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Decide Where the Buck Stops

By Clifford F. Lynch

Logistics Management, August 2002

Much has been written about the importance of drafting a well-defined, legally sound contract for outsourcing relationships before any business activity begins. It is just as important to develop a manual of all the necessary policies and procedures that apply to the arrangement and incorporate it by reference into the agreement. By doing so, the parties agree that this document is the official blueprint for the operation.

How easily a company can create such a manual depends on which of three categories it falls into:

  • Those that already have logistics policies and procedures that can easily be adapted for the outsourced operation;
  • Those that do not understand their own processes well enough to reduce them to a comprehensive manual; or
  • Those that depend on the provider to develop policies and procedures.

Obviously, itís most desirable to belong to the first category, but a surprising number of companies fall into one of the latter groups. Too often, companies outsource functions because they do not understand or manage them well, and no consistent procedures are in place. In such cases it is be critical to involve the provider in developing proper procedures.

A company that allows the provider to develop the procedures unilaterally, on the other hand, is headed for trouble. Coming up with operating procedures must be a joint effort because each relationship is unique and has its own set of requirements and challenges.

Policies and procedures are the roadmap to a successful outsourcing experience. Just as you would not embark on a journey in a strange country without a map, no client or provider should start the outsourcing journey without a clear understanding of the procedures and expectations.

More importantly, mutually agreed-upon procedures will help to establish accountability. It is absolutely critical that all parties understand what they and their companies are accountable for. This is particularly true when the client has an onsite manager in place at an outsourced facility.

A case in point: One company I know of contracted with a provider to operate a distribution center, with one of the clientís employees assigned to that location to act as a liaison between the two parties. Unfortunately, a disagreement over the distribution centerís layout arose even before the first shipment was made.

The clientís representative decided to retain a consultant friend to design the facilityís layout. Though the recommended configuration was flawed, the clientís representative insisted, over the providerís protests, that the consultantís layout be used. The result was nothing short of a warehousing disaster. Both travel times and operating costs far exceeded the standard. As a result, the provider lost money from the first day of the relationship.

The line in the sand had been drawn. The client blamed the provider for poor operating procedures and practices. The provider insisted that it was hamstrung by the inefficient layout. If there had been a clear delineation of responsibilities, this wouldnít have happened.

Chances are this relationship will not be successful. It could have been, however, had there been a clear delineation of responsibility and accountability. Conflicts inevitably arise in relationships, but if there is a clear understanding of each partyís accountability, itís possible to resolve most problems.

 

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