Manufacturers, distributors and retailers are fond of handing out awards to honor their best supply chain vendors, especially those that perform logistics services. But what if the logistics provider were to turn the tables and highlight its best customers? What would be the criteria for winning such an award?
In fact, the current economic crisis has providers thinking hard, not only about holding on to their customers, but selecting the right ones. A panicky client who demands across-the-board rate cuts but won't commit to a long-term engagement isn't going to attract many high-quality logistics entities, no matter how bad things are. What's more, any customer that fails to meet the provider halfway isn't going to derive full value from the relationship. Here, then, are some tips for companies on how to be a "best-in-class" customer of a logistics provider in a poor economy, offered by some of the top vendors in the business.
1. Think in Terms of the Big Picture. "Companies on both sides need to align with a customer's overall supply chain and business objectives," says Greg Aimi, research director with Boston-based AMR Research. Under the old way of doing things, he says, providers would be rated on the basis of "myopic" measures which might seem logical on a stand-alone basis but prove "suboptimal in the grand scheme." Contracts might contain requirements that actually prevented a logistics provider from participating in those larger objectives.
For example, the arrangement might call for the maintenance of warehouse space in a particular city or state, regardless of whether that precise location makes sense for the customer. Both parties should understand how a particular warehouse or transportation service fits into the larger puzzle, Aimi says. Conversely, a good relationship will give the provider some leeway in determining where to cut inventory or reduce overall service costs. "Don't restrict the provider's ability to find the right approach," he says. "But measure them on the desired results."
2. Don't Get Fixated on Transactional Pricing. Carl Fowler, senior director of 4PL (fourth-party logistics) solutions with Menlo Worldwide in San Mateo, Calif., says enlightened customers view the supply chain as a coherent undertaking which stretches from the acquisition of raw materials to final delivery of finished goods. They don't let the allure of an attractive freight rate between discrete points obscure the needs of the larger chain. A broader view, Fowler says, might cause the company to realize that the route in question can be eliminated altogether. A good logistics provider can help the customer to make that decision-as long as it's given the freedom to look at more than individual links in the chain.
A reasonable approach to price must be preceded by a look at all of the costs involved in a network, says John Fitzgerald, vice president of global sales and marketing with Seko Worldwide in Itasca, Ill. In addition to basic transportation, customer and provider must factor in the cost of claims, shipment damage, administrative and backroom procedures, and the relative information technology capabilities of various providers.
All of those elements can affect the performance of a supply chain. As Fitzgerald points out, "a 99-percent service level at one dollar is better than an 80-percent service level at 95 cents. You really do get what you pay for."
The ability to see beyond hard numbers can influence the choice of provider as well. Businesses with a commitment to continuous improvement "are going to select their 3PLs based on capability, as opposed to bottom-line price," says Steve Dean, senior vice president of sales and marketing with Ryder System in Miami. "There are the hard savings that you can identify in an RFQ [request for quotation], but there are also the soft savings. For example, what does it mean when you can increase the timeliness of an ASN [advance shipment notice] transaction?"
3. Set Realistic Expectations for Results. Going into a relationship, the customer's buying organization might have failed to detail exactly what benefits the provider is expected to deliver. After that, poor communication between various levels of both organizations only serves to make things worse, leading to misunderstandings and finger-pointing, Aimi says. Even before the provider is officially hired, the customer needs to spend time developing an internal culture that fully embraces the idea of outsourcing-then set clear expectations based on the adoption of that philosophy.
A letter of understanding, or one that outlines the precise scope of work, can help the partners to define their intentions, says Fitzgerald. "Many times that hasn't been done," he adds, "and at the end people are pointing at each other."
A change in management is one event that often leads to misunderstandings and recrimination. Putting the details of the deal into writing can also help to avoid the danger of "scope creep," whereby the provider's responsibilities range well beyond what was anticipated, without any clear intent behind the change.
4. Emphasize Accurate Data and Automation. "The more accurate the data is, the more accurate the business case will be," says Aimi. "You can set expectations so much better if your analysis is based on real information." Data integrity on the customer side is vital to establishing metrics to track ongoing performance, and crafting a "gain-share" relationship that benefits both parties over the long run, he says.
Lack of good data shouldn't be used as an excuse for failing to drive improvements in the customer's supply chain, says Fowler. Ultimately, however, data quality is the key to building a truly effective IT infrastructure.
Fitzgerald prefers companies that are committed to the use of technology for processing data and documents. Laggards are more likely to suffer delays in their shipments as well as dysfunctional relationships with service providers. "We look for customers who want to be in an automated environment," he says.
5. Work From a Set of Clear and Concise Metrics. A series of key performance measurements are essential to identifying areas for improvement and tracking the success of those programs. Menlo figures its network cost per kilogram, zeroing in on the amount spent on moving raw materials for each item produced. With that number in hand, the vendor can proceed to drive down costs. At Seko, says Fitzgerald, detailed measurements go hand in the hand with the setting of expectations for performance.
Classic "lean" techniques, originally developed for the assembly line, can be applied to a customer's logistics operation. Far-seeing companies have a keen eye for the kind of waste and process redundancy that are the chief targets of lean programs, says Dean. "It's easier to establish a relationship if the client has a willingness to engage in lean methodology."
Menlo deploys value-stream maps-another key aspect of formal lean programs -for eliminating waste from the system. The exercise produces "a pictorial representation of how things actually work," Fowler says, equipping partners with the raw material for cross-divisional teams to implement change.
Also linked to clear metrics are the existence of standardized procedures which dictate how a company handles its inbound and outbound transactions. They allow the logistics provider to respond in kind, tailoring its own processes to meet the needs of each customer, says Lee Connor, president of John S. Connor Inc. in Baltimore. The provider needs to know exactly what kind of event triggers a shipment, along with such critical information as destination, consignee and special requirements. "We can do a lot of up-front preparation that way," says Connor.
