Tying the 3PL Knot
Meet shippers who quit playing the field and settled down with a 3PL partner.
If outsourcing is like a relationship, it’s probably a second marriage. Both parties approach the courtship with caution, trying not to let emotion blind them to the facts while seeking to avoid past mistakes. That doesn’t take away from the excitement of a good match, and some of the best outsourcing partnerships have thrived for years and continue to produce positive results.
Not to overtax the analogy, but good relationships, human or outsourced, result when the parties act simultaneously in their own best interests and in the best interests of the group. “That’s really ‘game theory,’” says Kate Vitasek, founder of consulting firm Supply Chain Visions Ltd.
Vitasek refers to a scene in the film A Beautiful Mind where Nobel Laureate mathematician John Nash explains a dilemma that is safer just to describe without comment. In a bar, Nash tells some male colleagues: “If we all go for the blonde, we block each other; not a single one of us is going to get her. So, then we go for her friends. But they will all give us the cold shoulder because nobody likes to be second choice. But what if no one goes for the blonde? We don’t get in each other’s way, and we don’t insult the other girls. It’s the only way we win.”
The point is not about making a crude dating ritual more effective; rather that the best result comes when everyone in the group is doing what’s best for himself and for the group. That’s basically what third-party logistics providers (3PLs) and their customers answered when we asked, “What makes a good logistics outsourcing relationship?”
It sounds simple, but it isn’t easy.
No outsourced logistics relationship is perfect, but many, such as the ones on the following pages, perform close to the Nash ideal and enjoy wedded bliss.
Honest Communication: Welch’s & Weber Distribution
Some potential outsourcers strike out when courting a 3PL because they don’t prequalify suppliers; instead, they just blast out their requests. That indicates they are probably procurement oriented and merely looking for price, notes Carl W. Neverman, vice president of strategic accounts for Weber Distribution, a full-service 3PL based in Los Angeles, Calif. He prefers to be courted with requests that closely match Weber’s service offerings.
Those types of specific requests indicate that the potential customer has thought about its needs before seeking a provider, and has spent some time examining the capabilities of 3PLs in the market.
As the “courting” process moves forward, Weber conducts its own due diligence. For example, Neverman quizzes companies that know the prospective client: Do they pay on time? What is the corporate culture? How have they acted in other outsourcing relationships? At the same time, he follows the conventional procedure of examining their financial stability, how often they change providers, and other key factors.
Matching customers with the right 3PL is not an exact science, admits Neverman. He has lost and gained business that has and has not fit Weber’s model. But he is more aggressive about pursuing companies whose needs closely match Weber’s service offerings.
As in any relationship, communication is a recurring theme between Weber and its prospective clients. When companies are open, and provide thorough information about themselves, it indicates they are serious about making a mutually beneficial 3PL relationship work.
An overabundance of information is a good start, but it is important to link that data to future needs and goals, notes Neverman. Along with historical information, a view into some strategic goals helps Weber funnel that history into a company’s changing needs and develop better solutions, alternatives, and contingencies.
Access is another component of communication. Neverman says it is important that his group has access to all the “organizations” within the client company and to various levels of management. Full access helps avoid the seemingly endless problem of functional silos that create, or at least perpetuate, conflicting goals and objectives.
Depth in a client organization helps Weber identify opportunities and solutions, and plan for contingencies. A 3PL has to use that depth of reach cautiously when trying to influence change, “but it helps put a value on what you do,” explains Neverman. “You have to take a holistic approach to how certain actions benefit all parties in the relationship.”
An example of a healthy partnership is the one Weber enjoys with Welch’s, the company that singlehandedly put the Concord grape on the map. Owned by the National Grape Cooperative Association Inc. since 1952, Welch’s refers to its 1,150 grape growers as its family. So, it’s not surprising to learn the successful elements of Weber’s relationship with Welch’s: “Honesty; upfront communication on everything—the good, the bad, and the ugly; and openness, especially about future needs,” says Neverman.
