Lack of standards and poor or incomplete information plague the process of soliciting bids for outsourced logistics services.
“You have to have a plan; you have to know what your objectives are,” says Russ Marzen, executive vice president of warehousing and logistics for 3PD. Next, you need to research the tentative list of third party logistics providers (3PLs) and narrow it to five or six who could meet those objectives.
But capacity is finite, adds Pete Montano, executive vice president sales Con-way Truckload. Logistics providers are receiving and responding to requests for proposal (RFPs) and bid packages constantly. He offers an example of four retailers submitting proposals at nearly the same time for similar volumes in nearly identical lanes. From his perspective, all of the RFPs were from good companies and they were complete. Any of the proposals would provide a nice piece of business, but he didn't have capacity for all four. He responded knowing he'd likely be able to handle only the first bid that was awarded.
“We consider RFPs as opportunities,” says Robert Almazan, director of pricing and solutions support for Exel Transportation Services. “We see quite a few opportunities [RFPs] come through,” he continues, “and I'd say a good RFP starts with an overview that details what the user is looking for.”
First, there's a general company overview, says Almazan. Some 3PLs described this as part of a broader document typically referred to as a request for information (RFI) that often preceded placing formal RFPs with suppliers. From a strategic point of view, what are the company's goals and objectives, asks Almazan.
Sometimes the objectives include warehousing and sometimes its warehousing and transportation, explains Marzen. Not all 3PLs can provide both, so it's important to specify if the response needs to be a single bid and if the 3PL can outsource a portion and bring it in as a single bid or whether those need to be separate proposals. Montano agrees that many transportation proposals come in the same way and may specify all of the moves must be on the carrier's assets or allow a percentage to be subcontracted or brokered to other suppliers.
Timing is also critically important. “We'll get an RFP for business that's going to start in 45 days,” says Marzen. “If there's a warehouse involved, it takes a good 30 days to negotiate a decent rate.”
“As a respondent to an RFP, you want to be as effective as possible,” agrees Almazan, and if there's a lot of detailed information there, you're going to ask questions.” Many of the 3PLs agree that if there isn't time to get the answers, the 3PL will be forced to make assumptions, and those assumptions will be built into the price. “If the time is spent up front in preparation of the RFP, it's going to minimize a lot of time after the fact for the person that's sending it out,” adds Almazan.
So, the first step is to take a hard look in the mirror, says Chad Palmer, vice president of solution design for Transplace. “Really do a readiness assessment and make sure you're prepared to go through the RFP process and make the move to hire a third party provider.” He cautions that the decision will affect personnel and technology and it will have financial implications. Every stakeholder needs to be involved and understand their own perspective on the outsourcing decision — and whether or not they are ready to act. “Understand each stakeholder's power in the process and what their preference would be in outsourcing,” says Palmer. “It's rare that they're all aligned.”
Moving into the process itself, Palmer suggests each stakeholder develop goals and objectives. Be prepared to have some trade offs, he says. And be sure you really understand what is absolutely necessary in the relationship and what is just “nice to have.”
Define what will make a successful partnership, he adds. And here, he's not just talking about the mechanics of operations, he includes culture and people. “Once the two parties decide to move forward and engage, this is how we are going to handle problem resolution, establishing short-term and long-term goals and objectives.”
While ensuring the organizations are aligned on these qualitative issues, “it's critically important to have as much quality data and information about your network and about your business as possible,” cautions Palmer. This is the area where some of the more significant gaps occur that lead to misunderstandings setting goals or measuring performance.
Groups that don't have access to good data aren't necessarily cut off from outsourcing. Where there's a clear need to get better data on how the network operates, some 3PLs will develop that information for a consulting fee or will establish a benchmarking period at the beginning of a contract that allows for collection and analysis of the data and discussions of appropriate solutions. Those solutions are then solidified into goals and performance measures can be established.
RFPs have to ask questions in a format that provides for an apples-to-apples comparison of the answers, says Marzen. For warehousing, if you want a cost of pallet in/pallet out and a daily storage rate, that's how it should be stated. From that, the group developing the RFP needs to anticipate the questions the 3PL will ask when responding, continues Marzen. What is the average stay time? How many square feet do you need?
If you set up an RFP that's generic, says Marzen, you'll get generic answers. “You're not going to know any more than you did before.” Along with those broad answers comes inexact pricing. A 3PL responding to an RFP that doesn't include enough detail will make assumptions and build variance into the margin. The responses that come back can contain pricing that is off by an order of magnitude. Competitive bids will contain similar margin assumptions, so the net result is even the lowest bid is overpriced.
Be specific in the requirements, continues Marzen. Is it live unload or drop and hook? Drop and hook will require trailer parking. Are the shipments coming by rail? Are there dray concerns? Who is responsible for dray?
Leave room for creativity and ask the 3PL, possibly in a secondary section of the RFP, how they will reduce costs.
If short timeframes are a problem for a 3PL to ramp up for the business, long or indefinite timeframes are equally troublesome. Too long and some of the underlying conditions could change. Real estate markets can shift, capacity can get tight, fuel or other costs can rise or fall. And, as Montano had pointed out, the 3PL could be awarded other contracts.
Even where the RFP is not for a lead logistics provider, there may be cases for a three-party contract. Outline the accountability and expectations of all individuals involved, says Palmer. “You know if a company's thinking about outsourcing, they've already recognized there's a core competency it doesn't have.”
The same applies to the service provider. “They can't be all things to everyone,” continues Palmer. Buyers recognize and appreciate an up-front, honest approach to a multi-party relationship.
There are times when this is not the case, and Con-way's Montano says he sees RFPs that do not permit subcontracting. Other RFPs recognize the need may be there and will set a limit either on the amount that can be subcontracted or on who can perform the function.
Among common mistakes, Palmer says some companies jump too quickly into outsourcing before they know what they need. “This process is a big investment of time and money, and certainly there's an opportunity cost if you do engage and decide to participate. For that reason, the buyers need to do their due diligence up front and be sure they're ready to outsource.”
Montano agrees, noting that the 3PL that is doing its job will also be investing time and resources into its own due diligence — not only into the company submitting the RFP but also into its own ability to provide the service that is requested at the level required.
Certainty is important, says Sean Devine, vice president of pricing and engineering for Con-way. The more certain the 3PL can be about what to expect from the relationship, the less cost they have to build into the proposal. Certainty helps both parties. “We have to reserve in our pricing for things that we're not sure of.” Devine suggests both parties work together to determine what information is most important and to improve certainty.
If it sounds like the discussion circles around to the question, are you ready to send out an RFP, that does seem to be a recurring theme with 3PLs.
The first question to ask is, is your organization ready to outsource? Have you included the stakeholders and determined their needs? Is everyone on board from operations to the executive level?
Next, do you have the data and is it reliable? Can you quantify what needs to be done and project ahead for the term of the contract? Do you have the data in a consistent form, and can you provide it to a 3PL in a form that is accessible, useful and consistent? Is the response mechanism the 3PL will use compatible with the way the RFP will be issued?
What are the goals and objectives you want to accomplish from the contract? Are they spelled out clearly?
Have you started with an RFI to identify suitable partners? Or, have you provided sufficient information about your organization, its goals and its expectations to allow the 3PLs to self select whether to respond? Have you done your due diligence before sending out the RFP to ensure you are approaching providers who have suitable capabilities and meet core selection criteria?
An RFI is a good starting point to screen prospects. The step between an RFI and an RFP can include a non-disclosure agreement.
By general consensus, the RFP process is considered part of the negotiation, not a contract. It's a good idea not to try to shortcut the process by trying to make the RFP serve as a contract.