Outsourcing 101: Working Outside the Box: How to Begin Working with a Logistics Service Provider

Jan. 1, 2006
Selecting a logistics service provider isn't like buying cardboard boxes. Companies don't develop long-term relationships with cardboard boxes. They do (or should) with logistics partners.

When the practice of outsourcing logistics to an outside or third-party company began to grow in the late 1980s and early 1990s, the few service providers in existence at the time offered basic services such as warehousing, customs clearance and some transportation management.

Now, 15 or so years later, logistics providers offer services well beyond the basics, including transportation planning and execution, carrier management, vendor management, customs brokering, reverse logistics, supply-chain consulting, information technology development, kitting (pick and pack), light assembly and other special services.

Why Outsource?
Before looking around for a logistics provider, managers must decide if they even need one in the first place. One of the most basic reasons is to regain internal focus.

"A lot of companies want to get back to core competencies and outsource the rest," says Karl Manrodt, Ph.D., a logistics professor at Georgia Southern University (Statesboro, Ga.), and co-director of the Southern Center for Logistics and Intermodal Transportation. "A 3PL [third-party logistics provider] knows how to run a logistics function better than a shipper does." Since logistics is not a core competency for many companies, it makes sense to let the experts handle it.

Most service providers also have made a significant investment in information technology, saving companies from making such an investment to develop a system, and paying to run and maintain it. Another reason for outsourcing: A good logistics partner can provide objectivity that can help companies redesign internal processes to increase efficiency and save money.

Respondents to a 2002 Cap Gemini Ernst and Young study of 3PL usage reported an average service improvement of a 63%, a fixed asset reduction of 16%, an overall inventory reduction of 9%, a logistics cost reduction of 7%, and a reduction in average order length 2.2 days when they outsourced to a third party.

But before a supply-chain manager enthusiastically signs on the dotted line with the next logistics supplier that comes knocking, he or she should consider a word of warning from Manrodt. "Don't make this decision lightly," he says. Once a shipper outsources something, it is very difficult to bring it back in-house."

Another caveat: It may not be a good idea to outsource everything related to transportation and distribution. There may be some things that are strategic such that if they "went south," the company would be in trouble.

Finding a Partner
There are several steps to selecting a logistics partner. Of course, the more time that managers spend upfront, the more satisfied they are likely to be with the final arrangement.

The first step, according to Richard Armstrong, president of Armstrong & Associates (Stoughton, Wis.), a supply-chain market research and consulting firm, is to study the current providers. A company needs to get past the marketing hype to identify a logistics firm's real capabilities. In addition, he recommends searching beyond just the "name brands" he most well known third-party providers. He notes there are some lesser-known, mid-market service providers that can serve many companies' needs very well. One source to identify potential service providers is Armstrong's Who's Who in Logistics ( 3PLguideinf.htm).

Second, managers should look for a partner that has specific industry expertise. Most logistics companies have niches. Managers should look for one that will be somewhat familiar with their business.

Third, managers should make sure that the potential partners can serve the parts of the world where the company does business with the type of service it needs. If a company does business outside the U.S, managers should gather information on the following: the logistics company's international shipping program and capabilities, shipping security initiatives and customs clearance programs, so shipments don't get held up in customs. One plus is a service provider's compliance with CTPAT (the Customs and Border Patrol's Customs-Trade Partnership Against Terrorism). In addition, managers should look for logistics companies that have a demonstrated ability to anticipate delays that might occur with international shipments.

If a company does business in the Far East, it is imperative that it selects a logistics partner with a strong China presence and effective strategies and programs for doing business in and with that nation, as well as with other Southeast Asian nations. Part of these initiatives should be special arrangements at the West Coast ports.

Fourth, managers should study the logistics company's other capabilities, such as the ability to provide up-to-date information directly via the Web, and various custom services. Take the time to seek out a logistics partner that can think creatively about how to reduce costs and increase efficiencies. Such a partner should also demonstrate a willingness and ability to work directly with a number of functional areas in the client's organization, such as marketing, operations and even finance.

Once managers have narrowed down the list of potential suppliers to a half a dozen or fewer, it's time to create a request for proposal (RFP). Armstrong emphasizes the importance of limiting this request to a select number of companies.

"Few 3PLs are interested in wild goose chases," he says. If a company sends out too many RFPs, it won't get quality responses. "It costs them $40,000 to $50,000 to respond to an RFP. In sum, a shipper should not waste its time and the 3PL's by sending an RFP to someone it is not seriously interested in."

When sending RFPs, managers should provide as much information as they can. The logistics provider can't do a good job responding if a potential client provides incomplete or inaccurate information. In return, managers should expect and ask for a real proposal, says Armstrong. There's no need for a lot of marketing glitz. Managers need real analysis and a real description of how things are going to be done.

Virtually all logistics service providers will come across as competent and try to offer the best price during the sales process. As such, it is important to dig deeper. Managers should study the financial statements of potential partners. Since virtually all such contracts these days extend over several years, managers need to be sure that the company it selects is one that will be around well into the future. The real benefits of outsourcing logistics come when a company builds a long-term relationship with a service provider that really gets to know its business. For this, again, managers need to make sure that they select a company that will be able to grow with their needs.

Potential outsourcers should also look at management expertise and management turnover. A successful relationship depends upon executives who have been around for a while, and who will continue to be around. Next, while a lot of logistics providers are good at saving money quickly by eliminating low-hanging fruit, managers should find out potential partners' strategies to deliver savings in subsequent years.