Knowing Welch’s future needs has helped bring Weber into location optimization studies and facilitated efforts to reduce transportation spend. For instance, Weber offered a solution that combined some controlled and dry freight to optimize loads. Both products were being delivered to the same customer’s mega distribution center. Weber identified the opportunity, then worked with various groups inside Welch’s to develop the solution.
“Sometimes it’s important for the client to sell a new idea to its customer and explain the mutual benefit of adjusting a process or procedure,” Neverman adds. In the end, all parties benefitted. Weber improved its efficiency, Welch’s achieved transportation cost savings, and both Welch’s and its customer optimized delivery turns.
For richer, for poorer
Successful 3PL relationships are not just about storage or transportation rates, says Kevin Kilcoyne, senior manager of logistics for Welch’s. When selecting a 3PL, he looks at the provider’s financial controls, service, and technology.
Welch’s sets its supplier contracts to expire at staggered intervals, which allows the company time to evaluate and prepare for a new contract cycle. Staggering expiration times also avoids having all contracts come due at once. Requests for quote (RFQs) are fairly standard at Welch’s, but the company does review and adjust them to account for new conditions and developments, says Kilcoyne.
Because Welch’s uses multiple 3PL partners, several factors drive the selection process:
- Product type. Does the 3PL handle ambient temperature or frozen goods?
- Geography. Does the 3PL maintain regional facilities based on where Welch’s wants to warehouse and distribute products?
- Service . How does the 3PL perform based on product availability? Are products picked and ready to ship on time? Partners who also provide transportation are measured on on-time shipments and other delivery metrics.
- Technical capabilities. While Welch’s evaluates a 3PL’s systems, EDI, and inventory control metrics, it also places great emphasis on IT personnel. In addition, strong reporting capabilities for cycle counts and inventory control metrics not only help Welch’s track supply chain activity, but also identify opportunities for improvements.
When Welch’s strikes a deal with a 3PL, it doesn’t just lock away the contract in a drawer and forget about it. The company has established provisions for re-bids, competitive rates, and other opportunities to take advantage of market conditions.
“But that isn’t just an opportunity for Welch’s,” notes Kilcoyne. “The long-term relationship with Weber Distribution and other 3PLs enables us to come to the table early within a contract to restructure the size or scope of the business and present opportunities.”
Flexibility is an important characteristic for any 3PL Welch’s partners with, says Kilcoyne. He cites an example where Welch’s brought a few of its 3PLs together to identify some shipping opportunities, such as co-mingling products and linking distribution networks to take advantage of cost savings.
“Our 3PLs are not afraid to work with us and our other partners,” he says. “That has been extremely beneficial and allowed us to drive inventory reduction, consolidation, and freight rate savings.
“Creativity, trust, stability, and knowledge of our business are all important characteristics of a beneficial 3PL relationship,” Kilcoyne adds. “The communication and close connection to each others’ business helps both partners keep changing, improving, and finding new opportunities.”
In this environment, the 3PLs grow comfortable bringing solutions to Welch’s, including those that might involve one of the 3PL’s other customers. “While we’re pushing initiatives from our perspective, our 3PLs challenge us with new opportunities and ask us why we wouldn’t pursue them,” Kilcoyne says.
“We want to be as market competitive as we can, and take every penny out that we can, but we also realize our partners have to be profitable,” he adds. “While we maintain a business relationship with our 3PLs, we also look at it as a partnership.” Or a marriage.
A Non-Traditional Relationship: Hungry Fish & Kenco Logistic Services
A new startup and fast growth in a down economy sounds like the stuff of legend. Hungry Fish Media might become that legendary company that moved from producing and distributing one product to creating and running effective online campaigns for many products. But to earn its legendary status, it had to do logistics outsourcing right.
Hungry Fish co-founders James Sietstra and Daniel Wallace did their research, looking for an opportunity to apply their online marketing skills. They found it in the sports supplement segment, where they began promoting and selling Force Factor, a strength and endurance supplement.
On their first day in business, “we had two sales and neither was profitable,” recalls Sietstra. Undeterred, the two partners kept driving their marketing campaign.
