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LOGISTICS OUTSOURCING

Few informed logistics professionals would suggest that outsourcing is not a meaningful force in their industry. Indeed, outsourcing has increased dramatically over the past few years (almost $77 billion in 2003) and continues to grow.

It would appear, however, that in some respects the growth in logistics outsourcing has resulted more from accident than design. While there have been numerous successes, the failure rate is increasing, as well. The major cause for these failures in most cases is a firm contracting for, and a provider agreeing to, an outsourcing arrangement that neither party clearly understands or effectively manages.

 

Adherence to ten basic rules for both clients and providers will go a long way toward ensuring a successful and mutually beneficial outsourcing relationship.

THE CLIENT PERSPECTIVE

  1. Develop a strategy for outsourcing.  Outsourcing should always be carefully thought out and measured against an in-house solution.  This will help identify relative strengths and weaknesses for each alternative.  Include the provider in the process from the beginning.  While RFP's (Requests for Proposal) make potential agreements easier to evaluate, they can ignore the analysis of the most cost- and service-effective processes.
  2. Establish a rigorous provider selection process. Check industry sources, existing clients, and financial health. Carefully analyze management depth, strategic direction, information technology capability, labor relations, and personal chemistry and compatibility.
  3. Clearly define your expectations. A number of outsourcing relationships have been unsuccessful because of unrealistic expectations. Providers are often asked to submit bids based on inadequate information about volume, size, and frequency of shipments. Companies simply lack accurate or detailed knowledge of their own logistics activity. In addition, the cost of providing the service, especially in the information technology area, often is underestimated and/or misunderstood. Such inaccuracies result in providers developing costing for and committing to arrangements that donít reflect reality.
  4. Develop a good contract. Provide incentives to improve operations and productivity with both parties sharing the benefits. Clearly spell out obligations, expectations, and remedies.
  5. Establish sound policies and procedures. Give the service provider an operating manual. Ideally, the manual will be developed jointly with the provider and contain all policies, procedures, and other information necessary for the efficient operation of the outsourcing arrangement.
  6. Identify and avoid potential friction points. Both parties are usually aware of friction points that may arise. Identify them in advance and develop a procedure for dealing with them.
  7. Communicate effectively with your logistics partner. Poor communication is second only to poor planning as a cause of outsourcing relationship failure. Communication on all aspects of the operation must be frequent and two-way.
  8. Measure performance, communicate results. When setting up a relationship, clearly identify, agree upon, and communicate standards of performance. Measure performance regularly.
  9. Motivate and reward providers. Reward good performance; donít take it for granted. Compliments, recognition, awards, trophies, and dinners are all proven motivators. Do whatever works for your particular circumstances, but do something.
  10. Be a good partner. Good partnerships are mutually beneficial. Bad ones are not. Your logistics providerís ability to serve you and your customers often can hinge on your own performance or lack thereof.

 

THE PROVIDER PERSPECTIVE

  1. Encourage strategic thinking and planning. Often the outsourcing decision is not carefully thought out and planned by the client. If possible, become a part of the process from the beginning. While RFPís (Requests for Proposal) make potential agreements easier to evaluate, they can ignore the analysis of the most cost- and service-effective processes, as well as unique services you may offer.
  2. Understand the competitive marketplace. The sophisticated potential client will check industry sources, existing clients, and financial health. Carefully examine internal management depth, strategic direction, information technology capability, and labor relations, compared to that of the competition. Capitalize on the differences. Price on your own costs Ė not on what others charge or what it will take to close the deal.
  3. Insist on clearly defined expectations. A number of outsourcing relationships have been unsuccessful because of unrealistic expectations. Providers are often asked to submit bids based on inadequate information about volume, size, and frequency of shipments. Prospective clients simply lack accurate or detailed knowledge of their own logistics activity. In addition, the cost of providing the service, especially in the information technology area, often is underestimated or misunderstood. Such inaccuracies result in providers developing costing for and committing to arrangements that donít reflect reality.
  4. Develop a good contract. Suggest incentives for improvements in operations and productivity with both parties sharing the benefits. Be sure that all obligations, expectations, and remedies are clearly spelled out.
  5. Establish sound policies and procedures. Strongly urge the client to provide an operating manual. Ideally, the manual will be developed jointly and contain all policies, procedures, and other information necessary for the efficient operation of the outsourcing arrangement. Donít leave home without it.
  6. Identify and avoid potential friction points. Both parties are usually aware of friction points that may arise. Identify them in advance and develop a procedure for dealing with them.
  7. Communicate effectively with your logistics partner. Poor communication is second only to poor planning as a cause of outsourcing relationship failure. Communications on all aspects of the operation must be frequent and two-way. Visit your key clients on a regular basis.
  8. Request a performance measurement program. When setting up a relationship, clearly identify and agree upon standards of performance. Ask for regular performance measurement.
  9. Motivate and reward your personnel. Ideally, this should be done by the client. But if not, reward good performance; donít take it for granted. Compliments, recognition, awards, days off, and dinners are all proven motivators. Do whatever works for your particular circumstances, but do something.
  10. Be a good partner. Good partnerships are mutually beneficial. Bad ones are not. Your clientsí ability to serve their customers will be dependent on both your performances or lack thereof. Finally, even good partnerships end eventually. When this happens, handle it with dignity and courtesy.

Finally, while following these ten steps will set the right course for your outsourcing relationship, for it to truly succeed, it must be based on mutual trust and respect. A high level of integrity will ensure a high level of service and satisfaction.

 


New Publication!

The Role of Outsourcing in the Retail Supply Chain

To order your free copy, contact Cliff Lynch at cliff@cflynch.com

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Elijah Ray at eray@go2uti.com

 

 

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