As companies continue to turn to logistics outsourcing for at least a portion of their supply chain needs, the selection of a partner becomes increasingly strategic for both users and providers.
Both parties stand to gain significantly if an engagement is successful. Customers achieve competitive advantage, a result cited by 88 percent of 3PL users in Capgemini's Annual Third-Party Logistics Study; providers enjoy more business, an outcome documented by Armstrong & Associates, whose research shows that half of all new 3PL sales come from existing clients.
"3PLs that deliver and offer a great value are those that we tend to work with over and over again," says Jeanne Reisinger, director of global customer service and logistics at Procter & Gamble, Cincinnati, Ohio. "These are often people who have grown with us, especially as we have entered new geographies over the last several years, and we consider our relationships with these companies to be very important."
The key to lasting relationships that expand and strengthen over time is having the right partner at the outset. Here, the marriage analogy is impossible to escape. The ideal union that most have in mind when discussing 3PL selection, however, is one where the betrothed know each other extremely well and sign an air-tight prenuptial agreement before heading down the aisle.
Marketplace reality is more akin to bad internet dating, says Brooks Bentz, a principal in the supply chain practice at Accenture, New York. "People put an RFP out there saying what they want; they get three responses, then marry one of them after the first date," he says. But these relationships are complex and demanding and within each organization there may be different points of view as to what is necessary to be successful, he says. "Corporate guys have a set of goals related to cost and service, while local guys want someone who is easy to do business with and doesn't clutter up the yard with trailers. All of these views need to be taken into account."
That requires doing some internal work before getting to the formal bid process, he says, preferably with a strong, cross-functional team. "I think the biggest stumbling block to success is the failure on the part of the buyer of services to adequately determine what it is they are trying to do," says Bentz. Simply knowing that it wants to eliminate a private fleet in favor of contract carriage or wants to outsource all warehouse operations is not enough, he says. Rather, a company needs to go through a series of steps, the first of which is to establish a baseline that reflects how it is operating today. "For example, is the company basically happy with what it is doing now and just wants to change the cost characteristics, or does it have business processes that need to be overhauled? These are questions that must be answered so that when you go out to a 3PL you can tell them with a high degree of specificity exactly what it is you want them to do," he says.
As an example, a company wanting to outsource DC-to-store deliveries to a contract carrier might say that it has 12,000 loads a year, which averages 230 loads a week, Bentz says. "But if it moves 8,000 of those loads between August and December and most of those go out on Thursday and Friday, the third-party needs to know that."
Once a company has established the scope of its project, often with the help of a consultant, the next step is to decide which 3PLs to include in its evaluation.
"Deciding who would receive our bid request was really the toughest part of the process," says Jim Kayser, supply chain and transportation manager at Gardner Denver, an industrial equipment manufacturer located in Quincy, Ill. Gardner Denver recently began an engagement with Meridian IQ, a unit of YRC Worldwide, Overland Park, Kan. The company used a number of resources, including trade magazines and word of mouth, to identify third-parties with a customer base of similar companies, Kayser says. It ultimately sent a request for proposal (RFP) to seven companies, including an incumbent, and received back five bids.
To better target potential 3PL partners, companies increasingly are sending out requests for information (RFIs) to a fairly wide universe of providers as an initial screening process.
"At Penske, we are seeing more potential clients send out RFIs as an interim step to help them determine who should receive an RFP," says Joe Gallick, senior vice president of sales at the Reading, Pa.-based 3PL. This makes sense, he says, since the RFP process is cumbersome and resource-intensive for users as well as providers. "An RFI allows the client to select the few 3PLs that are really qualified to submit a proposal for their job and helps the provider more selectively focus its energies on those situations where it is a good fit," Gallick says.
Large customers and veterans of outsourcing use other resources as well. "We typically look at incumbents or players with whom we have a good experience in other areas," says Reisinger. "It's really a continual process for us because our regionally based purchasing organizations are always looking at players who come in to offer their services and assessing whether these are providers that should be considered when the next bid goes out."
Similarly, Hewlett-Packard, Palo Alto, Calif., bases its initial consideration on a pre-certified Authorized Vendor List, says Leo Bischoff, vice president of global logistics at HP.