Phase 1 included manufacturing and fulfillment, along with their core strength in online marketing. But as the business grew, the Hungry Fish founders focused on the areas where they could perform well and where control of a function would help them make improvements. That’s one reason they opted to build an in-house call center. It allowed them to stay close to customers and implement improvements faster. At the same time, they elected to outsource fulfillment.
Initially, Hungry Fish used two smaller companies for fulfillment. Distribution was an area where they didn’t feel they had the strong skills and ability to make continuous improvements, so they outsourced it. Their rapid growth soon outpaced the capabilities of their fulfillment service providers and it was time to look for a logistics partner.
True to their own model, they started their search for a 3PL online. While it may sound a bit like speed dating, there was more to it, Sietstra explains. The company, which launched its first product in April 2009, was starting to feel the pain of its rapid growth by the end of the year. No one in house had supply chain experience, but the problem areas were clear.
The two fulfillment companies had done an adequate job, but neither they nor Hungry Fish had anticipated the speed of the company’s growth. In addition to the success of its online campaigns, Force Factor had attracted the attention of brick-and-mortar nutrition retailer GNC. Force Factor was the most searched-for-and-not-found supplement on the GNC Web site, leading GNC to investigate the product and its supplier. That led to an exclusive deal with GNC, and Hungry Fish had a new Force Factor distribution channel to deal with.
Processes and inventory management were also showing signs of strain. Force Factor now required a national distribution network. And some of its technology solutions had become “clunky.”
With their needs defined, Hungry Fish culled through prospective suppliers by looking at their Web sites. They analyzed the scope of the service offerings, the capabilities of the companies, existing customer base and industry experience, and customer experiences. The list of prospects grew shorter.
As they narrowed the prospects further, the Hungry Fish crew talked to industry sources to learn more about the reputations of the providers and to gather information about direct experience those companies had with the various 3PLs.
Hungry Fish didn’t prepare a formal request for proposal, but it asked its short list of 3PL prospects to respond to its needs.
Working through the process, Kenco Logistic Services, a 3PL based in Chattanooga, Tenn., responded to Hungry Fish by asking questions and drawing out more detail about the operation and its needs. Both Sietstra and Wallace agree they were impressed with Kenco’s Judy Craig, who was willing to keep asking questions, and to explain logistics and make recommendations.
“Character counts,” says Sietstra. Hungry Fish and Kenco began to build a comfort level and some trust through the RFQ process, and so a match was made.
The open and easy interaction continued, according to Sietstra and Wallace. Inevitably, an operational problem did occur, which led to an internal discussion at Hungry Fish. They highlighted the importance of the issue to Kenco and offered to support a solution. Operations at Kenco responded within 24 hours with solutions and a backup to avoid any recurrence of the problem. “This type of communication was very effective,” says Sietstra.
Asked what advice they would offer to others who are considering an outsourced logistics relationship, the Hungry Fish founders suggest that 3PLs pay attention to their Web sites. With more people using digital information as an important part of their research, a quality Web presence is crucial.
They also remind prospective 3PL users, that “character matters in business; people show you who they are pretty quickly.” They place significant importance on communication and add the need for proactive solutions.
Hungry Fish Media is continuing to focus on its core strengths and develop new opportunities in online marketing. Sietstra and Wallace acknowledge that part of their decision in selecting a 3PL partner was driven by the need for national coverage. But going forward, they are also looking for scalability so the 3PL can keep pace with their growth. That includes being a pivotal link as the company grows into new geographies and markets.
Cross-Cultural Blend: Foscarini & Geodis Wilson
Making a match across broad geographies involves more than speaking a common language; it also requires an appreciation of the cultural differences that influence the relationship. For Italian lighting designer Foscarini, it was starting small in the U.S. market that made finding a 3PL partner more difficult.
Foscarini’s experience with outsourcing extended all along its supply chain. The company’s strengths lie in innovative design and delivery of special lighting fixtures. Because it outsources production, Foscarini is not tied to any particular sourcing location or manufacturing facility.
