All relationships have their challenges, and those between logistics outsourcers of logistics functions/activities and their contracted 3PLs are no exception. Yet, as with most relationships, the ability of partners to engage in open, honest dialogue goes a long way toward resolving concerns that do arise. This approach also can prevent many issues from occurring in the first place as well as work to elevate the relationship to a more strategic level. In fact, 3PL relationships characterized by transparency, accessibility and continuous productive communication deliver consistently superior levels of service, accelerated payback and heightened customer satisfaction. Not surprisingly, there's no magic formula for creating and sustaining a successful relationship between a shipper (manufacturer, retailer, distributor) and 3PL. However, effective partnerships that meet and exceed expectations generally incorporate five key elements.
1. Fit. The partners must be well-matched. Shippers should select a 3PL with deep and extensively demonstrated vertical domain expertise, capable of growing with the company and skilled at introducing best practices based on vertical-specific key performance indicators (KPIs) to manage the relationship well. As part of its commitment to optimizing performance over the long run, the 3PL should also utilize a continuous improvement approach such as Lean Six Sigma. Outsourcers and 3PLs must mutually define manageable goals and build solidly from that common shared foundation. A 3PL partner that focuses on understanding what's expected and doing it well - avoiding the pitfalls of over-commitment and associated under-performance - prudently establishes credibility with the development of a phased value identification, execution, realization and yield measurement approach.
2. Quarterly Business Reviews. Quarterly Business Reviews (QBRs) should be conducted on an established schedule to keep both the shipper and 3PL aligned on short-, medium- and long-term goals. The most effective QBRs are comprised of three components: reviewing the recent past, evaluating the present and preparing for the future. Measure how well the 3PL has performed against defined goals and identify any gaps that require immediate attention. Then, discuss KPIs and progress in addressing priorities or initiatives identified in the previous QBR. Finally, engage in frank, open-ended conversation about customer expectations as well as anticipated challenges and opportunities within their supply chain.
The more data-driven information the 3PL and the shipper can bring to this discussion, the better. For example, it's valuable for the 3PL to add cross-customer benchmarking to the QBR to compare metrics. It's also important to analyze market intelligence from expert industry sources, the economy, freight rates and other overarching factors. Plus, dedicated discussion on engineering and analytics topics ensures the 3PL puts the right resources in place to support the shipper's strategic initiatives through comprehensive analysis of the business, market environment and overall supply chain performance operating on the 3PL's platform.
In addition, the 3PL must actively listen to customer concerns for the future, which may be cost per pound of freight, the impact of new environmental regulations in 2011 or another matter altogether. Equally important, the shipper must share its vision of the future and the business strategy it intends to execute to achieve it. Is the company in growth mode, looking at an acquisition or planning to divest certain non-core assets? Will the company be introducing scores of new product launches in a single fiscal year? Do freight costs have to be limited to a certain percentage of sales dollars in order to ensure competitiveness? With sufficient understanding, the 3PL can be a powerful ally in making the outsourcer's vision a reality by designing the right processes, managing in real time against the right KPIs and adapting the jointly developed logistics system to anticipate changing needs/market demands.
Finally, the importance of executive-level involvement in the QBR cannot be overemphasized. Executive involvement assures alignment with the shipper's corporate goals and objectives and demonstrates the shipper's commitment to the 3PL relationship.
3. Control. The third element in an effective partnership is ensuring that the shipper retains ultimate control of their supply chain. Although the roles and responsibilities of each partner must be clearly defined and agreed to from day one, too much delegation can be a source of confusion and possible conflict that negatively affects the relationship and the 3PL's ability to achieve if not exceed the desired results. For instance, even if order management, transportation and fulfillment are highly segmented and outsourced, the customer needs to strategically coordinate the supply chain so that the 3PL can operate with maximum efficiency. A customer saddled with limited forecasting accuracy, vastly fluctuating demand and highly irregular processes can make any of these function's costs much more difficult to control in isolation.
In the best relationships, the 3PL functions as an integral extension of the customer, using their specialized expertise to accomplish greater results than the outsourcer would be capable of on its own. This requires the 3PL to work strategically with the customer, not simply serve as a "pair of hands" to execute policy. To facilitate the development of this type of partnership, the 3PL must first and foremost earn - and then be offered - a seat at the table that allows it to engage in open, honest communication with its shipper customers on a strategic level.
4. Configuration. The fourth element in successful relationships is the 3PL's ability to support business rules for the outsourcer as part of the on-boarding and configuration processes, as well as being able to continuously refine them as the relationship evolves. A highly disciplined 3PL with a depth of talent and industry-centric knowledge is well-equipped to manage and adapt responsively to a full spectrum of situations from low-margin, cost-focused to high-margin, service performance-sensitive focused - and everything in between. In fact, in today's increasingly complex, multi-echelon global supply chain environments, it is more critical than ever for both partners to remain nimble and agile, willing and able to reengineer their configurations and operating processes/practices in rapid fashion.
5. Continuous Improvement. Finally, the fifth factor in a model partnership involves integrating Lean Six Sigma or another wildly accepted continuous improvement approach as part of a multi-year commercial relationship. Although the particular flavor doesn't matter, continuous improvement itself is a non-negotiable competency for a leading 3PL partner. The 3PL must utilize a comprehensive diagnostic approach to analyze transactions and the processes around them, identifying outliers and inefficiencies which can be eliminated to reduce costs and improve service performance levels. Continuous improvement efforts consistently deliver win-win outcomes for both the 3PL and the outsourcer.
Clearly, capitalizing on 3PL-outsourcer relationships is a collaborative effort that both demands and thrives on communication, communication and more communication. Once a 3PL has demonstrated consistent performance that meets if not exceeds articulated expectations, the relationship - and the results achieved - will be further enhanced by the outsourcer's willingness to open the door widely to 3PL participation in strategic discussions. The more access the 3PL has to the business context behind the order data, be it material sourcing challenges or modified customer service requirements, the more aligned the solutions and services it can provide. And that's the core of a productive, long run relationship with a bright future.
Matthew Menner is Senior Vice President, Sales & Alliances and Brent Hudspeth is Senior Director, Consulting at Transplace.
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