C. F. Lynch & Associates

Let's Get This (Third) Party Started

By Clifford F. Lynch

DC Velocity, June 2003.

Until the law of unintended consequences is repealed, thorough planning will remain the foundation of any successful outsourcing arrangement. Put another way, third-party service is only as good as the service contract agreement. In that spirit, we offer customers and providers alike 10 basic rules for ensuring a successful and mutually beneficial third-party logistics service arrangement.

1. Think it through. Surprisingly, even the most sophisticated clients often fail to think the outsourcing decision through very carefully. All too often, theyíre simply trying to outsource a problem that theyíve been unable to solve themselves. To avoid becoming just another part of the problem, third-party logistics service providers (3PLs) should make every effort to become a part of the process from the beginning.

2. Itís due diligence, not due drudgery. For a client choosing a 3PL, itís important not to skimp on the investigation phase: check industry sources, talk to existing clients and investigate financial health. Providers should prepare for this scrutiny and be ready to demonstrate their financial stability. The savvy ones wonít stop there but will go on to make sure their internal management depth, strategic direction, IT capabilities, security and labor relations will stand up to scrutiny.

3. Be clear about expectation. A number of outsourcing relationships have failed because of unrealistic expectations. To often, clients ask providers to submit bids based on inadequate or inaccurate information on the size and frequency of their shipments. By the same token, itís all too easy for providers to underestimate the cost of providing the service. Such inaccuracies put providers in danger of developing costing for and committing to arrangements that donít reflect reality.

4. Spell it out. When drawing up the contract, both parties should focus on the specifics. Include incentives for improvements in operations and productivity with both parties sharing the benefits. Be sure to spell out all benchmarks, obligations, expectations and remedies.

5. Go by the book. An operating manual can be an invaluable aid. Ideally, the client and the provider will develop the manual jointly. But regardless of how itís created, the manual should contain all policies, procedures and other information necessary for the efficient operation of the outsourcing arrangement.

6. Anticipate problems. Both parties are usually aware of friction points that may arise during the relationship. Identify them in advance and develop a procedure for dealing with them should they arise.

7. Communicate. 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. Providers should take pains to report to key clients on a regular basis.

8. Set up a performance measurement program. When drawing up the initial contract, clearly identify mutually agreeable standards of performance. Providers should ask for regular performance reports from their clients. Doing so will ensure they have the opportunity to resolve issues on a timely basis Ė not when itís too late.

9. Reward outstanding performance. Ideally, this should be done by the client. But if that doesnít happen, the provider should reward good performance on the part of its employees. 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. Providers should never forget that their clientsí ability to serve their own customers will depend on the 3PLís performance Ė or lack thereof. A high level of integrity and performance will ensure a high level of satisfaction. And when the relationship comes to an end, it could get you invited back to the party.



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