Alex Rotenberg interview
Outsourcing Logistics 3PLs: What are some of the critical mistakes people make in outsourcing logistics 3Pls? Before asking this question we have to remember that outsourcing is always a strategic decision and when we talk about logistics this make or buy decision is even more complicated. Why is that? Well, very simply because logistics is all about service and service is all about perception so when we buy logistics service we have an idea what we buy but we don’t know what we get until we experience the service and very often our logistics partners are working for much larger companies like IKEA or Wal-Mart. So the question is also whether we will get sufficient attention over the lifecycle of the contract we have with them. Another important point, is that when you outsource logistics you do not outsource the complete activity very often you are building a solution, combining a number of building blocks like service providers, logistics carriers, forwarders, systems providers, etc, etc including very specific technologies to build better service at a lower cost and it’s very difficult to judge up front what you get. Each solution has its pros and cons and you only know what you get when you have put it all together. A last very important point, it’s that logistics works a lot with subcontractors so you have to make sure that all the parties involved have a fair mention, because if they don’t what will happen is that this will boomerang back to you in a form of bad service. Finally, logistics is all about flawless execution; make sure you get it right the first time because each action has various impacts on your customers. My advice if you want to outsource your logistics is to follow a number of rules. The first one would be to avoid short term costs focus and instead have a really long term view on the service you want to get. Logistics is in fact a trade of about what service you get at what cost. And if you focus too much on the cost savings side you are gambling on the sustainability and the quality of the logistics service. If you create a cut root cost competition, it’s a short term strategy and eventually it will back fire because logistics has a History of having over capacity and under capacity cycle and whenever they will be demand that exceeds the supply all your partners will defect and leave you with your problems to service the customers who treat them better than you. There is, in fact, only so much room for business to give its margin away. So cutting their margin through a hard negotiation like you would typically do in procurement is a very short term strategy. Once the right balance in terms of margin for all involved in the logistic scheme has been reached, logistics can in reality only deliver sustainable savings via innovation like improved collaboration and transparency. With other words by reducing risks and unexpected costs from bad processes. And to improve bad processes and avoid unexpected cost, it’s all about making the relationship better and focusing on win-win objectives with the logistics experts you work with. The second advice I would give is not to restrict the parties you want to work with. The greatest danger when selecting a logistics service providers or a logistics partner is only to look at the global logistics players. Especially if you are one of these smaller companies one of these multinationals which have a lot of logistics activities but just not enough to be top of the list for the big players like DHL. First of all, the reason not to go for these big ones without considering the smaller companies is because you will not have the same bargaining power as IKEA or Wal-Mart. Second, the global logistics partner will not necessarily be willing to offer you flexible terms and services. For a smaller company, it is much better to work with several smaller logistics providers and develop jointly, in time, the solution that you really need. A win-win relationship will be established for many years with the clear bargaining power to get best price at the best cost. And when the number of relationships becomes hard and complex to manage a logistics player can be brought it to manage these relationships but always keep control of logistics contracts and price negotiation because nobody negotiates better that the one needing the right service. The third advice is really to have a closer look at subcontracting. Making the assumption that your third party logistics services providers can cover the full ground and the geographical scope you expect is very risky. When contracting logistics suppliers, one of the crucial elements it’s there are very few global players and their service quality is very variable by region, market and service. Who is great in Australia is not the best in West Africa, a company serving the chemical industry is not good for fast consumer goods and the key to success is really tapping into all the specialists that you can use. But creating all these relationships with all these partners is a job in itself and on one hand we want to develop this partnership over the long term. On the other hand, we want to keep a healthy competition and be able to switch and change to lower cost suppliers when necessary. The secret is to design logistics processes that can evolve over time and where multiple suppliers can operate from one common set up. A supplier relationship management set up specifically design for your logistics partners. The fourth advice is really to take lot much more care about the service level agreements you make with your partners. Very often, we make service level agreements with very precise key performance indicators in them. But they cannot be enforced, or if they can be enforced it’s with a lot of extra manual efforts and with a lot of extra discussions, because logistics it’s about operations. Operations are complicated, are very detailed, and very hard to follow and track at management level. So what we need to do is to really take a big effort to look at the service level agreement and how we will enforce it before contracts get signed. We don’t want back and forth discussions; we don’t want KPIs where we don’t know who is accountable or responsible for not meeting the targets, what we want is KPIs supported by a set of very precise operational performance indicators, operational performance indicators that tell us if our partners deliver as per their expectations. I will give you a few examples. Typically, we have a key performance indicator about service on time in full; we want a 90% or 95% delivery service quality. But, very often, also, we don’t know which of the missed are accountable or attributable to our partners. So what we need to do is to make an operational performance indicator which will measure how many of the missed or delays we have in logistics can be attributed to our partner. Similarly, a perfect order KPI tell us of good we are and how well we deliver orders. But is the carrier responsible for not meeting it or not. So for that we really need to make sure, we look at the process in details and make sure that our partner delivers on the part that he is responsible for. So lot of homework needs to be done before we sign the service level agreement. We need to be clear about operational performance indicator, about reports that we will use to look at this operational performance and also what extra work we need to do to come to conclusions in meetings and how we can make sure, we can use the reports of our partners together with ours to come to clear and transparency agreed view about what happen in operations. Do all this homework before you sign the service level agreement because once the contract is signed it will be too late and difficult to enforce the agreed service if we can’t monitor the partner with minimal efforts. The last very important advice is about the operating procedures. Very often, our carriers and partners create very high quality and very detailed operating procedures and this is hard work. But what is missing, very often, in this documentation is information at the right detail level. What we need is operating procedures information at three different detail levels: for the stakeholders, for the experts of the process and for the users.
By having these tree levels of process documentation, one can ensure that stakeholders, the experts who built the solution and the final users of the different systems and steps in the logistics processes are all aligned around meeting the KPIs and the targets of the logistics partnership.