Relationships Go Beyond Metrics

Oct. 1, 2008
Keeping an outsourced relationship on track includes spending time with the people who make things happen

Dan Montgomery, director of warehouse management, western region and Latin America for APL Logistics, is clear about starting off right in an outsourced logistics relationship. “Typically, my suggestion would be that a potential user would get out and visit some existing sites that a 3PL runs.” That sounds pretty standard, but it doesn't always happen.

Montgomery suggests more than a walk through to have a look at the facility and systems. “Spend some time with the local management that runs those sites. Possibly ask some questions of folks working on the floor and those who are operating equipment. Also visit with the people responsible for running systems in the office — all in addition to talking to the local management.”

Another suggestion Montgomery has is senior management involvement. Have someone from senior management spend some time with the 3PL. “That's another way to get a feel for the culture,” says Montgomery. There are definite metrics to examine, like the safety record. For instance, Occupational Safety and Health Administration (OSHA) accident frequency records indicate not only performance but can show a safety culture. “Our industry standard's probably six to eight on an OSHA frequency,” says Montgomery. APL Logistics (APLL) uses it as a selling point that it is running at about a 2.0 over the last couple of years. “Safety is not something you put in a document, it has to be a culture that's developed over a long period of time. So that's really important.”

There are other more visual clues on how an operation is run and the organization's culture. “If you happen to be a food grade warehouse,” says Montgomery, “lots of our food grade warehouses are inspected by AIB, the American Institute of Baking.” Those inspections will provide a lot of documentation and require a number of procedures which senior management at a 3PL can put together as key performance measures. “But if it's not a culture that's lived and breathed by the lowest-paid person in the facility, it won't be successful,” Montgomery points out. Yet even a non-food-grade warehouse can exhibit many of those same positive qualities of being clean, neat and orderly. And that would suggest another facet of a quality culture.

A third area to look is lean management. Lean produces a lot of documentation, and so does ISO (International Organization for Standardization) quality certification, “but again, the lowest paid person in the facility has to understand the direction — and it needs to be a lot more of a culture — to be successful,” he points out.

“When you're walking the floor as a potential user, you need to ask somebody on the floor, what their thoughts are or what they know about the programs,” says Montgomery. If all of these factors that represent quality are present and understood, they are probably ingrained in a quality culture at that facility and at the company.

Culture, especially a quality culture, isn't something that senior management simply drives down through an organization. In fact, you don't want to drive that top down Montgomery points out, you want it coming from the bottom up. Improvements come from the people on the line who are doing the job every day.

Regardless of how the 3PL is compensated, look at how the workers are rewarded. “Whether you're in a cost-plus environment, a combination of fixed and variable, or a totally variable environment, incentive and gainshare programs are another key thing to look at as far as a cultural fit.” The reward system shows a 3PL's dedication to eliminating cost,” he notes. But, a gainshare and incentive program should include payment to the employees, not just the 3PL.

“We do have facility audit checklists,” explains Montgomery. “We will assign actual aisles to employees so that, again, you get a sense of ownership. I think you're only as successful as the lowest paid person out there on the floor understanding your overall objectives. And then also, I'm a firm believer that people don't come to work to do a bad job. But if they're not heard and they don't feel like they're a part of the process, and they don't feel like they have some ownership, then some stagnation might result.”

A simple quality check or culture barometer Montgomery employs isn't likely to apppear on most checklists. “I have facilities from Santiago, Chile to the Bay area in San Francisco, and the first thing I always do when I visit one of those facilities is I walk into the restrooms. Not the management restrooms, the employee restrooms out on the floor. You'd be surprised the cleanliness of that restroom and how that gives you an overall impression of how the entire facility is run. It's the pride that local people have in their facility themselves that is showing.”

The audit checklist is important because it drives performance through the things it measures. It should also drive compensation through incentives because it provides a benchmark for improvement. Ask to see the check list. It should cover security as well as safety and sanitation. And, as far as metrics, “If I were a potential client, I wouldn't want to have to ask for that, I'd want to see those posted. At every one of our facilities you have a metric board, basically at the entrance to the break room or the entrance to the office area so it's visible to all of the employees as they enter and exit for their breaks.” That's where APLL posts productivity and accident-free days or the results of the gain share program, inventory accuracy, outbound accuracy etc. It gives everyone a sense of ownership of the goals and the results.

