Power Partner

April 1, 2005
A successful relationship between manufacturers and logistics service providers begins with crystal clear expectations.

Manufacturing executives outsource logistics for two primary reasons: to save money or to improve performance. To deliver the anticipated cost savings and service objectives requires a commitment from both organizations that, like a successful marriage, builds upon the initial contract to make the relationship work for both parties.

"People who throw the contract over the fence and wash their hands of it are condemned to have difficulties," says Brooks Bentz, an associate partner in Accenture's Boston supply-chain practice. In conjunction with Northeastern University, the consulting firm annually surveys the 500 largest U.S. manufacturers about their arrangements with third-party logistics providers (3PLs), which have steadily grown in popularity. The percentage of these firms reporting that they use outside logistics services has increased from 38 percent in 1991 to 80 percent in 2004.

"The goal is to buy expertise that they don't have, and resources that they can't get for one reason or another," says Bentz.

The leading services provided by third parties include direct transportation, customs-brokerage, freight payment, freight forwarding and warehouse management. Before handing over responsibility for any of these activities, contractual obligations need to be well defined. Bentz compares it to sourcing a part from an outside supplier, where all of the specifications and quality requirements are known and clearly detailed. The trouble comes when companies lack a similar level of specificity and precision with regard to their logistics processes.

"In a lot of cases companies don't understand their own cost structure. If you don't understand your own cost structure accurately then how can you evaluate what a third party is going to do for you? How do you know if they're competitive or not competitive?" He asks.

One approach designed to make such costs transparent is a cost-plus contract, says Glenn Mauneu, a senior vice president for Pittsburgh-based GENCO. Such open-book arrangements make it clear to the manufacturer what the costs of running a warehouse facility or performing a service are, and how much the service provider is making. A third-party provider like GENCO manages the outsourced service to a customer-defined budget. Any savings are split between the parties, and overages may come out of the management fee.

Mauneu admits that some organizations are more open to such contracts than others. He believes they can help foster a true partnership. The gain-sharing and risk-sharing aspects also provide an incentive for continuous improvement on both sides.

"It tends to have us treated as an extension of the logistics department of our customers. That's really what we strive for, to make sure we're perceived as a valuable partner," says Mauneu.

Another characteristic of a good contract is that it establishes a legal foundation upon which additional services can be added as the relationship deepens and circumstances change, says Mark Morrison, a senior vice president of TNT Logistics North America (Jacksonville, Fla). The initial negotiations typically require many hours of negotiations, and shouldn't have to be re-visited every time a new activity is taken over by an outside partner.

In addition to establishing which party bears the risk in different situations, successful contracts specify performance metrics and targets. These metrics should be broad enough that they measure the overall performance of the supply chain, and not just one small piece of it. How frequently those metrics will be reviewed must also be defined.

"We sit down at least quarterly with all of our major accounts for performance reviews," says Morrison. "Those performance reviews go over a set of dials. Those dials are either green (positive), yellow (caution), or red (we're not performing in the manner we're expected to be performing). If we're not performing in one regard, we need to have responses and actions that address that performance."

Not only does the service provider have to be willing to respond to problems revealed during the review process, so does the manufacturer. That's why, after it reviews supplier performance, Owens Corning asks its suppliers to rate its own performance. They evaluate the Owens Corning dispatch team, as well as its payables and receivables groups, says John Gentle, global leader— transportation affairs for the Toledo-based manufacturer of insulation and other construction materials. As part of the initial supplier qualification process, Gentle has learned that he also needs to evaluate the capabilities and the relationships between the 3PL and its contractors.

"Not only am I going to evaluate them, but I'm going to evaluate their subcontractors and suppliers," he says. "And I'm going to ask those subcontractors and suppliers to evaluate the third-party logistics company. I think you really need to understand how well the third-party logistics company treats its suppliers."

Beyond being able to meet the qualifications, Gentle says the most successful partnerships still come down to strong personal relationships, which begin with the feeling he gets when he visits a potential supplier. Some companies have an aura, the people are professional, and it's enjoyable to go there. Others may be aloof and it's not very clear that they really want to work together.

"Those guys who sit in my carrier councils, who provide me guidance in all of the programs that I want to do, those are the people who rise to the occasion every year and just provide superior service," says Gentle. "They want to, and I want them. It's like being in love."

Another characteristic of the best 3PL relationships is constant communication. Service providers need to know what a manufacturer is planning to do tomorrow, and next quarter, whether it will be opening or closing plants, or moving production offshore.

"Visibility to strategy and visibility to production capability, demand and changes in the market, are probably as equally as important as the visibility of material in the supply chain because you need to be able to respond with the physical assets to address that change," says TNT's Morrison. Such communication is essential if the 3PL is going to develop the expertise or IT capabilities that its customers will need. Generally, if supply chain performance is to move forward, business goals must be aligned between organizations.

In the end, the best 3PL partnerships may provide the desired service at the lowest cost, but they also take care of the ultimate customer.

"This company is providing a service and is coming in direct contact or proximate contact with my customers," says Owens Corning's John Gentle. "I can't afford to have anything go wrong with the relationship I have with my customer."