Logistics Outsourcing: Making a Long-Term Commitment
Experienced outsourcers identify keys to establishing long-term relationships with third-party logistics providers, for better or for worse.
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"Over the past 10 to 15 years, the growth rate for logistics outsourcing has ranged anywhere from 15 to 30 percent annually," notes Gary R. Allen, senior manager of Cap Gemini Ernst & Young, Detroit.
Drawing on his experience with an annual study on logistics outsourcing, plus his years working for major third-party logistics providers (3PLs), Allen observes that as a company's relationship with a 3PL matures it frequently grows deeper and broader.
"As long as the 3PL performs according to expectations, the relationship will typically grow," Allen says. "Most users start small; they don't begin by outsourcing every component of their supply chain."
Establishing and maintaining long-term, mutually beneficial relationships pays off for providers, their customers, and their customers' customers through improved service and results. As the 3PL becomes an integral part of its customer's operation, relationships strengthen and grow, the 3PL gains knowledge of the customer's business, and contributes its own expertise. The synergy between the two companies pays off.
To learn the secrets of outsourcing for the long haul, Inbound Logistics talked with several managers who have worked with their outsourced logistics providers for several years or more.
Provider Partners at Air Products & Chemicals
Air Products & Chemicals Inc., Allentown, Pa., the world's only combined gases and chemicals company, has been outsourcing its warehousing operations for more than 20 years, reports Patti Platia. As supervisor of off-site management and field support, she works with 13 third-party logistics providers in North America.
For example, Platia has worked closely with Faure Brothers for
years, storing material at its Calamut, Ill., warehouse. The 3PL performs the typical receiving and shipping, relabeling, and transporting of international containers. In addition, Faure Brothers distributes products from a facility that Air Products jointly owns in the area. Platia has developed a list of attributes that she looks for in a third-party logistics provider. These attributes include:
- The ability to handle all aspects of Air Products' business, including hazmat storage facilities.
- Regulatory compliance based on commodities stored.
- Financial stability.
- Honest and open communications; no "smoke and mirrors."
- Very high service levels.
- A rigorous quality process.
Platia is demanding of the 3PLs—but also supportive. She treats them as integral members of the Air Products' team. "I work closely between our customer service organization and our warehouses. If issues or nonconformances arise, I investigate the specifics of the situation, see how the provider contributes, and determine whether our instructions could have led to the situation," Platia says. "Together we decide what we can do to prevent recurrence."
The warehouses and Air Products are in constant contact, and work together to head off potential problems. For example, a 3PL and Air Products are each aware when either party has a new customer service representative (CSR) on board. They watch carefully to ensure that no problems crop up that a more experienced CSR might catch, and let their partner know if the new CSR needs additional training.
Air Products finds the right balance in providing oversight. For example, the company provides warehouses with an operations manual, giving explicit instructions on expected outcomes.
"We let them decide the best way to get to the outcome unless there are areas where we've had problems, then we give specific instructions," Platia says. "The warehouses have the opportunity to review the manual, and come to us if they have any questions or would like us to consider a better practice. It's all about working together to meet requirements."
Every year Air Products has a provider challenge program, with each partner competing for recognition as warehouse of the year. The challenge is scored on a point system, with points accumulated over a year.
For example, typical nonconformance—such as when a customer calls with a complaint—counts as one point against the provider. If the provider causes a discharge of a product (from a punctured drum, for example), it is assessed 1.5 points. Internal issues such as inaccurate billing get hit with half a point. The top warehouse of the year receives a plaque and recognition for its employees.
Maintaining productive long-term relationships with her third-party logistics providers is important to Platia. "Moving to a new warehouse requires a lot of additional time and expense," she says. With a long-term relationship, "you have a better probability of coming to a mutual resolution" when problems occur.
She speaks from firsthand experience. "A lot of the warehouses have been in our network for 15 years or more. They understand the business, and know what we do," Platia notes. That knowledge pays off in better service and higher productivity and quality.
Oil-Dri Outsources Private Fleet
Five years ago, Oil-Dri Corporation of America elected to get out of the transportation business, recalls Dave Weiske, vice president of logistics for Oil-Dri. The company—which manufactures soil conditioners, floor absorbents, livestock feed products, agricultural crop protection chemicals, and cat litter—had operated a 150-truck private fleet, which handled about half of its transportation.
The fleet delivered excellent service—around 99-percent on-time performance for both Oil-Dri and its backhaul customers. But the potential liability and low returns of operating a private fleet caused Oil-Dri to search for a transportation partner.
