Our recent blog on building strong 3PL/client relationships got the attention of BJ Patterson, CEO at Pacific Mountain Logistics, serving the Los Angeles area. He commented that there is often a disconnect between client expectations and reality, and that the request for proposal process is often used as a tool to drive price down, which then sends a strong message to the 3PL that wins the business.
“The RFP process drives down the price and sets an economic expectation with the 3PL,” he wrote. “While the hiring companies often speak of service and its importance to them, they still look for the lowest cost option. They want Cadillac service at Chevy prices. To make it work, the service provider (3PL) and the hiring party (Shipper/manufacturer) have to develop trust and work together to drive unnecessary expense out of the process. [They need to] collaborate on what “excellent service” means to both of them.”
Reading Mr. Patterson's comments reminded me of a similar perspective that was offered at the same 3PL panel discussion held at the WERC Conference I referenced in that blog post. Eric Kaess, director of supply chain for Ecolab, a water, hygiene and energy technologies and services provider. Kaess mentioned a valuable lesson he learned from an early experience hiring a 3PL.
Let's start with the expectations issue. Ecolab's expectations were built on dealing with 3PLs to run little regional warehouses. These were similar to relationships with public warehouses, with Ecolab maintaining control of internal warehousing for the regional distribution. Eventually Kaess's staff realized if Ecolab was not going to invest in its own logistics systems, or the bricks and mortar surrounding them, then it needed to look at 3PL partners that would.
But in designing its outsourcing model, Ecolab focused too much on the bricks and mortar and not enough on the human software. In other words, it defined what it wanted to outsource and worked out the terms without going deep enough into the human resources of the 3PL it eventually selected. It took Ecolab two years before switching managers and stabilizing the situation resulting from that shaky start.
“One of the key points of that was the competency level of the local general manager,” Kaess explained. “Had we done our homework a little better and interviewed better, we probably would have had stability a bit faster than we did. Now we have a new GM and it's a lights out, beautifully running operation. We took the lessons learned from that first engagement, and after a two-week startup it's been smooth sailing.”
Those lessons came in handy when Ecolab took on a new, more complex business segment made up of the 40,000 SKUs of businesses it acquired over the last two years. Those legacy businesses came with legacy challenges. This time it knew what it had to do to make a 3PL relationship work.
“We brought our partner in six months in advance to learn and run the operation with our existing leadership acting as consultants to really force that learning and ownership so when we do cut over to the new provider it will be a lot more seamless,” Kaess said. “You have to see it as a partnership.”
Fail to do so and the cost of that relationship will be much higher than you bargained for.