By Clifford F. Lynch
Inbound Logistics, October 1999
To say that the outsourcing of logistics services has grown in popularity in recent years would be the classic understatement. During the past five years the industry has grown dramatically; and at last count, there were almost 500 firms (asset and non-asset based) offering "third party" logistics services.
This number is multiplying daily, as is the number of outsourcing agreements. According to the "1998 Third Party Logistics Key Market/Key Customer Study," conducted by the University of Tennessee's Center for Logistics Research, the trend toward logistics outsourcing will continue, at least for the foreseeable future.
R. V. Delaney of Cass Logistics estimates that by 2000, the amount spent for outsourcing will approach $50 billion.
While successes have been numerous, the failure rate is increasing; and in several recent instances outsourcing relationship disputes have ended up in court.
The major course of failure in most of these arrangements is the client contracting for, and provider agreeing to, the provision of services that neither party clearly understands.
For a logistics outsourcing relationship to work, ten basic rules must be followed.
(1) Develop a strategy for outsourcing.
Outsourcing should always be thought out carefully 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 outset. While an RFP makes proposals easier to evaluate, they can ignore the analysis of the most cost- and service-effective processes.
(2) Establish a rigorous selection process.
Check industry sources, existing clients, and financial institutions. Carefully analyze such things as management depth, strategic direction, information technology capability, labor relations, and personal chemistry and compatibility.
(3) Clearly define your expectations.
A number of third party relationships have failed because of the client's unrealistic expectations. Often providers are asked to submit bids based on inadequate information about volume, size of shipments, frequency, seasonal variations, etc. Some user firms 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.
When given inadequate or inaccurate information, providers can develop costing and commit to arrangements that don't reflect reality. Once they develop a greater knowledge and experience with the relationship, providers often find they have made decisions they find impossible to live with.
(4) Develop a good contract.
Provide incentives to improve operations and productivity with both parties sharing in the benefits.
Clearly spell out obligations, expectations, and remedies.
(5) Establish sound policies and procedures.
Since no contract can contain all the policies and procedures applicable to day-to-day activity, it is important for the client to provide the service provider with an operating manual. Ideally this would be one they develop together and should contain all policies, procedures, and other information necessary for the efficient operation of the account.
(6) Identify and avoid potential friction points.
Both parties usually are well aware of friction points that may arise. These should be identified in advance, if possible, and a procedure developed for dealing with them.
(7) Communicate effectively with your logistics partner.
Poor communication is second only to poor planning as a major cause of outsourcing relationship failure. Communication on all aspects of the operation must be frequent and two-way.
Often the logistics service provider is expected to operate in an information vacuum, and before long, the entire operation becomes reactionary. This is the first step toward failure.
(8) Measure performance, communicate results.
When setting up a relationship, standards of performance should be clearly identified, agreed upon, and communicated; and performance should be measured on a regular basis.
To facilitate effective measurement, make sure that performance standards are measurable and achievable. A frequent mistake is to establish standards that are so vague as to be meaningless. Measure only those things that are important!
(9) Motivate and reward your providers.
Good performance should be rewarded, not taken for granted. Compliments, recognition, awards, trophies, and dinners all are proven motivators. Do whatever works for your particular circumstances, but do something.
(10) Be a good customer.
Good partnerships are mutually beneficial. Bad ones are not. Your logistics provider's ability to serve you and your customers often can hinge on your own performance or lack thereof.
For outsourcing arrangements to succeed, they must be based on mutual trust and respect. Unless there is this sense of integrity in the relationship, it most certainly will fail.
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