It makes sense for Foscarini to use a 3PL, especially in the United States, explains Carlo Urbinati, the company’s managing director. Foscarini entered the U.S. market four years ago through a distributor, but Urbinati didn’t like being so far from his customers—the dealers and buyers. “We wanted to improve our connection both ways—getting to know the market and the market getting to know us,” he says.
Foscarini carries large inventory volumes in the United States because its service levels won’t tolerate the three-week transit time to deliver product from Italy, says Urbinati. It started out using two forwarders to handle transportation, but Urbinati grew increasingly dissatisfied with their quality and service.
“We’re a small company, and we need to be flexible and efficient to deliver a near just-in-time service to U.S. dealers,” he says. “It was illogical that we couldn’t get the high service levels we enjoyed in Europe.”
The logistics problem in Europe is very different from the United States, notes Urbinati. In Europe, 65 percent of Foscarini’s orders come in through its IT system. Dealers who are pre-approved for credit place orders electronically, and operations that do not require a human value-add are performed automatically.
“Ordering in Europe is quicker, more efficient, and error free,” Urbinati says. “And the system is always working for the dealers, even at night or on Christmas Eve.”
Luca Baldoni, account manager for global freight management company Geodis Wilson, had called on Foscarini a few years ago when he worked for another logistics company that did not offer 3PL services. When he joined Geodis Wilson, he contacted Foscarini again, and found the company receptive.
Today, Geodis Wilson is working with Foscarini to develop a Web portal system in the United States that clones the system it uses in Europe, says Baldoni. Dealers who are pre-cleared and have a credit history can log on to a Web portal and place their orders. The orders are automatically approved and electronically transferred to the Geodis Wilson warehouse in New Jersey, where workers pick, pack, and ship.
This system gives the dealers—and Foscarini—complete visibility, and operates “hands-free,” even while the Italian offices are closed for summer vacation.
Although Foscarini’s U.S. business continues to grow, the company does not locate employees in the United States. It is not uncommon, however, for Geodis Wilson to provide office space to visiting teams who might come over temporarily to work on a project.
“It may not sound like much,” Urbinati says, “but it saves us the hassle of locating a temporary office and negotiating a short-term lease.”
Many companies break into a new market this way; maybe adding a small sales office, but typically not operating their own facility. Baldoni cites the example of one global company that established itself in the United States, then decided to perform its own logistics services. It bought a facility when the market was bottoming out, and saved a substantial sum on the purchase. “But, the facility has sat empty for the last two years,” Baldoni notes.
The problem for Europeans dealing in the U.S. market, says Baldoni, is that Europe has higher quality products, with lower quantities. The United States is the opposite—lower quality products with higher numbers.
“If a European company doesn’t move one million units a year, some 3PLs won’t even consider meeting to discuss a possible solution and partnership,” Baldoni notes. “Many U.S.-based 3PLs are driven by numbers and want to fill their distribution center space.”
It’s a cultural difference, he adds. “Whether the European firm moves $4,000 coats or discount shirts, it’s still a $4 transaction for the 3PL.”
building a relationship
Foscarini wanted an integrated solution where dealers would be able to check availability, place orders, and view delivery times. This is working well in Europe and helping to position the brand with distributors there, says Urbinati. The partnership also matched Geodis Wilson’s goal of attracting customers who were looking for integrated solutions, rather than mere pick/pack transaction capabilities.
While each 3PL relationship places unique demands on its partners, some consistent qualities are the hallmark of successful partnerships. Communication heads the list, starting with the prospecting stage and continuing throughout the relationship. Importantly, communication has to flow both ways. That requires trust and openness—both of which are earned over time.
For a new relationship, reputation counts. Networking with other outsourcers to determine a 3PL’s reputation becomes part of the selection process, along with formal information gathering on company size, capabilities, financial stability, and customer references.
Happily Ever After?
Unlike marriage, successful outsourcing relationships also include formal measurements. Keeping score and discussing and correcting problems and weaknesses with your 3PL may help strengthen the relationship. It could produce the opposite effect with a marriage partner, so with the caveat not to take the marriage analogy too seriously, don’t forget to celebrate a successful 3PL relationship with your partner if you want to continue to enjoy happy anniversaries.