Outsourcing isnít just for the big guys anymore Ė or just the tiny ones,
for that matter. With the explosion in global trade, companies of all sizes are
looking for outside help managing their rapidly expanding supply chains.
For those new to outsourcing, the first challenge is choosing a partner. What
should you look for in a logistics service provider (LSP)? Though one companyís
service needs will differ from anotherís, we think there are some basic
criteria that every prospective outsourcer should consider. (See the
accompanying sidebar for a sample checklist.) What follows are 14 factors to
weight when choosing a partner:
Financial stability. Though it might feel awkward to question a
candidate about its financial stability, itís an essential part of the due
diligence. For one thing, you want assurances that the provider will be around
for the long term. For another, if youíre signing a sizable contract (as is
common today), youíll need to ascertain that the logistics service provider
has adequate financial resources to provide the support you require.
Business experience. How much experience does the candidate have in
providing logistics services in general? How about in your particular
industry? Finding a partner that already knows something about your industry
shortens the learning curve.
Management depth and strength. When you sign an outsourcing agreement,
youíre not just purchasing services; youíre also purchasing expertise.
Make it a point to check out the people at the top.
Reputation. Seek out some of the providerís clients and talk to them
about their experience with the company. One question to ask: Does the
provider simply do what itís told or does it constantly seek out ways to
Strategic direction. Just as your company should have a business
strategy, so should the provider. Surprisingly, many do not Ė and a large
percentage of those that do seem to have a planning horizon of approximately
one afternoon. You might argue that the providerís strategy should be the
same as the clientís, and thatís true to a point. But a well-managed
service firm should have its own goals and objectives as well. It should also
have commitment and direction.
Operations. Thereís no substitute for a careful, in-depth evaluation
of the providerís current operations. Assign a qualified person or team to
assess the quality and efficiency of the candidateís services.
Global Capability. Can the candidate meet all of your global needs
either by itself or through existing alliances? Be careful on this one. Itís
not enough to be able to locate China on the map!
Information technology. Donít accept any excuses here. In any
logistics operation, state-of-the-art systems are critical. In specialized
areas like international shipping, cross docking, order fulfillment, and
freight bill payment, they are an absolute necessity. You also have to make
sure that the providerís systems are compatible with any ERP (enterprise
resource planning) or other systems you use.
Commitment to continuous improvement. Is the provider committed to
ongoing performance enhancement? Does it have a formal procedure for
Growth potential. If, like most companies, you anticipate growth in
sales volumes, product lines or markets, you need a partner who will be able
to keep up. Make sure the logistics service provider is in a position to
support your growth.
Security. The events of Sept. 11, 2001, awoke Americans to the
realization that terrorism is more than a theoretical threat. Today, itís
essential to secure your supply chain against not only theft and pilferage,
but also against infiltration by terrorists. Make sure the candidate has sound
security precautions in place.
Chemistry and compatibility. Chemistry isnít just a factor in picking
a spouse. Itís also something to consider when choosing a logistics partner.
Follow your instincts and heed your intuition. If you have concerns about
personal chemistry and compatibility at the outset, think twice about going
ahead with the deal. The situation is unlikely to improve over time.
Ethics. If weíve learned one thing from the recent corporate
accounting scandals, itís this: You need to be extremely careful about whom
you deal with. Ask candidates about their codes of ethics. Though only the
larger providers are likely to have formal ethics policies, even the smaller
players should at least have some kind of code of ethics for their employees.
But keep in mind that a written policy is no guarantee of ethical conduct. In
the words of Mason Cooley, "Reading about ethics is about as likely to
improve oneís behavior as reading about sports is to make one into an
Cost. Though price need not necessarily be the least important of your
selection criteria, neither should it be the foremost consideration. The
manager who selects a provider based solely on cost has committed to an
outsourcing strategy that has little chance of success. Ideally, cost should
be a factor only in deciding among candidates that meet all the other