"We went through an extensive selection process," Weiske explains. "We wanted a provider that could come in-house and take over the transportation business we had in place—our trucks and the valuable assets of the drivers themselves." Oil-Dri looked at 25 potential providers, then narrowed its decision down to three finalists.
"It was a very difficult decision," Weiske says. Weighing the economics, service, quality, and professional aspects of the decision, Oil-Dri selected CRST Logistics, Cedar Rapids, Iowa, to manage its transportation.
In addition to taking on Oil-Dri's equipment and drivers, CRST Logistics also signed on some of Oil-Dri's other personnel, including dispatchers. The 3PL initially operated from Oil-Dri's plants in Georgia and Mississippi, and was able to reduce transportation costs, an important priority for Oil-Dri.
"We're not selling gold dust, we're selling cat litter," Weiske notes. "Transportation is a significant part of our delivered cost of goods."
Two years ago, CRST Logistics centralized the transportation operation at its facility in Cedar Rapids, pulling its resources out of Oil-Dri's plants. Oil-Dri initially was concerned about a difficult transition, Weiske recalls. "But ultimately we felt comfortable that it would deliver results and enable us to share resources better than ever."
The centralization "achieved great success in the first year," he says, enabling the 3PL to streamline the operation and further boost performance. Today, both CRST Logistics and Oil-Dri realize the benefits of that centralization move every day.
The 12 Elements of Success
What are the critical success factors for establishing a successful long-term relationship with a 3PL? Our sources identify a dozen factors that need to be in place to outsource for the long haul.
1. Understand your business and your requirements. If you don't understand your current baseline—including logistics and supply chain costs and internal service levels—you won't be able to measure your 3PL effectively. "Most companies don't have a good feel for their true costs," says Cap Gemini's Gary Allen. If you're one of them, invest the time to understand your operation before beginning the outsourcing process.
2. Own the relationship. It's important to develop a management process and structure to oversee your third-party providers.
"You have to know your business, have the right metrics in place, and invest in the right technology to feed information to you, including the management reports you need to make sure the 3PL is doing its job right," says James E. Grieger, senior manager of Harkness Wilder LLC, supply chain management consultants based in Evanston, Ill. Accountability for a successful relationship ultimately rests with the buyer, Grieger notes.
"The buyer has to own the relationship, and make it a priority," notes Julie Baylin, president of Harkness Wilder. "You can't just give up a piece of your supply chain, then turn your back on it. It's too important, your customers are at stake."
3. Get off to a good start. Invest the time required to make sure that you and your 3PL are in strategic alignment, Grieger advises. Developing a vision and mission statement can help communicate your goals and objectives and lay the groundwork for a strong relationship.
It's also important to provide plenty of time to transition the operation from in-house to the 3PL provider. In addition, "the 3PL and its client's logistics team need to spend a lot of time early on to delineate lead and support roles in the relationship, so that it's very clear who is responsible for doing what," notes Randy Telfer, a partner with The Progress Group, a supply chain consulting group located in Avon, Conn.
4. Establish trust. "Building trust in the entire relationship" was a key step when Oil-Dri first began working with CRST Logistics. "We had to feel comfortable that we weren't just getting a lot of lip service," Weiske says. Having a team from the 3PL provider at each Oil-Dri plant helped build this trust in the early years.
"Integrity builds trust," notes Roy Ludvigsen, team leader of global distribution operations and analysis for Dallas, Texas-based Kimberly Clark Corporation Health Care Sector. "That means doing what you're supposed to do when you're supposed to do it, and owning up to and working through mistakes."
Trust can't be taken for granted. For example, when a 3PL is acquired by another company, "the trust has to be rebuilt to some degree," Ludvigsen notes. Trust is built on relationships, and it takes time to build new ones, especially after major changes in the provider's management team.
5. Develop relationship management capabilities. Managing a third-party logistics provider is far different than managing the operation itself. "In my previous life as director of our private fleet, I was a very hands-on manager," Weiske says. Outsourcing provides "an opportunity to focus on and manage the critical components of the whole supply chain rather than micromanaging the business."
But results won't be achieved without active management of the 3PL. "There still needs to be infrastructure on the client side, including people and technology, to ensure a successful relationship," Gary Allen says. "Managing relationships with 3PLs requires a much larger focus on strategic skill sets and organizational change management skills."
6. Measure performance. "Service metrics tell the story," notes Dave Weiske. Oil-Dri, for example, built an integrated measurement system that includes a performance scorecard. Both CRST Logistics and Oil-Dri measure the 3PL's performance. If the numbers do not agree, the two parties have to reconcile the difference. The gaps that occurred early in the relationship don't exist today. "Now there's little variance," Weiske says.