Once managers have narrowed down their list to two or three companies, they should get to know the people with whom they might be working over the next few years. Everyone should be comfortable with their counterparts. Managers should take time at this point to understand the culture of their potential business partners.

Negotiating the Contract
Once supply-chain managers make a decision, there's a good chance the logistics service provider will offer a copy of its standard contract to sign. Don't sign it. Such a contract is a good place to start, but all of the terms should be reviewed with legal counsel, and maybe even an outside supply-chain advisor, to make sure that everything needed is in the contract.

How the contract evolves will depend on the strategic approach that a company wants to take. There are two possibilities: One is to start out with detailed specs, up to 50 pages or more, of every task that the company wants performed. The second is to provide a general guideline of what's needed on one or two pages, then ask the logistics service provider to make suggestions on how things could be done.

Both approaches have their benefits. The one that managers follow often depends on the culture of their company. One benefit of the second: If a company tells a logistics partner exactly what it wants and expects, it may be missing out on opportunities that the new partner can offer that had not been considered. However, if managers say what they think they want, then ask the logistics service provider to come back with alternatives, they may present a range of innovative ideas to improve productivity and service, and reduce costs.

Once the companies have come to an agreement on what will be outsourced, the next step is to set clear expectations on the specific services that are and are not within the scope of the logistics providers' work. This should be part of the contract. The worst thing that can happen in an outsourcing relationship is differing expectations that result in finger pointing.

According to Manrodt, one key to successful relationships is for terms and metrics to be well defined up front in the contract negotiations. For example, the contract can't simply say: "We want on-time delivery to improve." That has no real meaning. A company needs to define how on-time delivery is calculated, and expected performance levels. Metrics should not be forced metrics down a logistics provider's throat, though.

Both organizations need to agree on:

  • What will be measured,
  • How it will be measured,
  • Who will measure it (one or both organizations),
  • How the metrics will be re ported, and
  • What happens if objectives are not met.

While such contractual expectations may seem like common sense, they occur less often than one might think. In one study, Manrodt reports, 60% of companies that had outsourced logistics activities did not know how the metrics being used were defined. Contracts need to have a sufficient number of these (key performance indicators (KPIs) built into them, with a portion of revenue and profitability for the logistics partner tied to meeting them.

Bill Atkinson is a freelance business journalist with more than 29 years of experience writing about the supply chain, workplace safety and other topics.

Challenged with growth-related logistics issues, construction-supplier QPR called in LMS Logistics to streamline its shipping network.

Make the Most of Your Logistics Contract

While many companies like to keep things close to the vest and negotiate one-year contracts with suppliers, this rarely occurs in the logistics service world. One reason is that it takes at least three months for a third-party provider to get up to speed on a company’s operation. Managers don’t want a new logistics partner to have to reinvent the wheel every year. In addition, if a service provider only had a one-year contract, it won’t devote the same resources to that relationship that it would if it had a longer contract.

“The typical contracts I see these days are three to five years,” says Jeff Mueller, vice president of Sedlak (Highland Hills, Ohio), distribution and supply chain consultants. “A one-year contract is a bad idea.” A multi-year contract does not have to lock a company into an untenable arrangement, though. It can be flexible and written in such a way that the company is protected should changes occur—in the market or the service providers’ organization—that might adversely affect its business.

“This is an industry ripe for acquisition, and there is a lot of consolidation taking place,” says Mueller. As such, outsourcing companies should have a contract that, if they are not happy with changes in the service provider’s corporate structure, will give them an “out.”

In addition, managers should look for flexibility beyond the formal contract. For example, if something unexpected arises, both organizations should work together to address it, above and beyond what the contract might stipulate. It is virtually impossible to cover all possibilities in a contract.

Making the Decision to Go Outside

Two manufacturers share why they made the decision to outsource some logistics activities.

Ferro Corp. (Walton Hills, Ohio), a 7,000-employee company that produces industrial coatings, colors, ceramics, chemicals and plastics, needed to become compliant with customer requirements to select the best carriers in terms of cost, delivery time, and safety. The company selected Logistics Management Solutions (St. Louis, Missouri).

“LMS selects and manages the carriers for us, including the dispatching, tracking, and tracing,” says Chad Spencer, transportation manager. Ferro selected LMS because fit Ferro’s business model the best. “They were very flexible in setting up our program the way we wanted it,” he says.

For Carol Hiers, who oversees North American logistics for QPR, a division of Lafarge NA (Alpharetta, Ga.), selecting a logistics provider was a more personal decision. QPR manufactures materials that are used to repair pavement. She, too, selected Logistics Management Solutions. Her decision was based on the fact that an executive who had owned his own consulting company, and with whom Hiers had already been working, started working for LMS.

“He and I had had a long-standing professional relationship, and I didn’t want to lose that,” she says. “Anytime I ever needed anything, I could always go to him, and he would handle it.”

QPR began looking for outside logistics expertise when its business grew and began to require LTL retail deliveries, an activity with which the company had no expertise. “We were not familiar at all with that environment, and he provided us all the information and assistance we needed,” she says, redesigning the company’s entire network to work more efficiently. Today, Hiers can’t imagine doing business without such a partner.

“They bring so much to the table in terms of finding the best trucking companies, the best rates, and so much more, all around the country,” she says. “We just don’t have that expertise.”

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