RFI responses should be narrowed down to a "workable number" before sending out formal RFPs, says Bentz. "If you get 20 respondents to the RFI who all qualify, you will probably want to pare that down to between four and eight before executing the bid. Unless you have lots of money and lots of time, you really can't afford to evaluate bids from many more than that. These evaluations typically are being done by small groups of people and time is of the essence," he says.
While no one is entirely satisfied with the RFP process, all agree that sound construction and evaluation of RFPs is critical.
As noted earlier, 3PLs are looking for specific details about the scope of work, but that is not all. "In addition to services wanted, buyers need to include all the things that a 3PL needs to be aware of to create a good solution," says Dennis Walton, principal at Tompkins Associates, Raleigh, N.C. "If you know there may be an acquisition down the line or some other change in the environment, include that information so flexibility can be built into the approach. A good RFP also should have fair and well constructed accountability built in. There need to be risks and rewards for both parties."
Often potential clients have difficulty making RFPs as specific as providers would like. "If a customer doesn't have all the data, we would encourage it to select fewer 3PL companies and drive the opportunity through face-to-face meetings," says Dan Watkoske, chief of xpedx Supply Chain Services, Tampa, Fla. "When we bid a proposal, where we see gaps in information, we cover those gaps or uncertainties with higher margins to cover our risk. If we were closer aligned through the process and understood exactly how the company runs its business, we could generally give it a much more aggressive price up front and save everybody a lot of time."
"When customers don't take the time to do that baseline, a 3PL sees added risks," agrees Terry Haber, director of sales and marketing at CEVA Logistics, The Netherlands (formerly TNT Logistics). Haber notes that CEVA has a process to help companies develop a "current state" picture which then can be used as the basis for a "future state" solution.
Overall, however, companies are becoming better at the RFP process, Haber says. "I do think more customers understand that they have to provide a reasonable set of data to get a legitimate response back from a bidder. In many cases, the information we are seeing in RFPs is getting a little better, which allows us to give back more of a true response-not a vision document."
Gary Kowalski, chief operating officer at Menlo Worldwide, San Mateo, Calif., agrees. "RFPs generally are coming through with more specifics and more detail," he says, adding that the types of services and capabilities companies are looking for also are changing. "One new development we have seen is that clients are looking for faster startup capabilities than in the past," he says. "This obviously impacts how soon they can get their internal ROI."
Another issue gaining in importance is global capability, says Kowalski. "Having the right geography is an increasingly important part of the match. That's because global supply chains are creating more of a challenge for companies' internal infrastructure."
HP's Bischoff underscores this point. "Historically, our teams have focused more on getting boxes out of the door at the lowest cost while meeting customer expectations," he says. "Today, we are concentrating on collaborating between business units to provide solutions that can be leveraged across our portfolio of products and across regions where it makes sense."
Scott Hagan, director of global business at Mallory Alexander, Memphis, says potential customers are very interested in Mallory's global network "and whether we own all of our offices around the world or whether we work with agents or other partners." Mallory Alexander's extensive global network includes both. "Using agents can sometimes be seen as a disadvantage, but we overcome that with our systems, which enable a customer to go online and have total visibility. Plus, most of our partners are fairly large, well known entities around the world," he says.
Globalization is impacting the demand for 3PL capabilities domestically as well. "We have seen an increase in requests for small- and medium-sized distribution center operations," says Haber. "With extended global supply chains, there is less confidence and predictability on inbound material flow and people want to have a little more safety stock. So they are looking for a 3PL that can put together an inventory positioning solution fairly quickly and with flexibility, because in some cases they need to get out of these arrangements as quickly as they get into them."
Technology is more in demand as well, particularly visibility.
"Visibility to shipments, especially where it enables our customers to take out human capital, continues to be the issue with the biggest momentum," says Hagan. "It's the focus of a lot of concentrated questions in the RFIs and RFPs that we see."
The Buxton Co., Springfield, Mass., recently engaged Weber Distribution, Santa Fe Springs, Calif., to provide logistics services for distribution of its leather goods on the West Coast. "A big piece of our criteria was to be able to go right online and at any given time see exactly what our inventory is and where an order is in process," says Joanne Berwald, vice president of operations. "That's a big issue for us because we are constantly communicating with retailers who want to know the status of their orders. We have to be able to look online while on the phone and give them an answer."