Don't focus solely on operational measures, advises Gary Allen. "Most companies still use cost and cost reduction as their number-one measure," he says. "While cost has to be a key component, 3PLs touch many other key areas." Explore ways of measuring the 3PL's contribution to increased sales or the tax advantages of outsourcing, for example.
7. Be a good customer. "Recognize that your logistics provider is an important part of your company, and that you should both have the same goals," says Ludvigsen. This means treating the 3PL as a partner rather than as a vendor.
"Be a good customer," advises Julie Baylin. "Once 3PLs are in-house, treat them like an integral part of your organization."
"Good partnerships are mutually beneficial," notes Weiske. "Bad ones are not." As with any client-provider relationship, the ability of Oil-Dri's 3PL "to serve us and our customers often hinges on our own performance or lack thereof," he says.
8. Communicate. Open and honest communication is important for an ongoing relationship. "If you don't maintain good quality communications and meet on a regular basis, there's no question you will fail," Weiske warns.
To ensure good communication, Kimberly-Clark Health Care Sector brings together its warehouse supervisors and customer service representatives to meet with Kimberly-Clark staff and manufacturing personnel each year. The distribution operations meeting held this May included a tour of the company's plant in Mexico.
"This meeting allows us to communicate our expectations to a large group, allows everybody to communicate best practices, and enables people to see our facilities, so that they can understand why we do some of the things we do," notes Roy Ludvigsen. "When they understand our business better, they do a better job. And it creates ownership," he says. "When we get ownership at all levels, people want to do their best for Kimberly-Clark."
Effective communication goes both ways, observes Patti Platia.
This requires considering your partner's viewpoint, and providing complete information to the 3PL. "Clients don't necessarily give their providers a head's up when things like volume are going to change," she says.
9. Share risk and reward. "Fair compensation is a critical success factor" for establishing a long-term relationship with a 3PL, notes Cap Gemini's Gary Allen. According to Weiske, Oil-Dri, for example, has added a performance-based reward component to its new contract with CRST Logistics.
Successfully sharing risk and reward "comes down to how you structure the relationship so there's the right level of trust, openness, and fairness," Allen says. Identifying the right measures and level of reward can be a challenge, but it's important to work with your provider to do so. "Gainsharing over time is going to grow more common as it gets perfected," predicts James Grieger.
10. Recognize your 3PL's team. In addition to providing financial reward, don't forget to recognize the 3PL employees' efforts, Weiske says. "These guys are out there 24/7 trying to obtain equipment for us. When they get done at the end of the day, they don't always get a pat on the back." Even informal recognition, such as an e-mail to an associate's supervisor, can make a real difference, he says.
11. Work through the hard times. Recognize that problems will occur. Then, before they do, establish a problem-resolution team, methodology, and process, suggests Grieger. Set the process up so that, when performance hits a certain level, "it automatically triggers a corrective action process," he says.
Problems are a natural part of any client-3PL alliance. "All relationships have their ups and downs," Ludvigsen notes. "The way to build a long-term relationship is to live through those ups and downs," and work through whatever problems the provider may have.
In most cases, working through problems is more productive than changing providers in mid-stream. "I'd rather go through a little bump than change providers and have to go into a big valley and over a mountain," Ludvigsen says.
But don't hesitate to take action if performance declines, Platia advises. "A provider may get complacent, because it has been doing this work for years," she says. When performance falls to a certain point, "we need to get it fixed fast. Things can go south very quickly; it takes awhile to bring them north again."
In some situations where a 3PL's performance has deteriorated, she has required that the provider's owner attend weekly meetings to ensure that difficult service issues get the attention they need until the situation turns around.
12. Push the envelope. Some of the greatest benefits of outsourcing are realized after the relationship matures and the 3PL is integrated into its client's operation. For example, the Health Care Sector of Kimberly-Clark is starting up a material handling excellence team, with representatives from its mills and its third-party logistics providers, working together to improve the operation.
Companies increasingly look to their 3PL providers to contribute to continuous improvement of the overall operation. For example, Patti Platia expects her providers to identify opportunities for cost reduction and operational improvement.
Maintaining a long-term relationship with a third-party logistics provider enables companies to reap significant benefits from outsourcing. During its first four-year contract with Oil-Dri, "CRST Logistics has absorbed a great amount of knowledge about our infrastructure and customer base.
That knowledge isn't something you can obtain in a one- or two-year relationship," observes Dave Weiske.
When it comes to logistics outsourcing, Roy Ludvigsen is in it for the long haul. "If the 3PL provides what you need, and if it's competitive in the marketplace, there's no reason to upset the applecart," he says.