The pros and cons of 3PLs

Oct. 10, 2005
How good are you at what you do? That's the basic question companies need to ask themselves before they consider outsourcing some of their tasks to a

How good are you at what you do? That's the basic question companies need to ask themselves before they consider outsourcing some of their tasks to a third-party logistics provider (3PL).

"In areas where we don't want to invest, we look to 3PLs to make that investment," says Scott Saunders, vice president supply chain with Moen Inc., a manufacturer of plumbing products. "We ask 'Are we the best in the world at that function? Is it a strategic competence area?' If not, we consider outsourcing."

When he outsources a function, Saunders looks to the 3PL to provide creative ways to move the company's freight. The search for creative solutions, however, is not always successful.

Two years ago, Saunders brought in several large and small 3PLs to bid on Moen's total transportation management package.

"We recognized transportation management wasn't our core competency and thought we could save time and resources by outsourcing the function," Saunders remembers. "But according to the 3PLs invited, based on the way we run our business, there wasn't a lot of money on the table for them. No providers seemed to think we could both win."

Saunders heard the same story in the distribution arena. "The big guys didn't find our business attractive enough and they didn't offer us enough perceived value to take Moen to the next level," he says.

Emily Rodriguez isn't surprised by Saunders' findings. "There is a great deal of disappointment over the lack of expertise and ability to improve supply chain performance. Good stuff is the exception," notes Rodriguez, an independent consultant specializing in process reengineering.

Rodriguez believes a lack of strategic thinking is hampering 3PLs. "They target customers, develop the revenue stream and aim for more business, but they wait till the customer screams for solutions, then play catch up."

She doesn't hold the OEMs blameless. While manufacturers outsource to gain benefits, they often lack confidence in the provider, Rodriguez surmises. The customer doesn't have a sufficient comfort level with the 3PL, so the customer tells the 3PL just what to do. However, she typically does not see 3PLs coming forth with best practices from other customers or other industries.

"Perhaps companies that haven't found a service provider that adds value are trying to fit a square peg into a round hole," suggests Stephen Erb, manager of logistics for truck and service parts with truck manufacturer International Truck and Engine Corp. "3PLs tend to specialize in specific competencies and industries. If you want to outsource, specify what you want to achieve, identify the gaps and use a cross-functional team to evaluate 3PLs. Make sure the provider has the people and processes to support the changes you want to implement."

As one who has considerable positive experience in outsourcing, Randy Louie, director of customer fulfillment with network computer maker Sun Microsystems Inc., suggests lack of success could relate to how an OEM scoped what they outsource. For example, since his team hasn't found a single global 3PL with adequate capabilities, Louie has taken a regional approach. Until he can find one 3PL with full capabilities, Louie divides his global business — he's responsible for Asia/Pacific and the Americas — among three 3PLs and succeeds in each region.

Outsourcing success at industrial conglomerate Honeywell International Inc. has led to an increase in overall use of 3PLs over the years.

"We feel 3PLs have improved in performance and in service offerings," notes Victor Guzman, director of supply chain and logistics with Honeywell. "They serve a specific purpose and outsourcing allows us to avoid significant capital investment in non-core activities. As 3PLs gain experience, we have developed a higher comfort level with providers. We're better able to tolerate the risk level and we don't have to worry about issues such as strikes or leaky roofs."

Louie notes the bulk of Sun's logistics is outsourced to multiple 3PLs "We've been in these relationships since 1990 and have grown more dependent on 3PLs over the years. We continue to leverage the expertise of the 3PLs and rely on them more heavily. It's been a natural growth in business as the 3PL industry has grown and improved," he adds.

Knowing whether the 3PL's performance has indeed grown and improved depends on an effective evaluation process.

"If we're looking to outsource to a 3PL, it forces us to evaluate ourselves," Moen's Saunders indicates. "Are we looking at our organization with realistic expectations? We have to make sure we measure the right things internally. If we're measuring the wrong things, it will skew expectations."

For Moen, a starting point in the measuring process is Ohio State University's partnership model. "The model contains a supplier agreement and leads us to spend time with our supplier base developing goals and expectations for both sides. We tie the expectations to scorecards linked to performance. We review those scorecards monthly to gauge performance to expectations," Saunders explains. "And we're willing to reevaluate the relationship and adjust the expectations and the scorecard if we didn't get it right from the start."

"Metrics have to be based on the starting relationship and that's not always the way it ends up," Rodriguez concurs. In an earlier phase of her career with a manufacturing company, Rodriguez found she and two co-workers each had different expectations for the 3PL relationship. "None of us ever met with the 3PL at the same time. As a result, finance beat up on the 3PL over items that were never built into the relationship," she explains.

Laying out realistic expectations for the marriage is important. "I don't want a lot of surprises," states Honeywell's Guzman. "If my expectations are not clearly laid out, small things can blow up and ruin the relationship. If expectations are carefully laid out, we can hold our suppliers to a level of excellence we cannot typically meet ourselves."

Over the course of its long-term relationship with its 3PLs, Sun has made clear its expectations for continuous improvement. "We set targets for 3PL providers every quarter and we measure performance every quarter. The targets get tougher to achieve even as we make improvements," Louie explains. "We talk with 3PLs regarding their achievement ability, but we're the ones setting the targets."

Every quarter, executives at the director and vice president level from Sun and the 3PLs review performance to those stretch targets. "We look at the scorecard results (see sidebar, "Measure for success"), and discuss steps that will move us forward. These meetings tend to address issues at the tactical level such as root cause analysis and corrective actions," notes Louie. Once or twice a year, top executives from Sun and the 3PLs review strategic issues to improve the relationships.

At International, Erb's team tracks key performance indicators monthly. "We review operations and metrics monthly," he notes. For International's lead logistics provider (LLP), reviews focus on key transportation metrics. The LLP helps International measure actual carrier performance and exceptions. Using common metrics allows International to compare metrics per vehicle or location and across locations. "We expect performance improvement both at the location level and across the network," Erb states.

In addition to monthly quantitative measures, International conducts a voiceofthe-customer survey every six months to capture qualitative expectations. The survey measures qualities such as the 3PL's responsiveness to customers, allowing International to identify specific issues and take corrective actions.

On the quantitative side, Honeywell's method of evaluation varies with the type of service and contract. "In warehousing, for example, we look at productivity through measures such as lines picked per labor hour. Freight forwarders are measured on response time," notes Guzman.

Since 3PL performance is measured by each business unit at Honeywell, Guzman's team doesn't see actual performance data. However, he receives exception reports and, if there are consistent issues, he knows service is not being delivered. "If a 3PL misses performance targets, we look to a counselor to help us out with the marriage. If we cannot resolve the issues, we get a divorce," Guzman admits.

Sun also is committed to developing the relationship and working things through if there are issues with a 3PL's performance. "If we determine there is no way to bring the provider to an acceptable performance level, we leave by mutual decision," Louie says.

Honeywell International Inc.
International Truck and Engine Corp.
Moen Inc.
Ohio State University
Sun Microsystems Inc.

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