Similarly, Keller Logistics, Defiance, Ohio, recently implemented HighJump warehouse management software to provide inventory visibility. "Our customers were demanding that we have a robust warehouse system controlled with radio frequency so they can have accurate up-to-the-second inventory information," says President Bryan Keller. "They want a system that can link to their systems. The days when customers would come in and set up a warehouse using their assets or their computer equipment and technology are gone."
Visibility to performance metrics and documentation of those metrics also is important, says Tom Giovingo, executive vice president of Fidelitone, a 3PL based in Wauconda, Ill. "Our clients use this as part of their marketing effort," he says. "Being able to say that their orders are shipped within five hours or within 24 hours and that they have a 98-percent service level or a 99-percent on-time delivery is very important."
While it often manifests as questions about technology, what companies are really looking for are 3PLs that can lead them into the future, says Mike Noone, vice president of logistics-Americas at APL Logistics, Oakland. "It's not just about what you can do for me today as far as physical or information services are concerned, but how well you can enhance the supply chain going forward. That's why APLL has really strengthened its supply chain engineering capabilities."
"Companies are looking for 3PLs that can actively anticipate and identify new opportunities," agrees Mario Van Vliet, a consulting principal at U.K.-based Capgemini. "We see some shippers including innovation and process improvement as part of the key performance indicators they will measure."
Pricing, of course, continues to be a strong determinant of 3PL selection as does the financial strength of 3PL companies. "These partnerships need to continue to offer competitive costs and flexibility, along with state of the art solutions," says Bischoff. "We continue to drive for competitive pricing with a balance of operational performance."
All of these varying requests make for large and complex RFPs that require significant resources on the part of 3PLs to respond. Consequently, providers also go through a selection process.
"We weigh the scope of work against our capabilities to make sure it is a global fit," says Kowalski. "If we don't know the customer that well, we also look at the quality of the RFQ because that gives us some sense of how serious they are. In some cases, we also look at the past history of that customer's outsourcing engagements."
"What we really look for is the quality of the RFP and the quality of data coming back from the company that is outsourcing," says Watkoske. "That's number one. We assess the RFP and how the business needs to be run. If we have available assets in the concerned geography, then we consider the business. If it is a stretch for us and doesn't fit us really well, we don't waste our time with it."
"We like for RFPs to be the result of some earlier effort we might have made to penetrate a client," says Gallick. "But we recognize that RFPs are part of the procurement process. So if a bid is unsolicited, we try to gather as much additional information from the customer as we can to help us understand the issues. If we are unsuccessful, it is a lot less likely that we will pursue it. We have found that the best outsourcing experiences are the ones where the client and 3PL are really able to sit on the same side of the table and co-create and co-execute the solution."
Noone says that APLL also prefers to avoid blind bids. "We think the best approach is to identify root causes and then come up with a solution that may enhance the overall program and we have a strong engineering group that we use to do the analysis. That type of approach is very difficult to do prior to engaging with a customer," he says.
3PLs are as concerned about the financial stability of potential customers as customers are concerned about their financial stability. "SEKO Worldwide always "measures the financial strength of a potential customer," says Tom Szwaja, vice president of domestic field operations at the Itasca, Ill.-based provider. "Their credit history is important. We also need to consider the account's claims history, and the customer's expectations of the liabilities we will assume," he says. If the company has a high claims ratio, "we ask what effect assuming that liability will have on our company's insurance history and the cost for underwriting our liabilities." SEKO also considers how well the potential client's business will blend with SEKO's current customer mix and whether it will require a different discipline and additional training. "We ask how many of our locations will benefit from the additional business, and how much will they have to adapt," he says.
Depending on where they are in their development, some 3PLs are less inclined to decline an opportunity to bid for business. "Mallory is in a strong growth mode, so we answer as many RFPs as we can because we are expanding the brand," says Hagan. "We figure that even if we don't win or get included for this round of discussions, responding will get us on the list for future consideration."
As RFPs themselves need to be specific, so do the responses, says Gallick. "When we answer an RFP, we are very specific about the scope of the activities we will provide, the metrics involved that will determine the success and how we are going to manage the relationship. We want to make sure that we are in alignment with the customer."
