LEVERAGING LOGISTICS: OUTSOURCING RELATIONSHIPS

By Joe Grubic, Global Logistics, Nortel Networks

During the past decade, outsourcing to 3PLs has been a means of leveraging economies of scale and tapping into a logistics infrastructure that delivers increased robustness to a company's supply chain. Logistics outsourcing has improved productivity and significantly reduced costs.

In the last few years, the demonstrated importance of the value chain - which influences all activities from order fulfillment through to order delivery - has focused efforts on ensuring that the end-to-end supply chain is both efficient and effective in seamlessly delivering products to customers. To achieve this supply chain excellence, the internal focus should be on craftsmanship and relinquishing operational responsibilities to the 3PLs. Developing and managing a logistics network requires a clear understanding of your customer's requirements, existing constraints, and the capabilities of your 3PLs . Bridging these gaps is a continuous process and must be managed internally to ensure that your end-to-end supply chain delivers the value you require.

Successful partnerships with 3PLs require a combination of trust and collaboration. Trust determines the level of flexibility you will allow the 3PL in running the operation to the best of their capability which, in its own right, should exceed your own. To achieve the agreed to performance and cost goals, it is necessary to have a partner that can deliver best-in-class processes and solutions. Therefore, acknowledge their abilities, agree on a mutually beneficial business arrangement, and trust that they will do what is in your best interest.

Various aspects of logistics within a supply chain are standard practices, but everyone has different ways of achieving the same end result, some more efficient than others. For example, legacy information technology systems are costly and cannot be replaced easily. Hence, many companies outsourcing their logistics activities to 3PLs request that they continue to manage the warehousing activities using existing legacy systems with established interfaces. For example, legacy inventory management systems that replicate the functions of warehouse management can restrict the 3PL from achieving efficiencies in the warehouse. Such inefficiencies include the inability to maximize the use of stocking locations, since the inventory management system requires that the inventory be segregated by bin location, product type, or customer. It is important to ensure that you do not restrict your 3PL providers from delivering the efficiencies they can by imposing your own tools and processes into their operations. Let your 3PL service providers take the lead in bringing efficiencies to your logistics operations and adapt and align your internal processes to that of the 3PL's.

Knowledge of the operation is another key success factor that must be transitioned and integrated successfully to the 3PL. Lack of knowledge transfer in the early phases of the partnership causes many companies to fall into the trap of implementing "band-aid" fixes that choke the potential downstream efficiencies in the supply-chain.

Examples of this can range from the way your products are designed, packaged, and shipped to the way orders are fulfilled and delivered. To further illustrate these possible inefficiencies, we can review a requirement where Company A utilizes a 3PL provider to manage warehousing on their behalf for the purposes of marshalling finished goods assigned to customer orders. In order to fulfill the complete order, the 3PL provider must receive product from various supply sources and consolidate the material to complete the order prior to coordinating delivery to the end destination.

Some of the products are ordered from an OEM supplier and packaged using a part number defined by Company A. Company A has defined a standard kit from these products with a unique part number, as they order it in this form regularly. The part number has a single reference but is packaged separately on three pallets, using the same part number on each package. This poses a problem for the 3PL warehouse provider, which is required to receive the product as the part number defined by Company; if it consists of more then one SKU (Stock Keeping Unit), then the unique, individual package identification numbers are missing.

The warehouse provider must know that this OEM sourced part number consists of more than one SKU prior to receipt. Addressing these types of issues with your supply chain trading partners can significantly reduce inefficiencies and issues caused in the fulfillment process. A recommended solution would be to have the OEM prepackage this kit into unique container identifications to minimize discrepancies in the receiving process. Failing such logical solutions requires "band-aid" fixes to be implemented at the back end of the supply -chain. Although these are the easiest and quickest short-term solutions, they cause further inefficiencies and drive incremental costs. To avoid these complications, transition this operational knowledge to your 3PL partners so that you can work collaboratively to implement the right process change, at the right time, within your supply chain.

Working in a collaborative environment with your 3PL partner(s) is critical in defining the road map from the current to desired end-state. Each party must acknowledge the current state of the operation before improvements can be identified and ultimately delivered. Collaboration does not become less important as the relationship matures. Your business continually evolves, so change is constant. A collaborative working relationship requires both parties to continually review baselines and revise targets, retaining a positive momentum in your relationship.

Prior to integrating a 3PL partner into your business, you must have a clear understanding of your performance expectations and ensure that the 3PL provider has the capabilities to deliver them. The key requirement for improving performance is acknowledging current performance. To ensure an effective relationship with your 3PL partner, realistic performance targets need to be established that deliver the desired results. Ensure that the targets are SMART (specific, measurable, attainable, realistic and timed). The 3PL must have complete accountability and control in achieving the expected results. Metrics that require collaborative efforts between you and your 3PL partner should not be discounted, but the 3PL's accountability should be minimized. These metrics should be managed internally to ensure achievement of the necessary results.

The role and responsibility of the 3PL provider should be primarily focused on executing the operational activities within the logistics network. It is necessary to continuously remind yourself of the reasons for outsourcing in the first place. Many companies constrain the 3PL's ability to manage operational activities, impeding their ability to achieve the desired efficiencies and productivity gains. Micro management has been identified as the major issue in many outsourcing initiatives. Companies continue to influence the 3PL to run the business as they did prior to outsourcing. 3PLs know how to manage logistics operations, since this is their core competency. They should be empowered to make the appropriate decisions and implement the necessary improvements within the logistics network to deliver the performance targets that they have committed to.

Logistics outsourcing generally fails if the logistics service provider overstates its capabilities and commits to unrealistic performance, or if the outsourcing company does not accurately reflect the true state of the business. Outsourcing is a partnership and both parties must be committed to a successful outcome.

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