," says Boroughf.
Building Business Intelligence
One example of close collaboration between USG and Transplace is the role USG played in helping develop Transplace's Business Intelligence (BI) offering. About five years ago, Transplace built a new set of reporting and analytics solutions, using the Microsoft Business Intelligence suite as its development platform.
"USG was one of the early adopters of this solution," Menner says. "It worked very closely with our development team to ensure what we built fully aligned with its requirements and delivered significant analytical insights to its transportation networks."
USG's goal was to collect more real-time information about its shipments, to help improve on-time deliveries to customers while managing costs, Boroughf says. USG employees helped develop BI's concept and design from the start.
Today, USG uses BI to create custom reports that give the company deep insights into its transportation operations. Because USG was involved in shaping BI, it gained a tool that is particularly tailored to its needs. "We saw the immediate value and were able to use it right away," says Boroughf. "At the same time, Transplace made sure the offering would work for all its customers."
USG's annual procurement truckload transportation procurement also illustrates the nature of the partnership that has developed between the manufacturer and its 3PL.
"USG and Transplace had worked closely over the years on annual transportation services sourcing engagements, employing an internally developed and supported optimization model that solved the assignment problem," says Menner.
But according to Boroughf, that process didn't entirely suit USG's needs. Specifically, he wanted his team to retain full knowledge about the carriers that were bidding on the company's business. Transplace's process didn't allow for that.
About four years ago, Transplace formed a strategic partnership with CombineNet—an online procurement solutions vendor. With support from its own engineering services organization, Transplace started offering CombineNet to its entire customer base, including USG. "Using CombineNet for the last three sourcing engagements was a logical progression of our partnership," Menner notes.
The progression suited USG well. "Transplace was still providing and supporting the technology tools," says Boroughf. "And we were still engaging their consulting services. But my team was keeping the knowledge that was very important, and utilizing the technology in a more enhanced way."