Compensation is then a matter of a little creativity. Montgomery describes “safety bingo” where prizes are given out for accident-free days. “Each day you don't have an accident there's a bingo number given out to the employees. Depending on the length of accident-free period, the prizes get bigger. I've got a facility that's going on two years accident free. We're giving away flat screen TVs with our safety bingo. So those prizes escalate the longer the facility is accident free.”

Safety is only one measure and one area for employees to realize incentives. Gainshare incentive programs are funded by productivity increases. These gainshare programs can operate in any contract environment, cost plus, fixed and variable or totally variable, Montgomery reiteraes. When you gain productivity you're going to eliminate labor cost, he says. “And then typically what we do is, the employees will receive a lion's share of that productivity savings in dollars.” In a total variable environment where the 3PL's taking all of the risk, they're typically going to receive the other portion of that cost saving. “In a fixed and variable or a cost plus environment, we will typically share those productivity savings with the customer. Because they are sharing in some of the risk by having some of the fixed cost,” says Montgomery.

But a key to ownership of the continuous improvement process is to put that reward where the improvement is achieved. Montgomery explains. If a facility generated $10,000 in gainsharing dollars for the month, $2,500 of it might go to the 3PL corporation, $2,500 to the customer and $5,000 to the employees. But that $5,000 would be split into five categories. In other words, one category would be injury free. And if you had an injury for that month, that $1,000 would not be paid to the employees. The next category might be inventory accuracy. You have to hit the quality as well as your productivity to get that payout.

Most of the incentives would be run by true productivity dollars, but if there's an incentive from the user on a certain metric, that might not be productivity dollars. “Again, I'm such a strong believer that you're only as successful as the lowest paid person in the facility and empowering them, so we would set that incentive up.”

Montgomery sums up on incentives, saying that success goes to the relationship again and making sure both parties understand what's critical and what's not. Depending on the industry, some things may be more critical than others. And industry-specific factors aren't the only drivers. Montgomery notes that even some long-term users will say, “You guys are just doing great with the blocking and tackling with the facility, but I'm getting a lot of pressure from my board to think out of the box and find savings.”

Enter lean logistics. Under a lean program APLL will put a team together. That team is not just the local general manager at the facility, says Montgomery, it includes the hourly people out on the floor that are actually doing the job. “That's really where a lot of the ideas for savings come from,” he points out. “And in addition to that, we will train lean employees for the user as well — at their site.” The real win on lean savings comes when it was a project team with lean members from both the user and the 3PL.

Often, the 3PL won't have the authority to make changes that can produce savings and the user will need to be involved. That's where the lean-trained people at the user's company are really important. Communication is vital, and having everyone speaking the same lean language helps.

In fact, communication is a universal need when it comes to keeping an outsource relationship working. Montgomery suggests taking some time outside the facility and corporate setting to build a little more into the relationship. It helps with the communication and, “Pre and post-contract, I think where most failures come, and I know it sounds simple, but it is lack of communication. It is so critical that the two companies are communicating clearly and you don't have somebody on the supplier side or on the 3PL side that has an agenda that's not understood by both parties.”

Quarterly business reviews are a formal tool APLL uses to give an opportunity to walk through all the metrics and incentive programs. The reviews are written into the contract, and typically one of those quarterly reviews requires executive management attendance from both sides. “That way you make sure communication is clear. But to me that's the biggest place that the relationships go sour is that open line of communication is not kept open and the objectives are not made clear by both sides.”

If there are two things that remain consistent in Montgomery's discussions of outsourced relationships, they are contact and communication. One ensures everyone has a sense of what is the current, the other ensures both sides understand the desired state and how it will be achieved. And when that is working, there is less of an “us and them” attitude and more a sense of a group striving for a common goal.

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