Aligning with customers is important because the issue of over-promising has been a problem for some outsourcing engagements. "We have had to learn from past mistakes," says Reisinger. "There is a fine dance here, where we say 'what' we want and the 3PL says 'how'. The failure of that dance to occur successfully has us being a bit more proscriptive on some of the 'how'. We have found a tendency to have a mismatch between commitment and delivery, so we have really put in place a lot more check points and reviews to ensure that the preparation the 3PL is doing and the resources it is dedicating are as extensive as our experience tells us they need to be."
When RFPs have been answered, customers typically go through another round of evaluation and paring.
At that stage, "one of the things we do is to just make sure there is no missing data," says Reisinger. "We check the data for reasonableness and where it seems either excessively high or excessively low, or just out of pattern, we will go back and ask questions to make sure there wasn't an error."
This stage often includes site visits to other clients of the 3PLs in contention and by the 3PL to customer locations.
"We are looking for somebody who knows the type of business we are in and what it takes for us to be successful," says Reisinger. "We are a big volume operation and there are a lot of people who aren't used to running the really big distribution centers that we need. If you are talking 100,000 square feet versus a million or better square feet, it's two different worlds. We have to have a provider who can play in that bigger world."
Procter & Gamble also looks at what Reisinger calls bench strength. "We want to know that if a site has trouble and needs extra help, the 3PL has the ways and means to flow those resources," she says.
In its recent selection process, Gardner Denver visited other clients that it chose itself, as well as those that it was directed to by the 3PLs under consideration. It then used a weighted methodology to score various capabilities to come up with a total for each 3PL. This process narrowed the field down to two, an incumbent and Meridian IQ, which ultimately won the contract.
"At this point we began to go into more depth and had lots of face-to-face meetings," says Kayser. The incumbent already was a well-known entity, but Gardner Denver delved deeper into a review of Meridian IQ. "We wanted to really know what this company was like. We visited its headquarters and talked to people within all the specific disciplines, not just their sales people, but their procurement staff and operations staff, even their accounting staff to see the caliber of people they had. We had an opportunity to interview various players in the organization."
As face-to-face meetings progress, intangibles play a larger role.
"As the process gets down to a short list of finalists, companies really become more focused on what the relationship may be like," says Walton. "Will these folks approach the partnership with a lot of creativity? Are they excited about it? Are they trustworthy? When we are working with clients on a selection process, one question I always ask in the final round is simply, 'do you think you can work with these guys?' There will be bumps along the way and if don't have good relationship at the outset, it's kind of tough to get over those bumps."
While agreeing that culture and chemistry are important factors, "what you don't want is a bunch of 'yes people' sitting around the table and patting each other on the back," says Fidelitone's Giovingo. "You want competent, quality and professional relationships where it is OK to challenge each other. That's healthy and it keeps everyone on their toes. If I am just doing the same things for my customers every day, day in and day out, over time I am not adding value. It is critical that we and our clients challenge us to bring new and diverse services or technology to the table."
Managing the Relationship
Finally, when the deal is done and implementation begins, managing the relationship takes center stage. "A strong vendor account management between the 3PL and HP is key as well as an effective communication process," says Bischoff. There are always changes and the failure to anticipate these changes proactively "is a sure way to shut down an operation and a 3PL relationship." Similarly, he says, "poor communication breeds dysfunctional 3PL operations. Structured, constructive feedback between the teams in an open and honest forum must always be allowed to exist even if the message is unpopular or undesirable."
"Communications also helps guard against complacency," says Kayser. "My experience is that as the term of a contract goes on, you lose a lot of the enthusiasm that everyone had in the first year and complacency can set in. You stop pushing the envelope, and the improvements and savings that you saw early on begin to tail off. Everyone needs to guard against that."
Bischoff agrees. "Both parties must be more vigilant in seeking ways to improve the supply chain and be innovative and should devote time to strengthening the relationship. This should lead to a continual rethinking and questioning of the supply chain, the role logistics plays in it, how business is done and what measures can be taken to improve it."
"In the end, we have to remember that the part of the supply chain that is being outsourced by our customers is still their supply chain," says Haber. "We are operating a piece of what is still their business, so there cannot be an arms-length relationship. Otherwise, it might fail."
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