6. Focus on Collaboration. This overused word nevertheless has real value in defining the optimal arrangement between customer and logistics provider. "It's really important to have a collaborative relationship, where you're bringing together the best of both worlds," says Scott Morgan, vice president of customer care with DSC Logistics in Des Plaines, Ill.
True collaboration requires that the two sides share a vision of what the customer wants to achieve, whether that's boosting the efficiency of existing operations, shedding non-core competencies or expanding into new markets. Fowler says everyone in the supply chain needs to get involved. A packaging expert might discover that by altering certain packaging specs or quantities, the shipper can fit more product into an ocean container. Procurement staff and outside suppliers should also be in the loop. Fowler recalls one instance where multiple individuals within a customer's organization worked with Menlo to implement a successful postponement strategy, whereby certain product attributes were finalized at points close to the customer. The result was a 40-percent reduction in delivery time.
Mike Gardner, chief development officer for the Americas with Exel in Westerville, Ohio, wants to know the customer's long-range business strategy, especially any factors that might force changes in the supply chain. "Are they in heavy acquisition mode? Is there a possible divestiture of products or brands? All that impacts the supply chain," he says.
Real collaboration involves the sharing of both risk and reward. That's especially crucial in rough economic times, when the provider can get stuck with excess transportation and warehouse capacity if the customer opts out of a contract, changes its supply chain strategy or goes out of business. Gardner suggests a provision that obligates the client to use the provider's facilities for a given period of time, or until they can attract an alternative user.
As a means of heading off any misunderstandings, Dean feels most comfortable in relationships where he was able to meet multiple team members from the customer's side at the outset. "Some of my best experiences were when we knew who the players were, well in advance of making final decisions," he says. (The same courtesy, of course, should be extended by the provider to the customer.)
7. Meet Regularly With the Provider. There's no hard and fast rule about how often the partners should get together to talk about major issues, but meetings should be on a fairly frequent and regular basis. Menlo sits down with clients every week. "At a minimum, it's got to be monthly," Fowler says. Topics include the state of the relationship, project plans, expectations of return on investment, and whether desired results are being achieved.
Communication has to happen in the trenches as well. Gardner cites one Exel customer who has what he calls a "war room"-an operations command center where managers can cope with immediate crises such as late trucks or bad weather. Exel keeps staffers on site there at all times.
8. Get Senior Leadership Involved. "We're looking to build relationships up and down the organization," says Gardner. Green Bay, Wis.-based Schneider Logistics typically works with managers up to the level of senior vice president, according to Bill Miller, vice president of supply chain management. With smaller companies, the provider might find itself dealing with a chief operating officer. Even the chief executive officer comes into the picture at times, usually when that individual has a background in logistics, Miller says.
Senior-level reviews tend to occur once or twice a year, Miller says, with quarterly reviews taking place at the general-manager level. The latter can involve individuals from various logistics or supply chain disciplines. The high-level talks will focus on how the parties are meeting their strategic objective, with a particular emphasis on any changes in facilities or distribution networks.
DSC sets up quarterly business reviews with its largest customers, often drawing the participation of senior leadership. Top executives on both sides of the fence come together in annual or biannual meetings. "You get very busy in the day-to-day," says Morgan. "That level of commitment is really critical."
9. Think Long-Term. In today's uncertain economy, it's only natural for companies to feel uncomfortable about committing themselves to an ironclad, multi-year contract. But logistics providers, in order to provide the level of resources that makes for a successful engagement, need some assurance that the client plans to stick around. The customary term of outsourced-logistics contracts today is three years, according to Miller. "In my mind," he says, "that's a long enough period for those objectives to be identified and progress to be made. Obviously, we hope to turn that into a six- or nine-year relationship."
In the case of new contracts, a commitment of three to five years is often needed to protect the logistics provider, Aimi says. It could easily lose money on the deal for the first year or longer, particularly where expensive warehousing or distribution facilities are involved. The provider wants to make sure that the customer won't walk away before the profits start to kick in.
10. Be Open to Suggestions for Change. A good logistics provider will continually offer ideas for improving the customer's supply chain. A good customer will listen. One customer of Schneider Logistics went along with a proposal to convert a system of multiple less-than-truckload shipments into a unified delivery network, which operated with predictability on a daily basis.
Exel generates recommendations to its customers based on a series of annual surveys of their networks. Whether the customer can overcome its reluctance to change is another matter, Gardner says.
Morgan says DSC draws on its experience with multiple customers in order to share industry best practices. Sometimes that means better integration of information technology between the two entities, to ensure the more frequent exchange of data. In other cases it might result in the implementation of labor-management programs, which can boost worker productivity.
The best-in-class customer stands ready to respond to unanticipated changes in the marketplace, economy or distribution network. Last summer, soaring fuel prices prompted many U.S. companies to reconsider their overwhelming reliance on China as a source of manufactured goods. The long supply lines were becoming too expensive, and the delivery of product too unpredictable, not to consider alternatives closer to home, such as Mexico.
11. Pay Your Bills on Time. For all that high-flown talk of collaboration and trust, outsourced logistics remains a low-margin business. Slow-paying clients can make or break a relationship, jeopardizing the provider's profitability. Says Connor: "There's a concern in this economic climate that people are looking to stretch out their payables. In my view, that would be a mistake on the customer side."
AMR Research, www.amrresearch.com
John S. Connor, www.jsconnor.com
DSC Logistics, www.dsclogistics.com
Exel Logistics, www.exel.com
Menlo Worldwide, www.menloworldwide.com
Seko Worldwide, www.sekoworldwide.com
Schneider Logistics, www.schneiderlogistics.com
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