Supply Chain, Logistics & Warehouse Training

Outsourcing

The Four S’s: Applying Sound Purchasing Practices to the Process of Logistics

With literally thousands of Third Party Logistics (3PLs) and Logistics Service Providers (LSPs) scattered around the world, ready to make outsourcing a reality for you, how do you make the selection process less daunting for yourself?

Evaluating the business proposition for each LSP and 3PL becomes even more confusing when you begin to see that some are asset based, some are management based, some are integrated, and some are administration based. It can be like comparing apples to oranges, at best, to find the best fit for your organization’s unique requirements. In fact, many organizations lack the resources, time, or experience with outsourcing LSPs and 3PLs even to assess the need to outsource or its feasibility objectively. That’s why, when it comes to outsourcing, it’s a good idea to hire an experienced consultant, someone who can provide objective advice and practical assistance – someone who has “been there, done that.”

Whether you enlist additional help from a consulting resource or go it alone, however, you’ll need to apply the same solid purchasing and procurement skills you’ve used in the buying of any type of service (for example, transportation, warehousing, or logistics services) to your LSP or 3PL outsourcing process. You’ll also need to have a fundamental understanding of price versus cost.

What follows is a tried-and-true game plan for achieving a successful outsourcing experience. The process doesn’t have to be cumbersome or overwhelming if you follow the Four S’s.

In principle, outsourcing is a rendition of the sourcing process, of evaluating alternatives and making the best choice of a provider. Therefore, the Four S’s – Source, Solicit, Select, and Secure – are applicable. Our experience tells us that due diligence applied to these four areas will directly impact the longevity and effectiveness of your outsourcing relationship with the LSP or 3PL you select.

SOURCE

As obvious as it may seem you need to review, identify, and clarify the Business Process Outsourcing (BPO) requirement. You’ll need to review the internal organization metrics and Key Performance Indicators (KPIs) for the function, department, or process that will be outsourced.

Then you will analyze gaps in performance, establishing which are most critical. Gathering data and manipulating information will be done by compiling six to twelve months’ worth of history and activity requirements, in detail.

The next step is to obtain feedback on potential LSPs or 3PLs. This will necessitate a Request for Information (RFI). You will then need to prepare a profile questionnaire for the prospective providers to complete. Once a list of potential sources, both current and new, is prepared, you can review their profiles. Additionally, you will provide candidates with preliminary information about your solicitation and about your organization. Upon receipt of the completed RFIs and your review of submitted financials, insurance certificates, authority and operating documents, and references, you are ready to Solicit.

SOLICIT

Based on the RFI results, decide which providers will receive a Request for Proposal (RFP). Refine the list of prospective providers, based on their knowledge of your industry, their outsourced process orientation, and their geographic capabilities, discerning how consistent these factors are with your particular needs. When you Solicit, you also need to determine your preferred pricing and contract formats. Specify whether the bid or proposal is defined by the following:

• Traffic lane or facility allocation

• Geographic region

• Complete scope or network

If at all possible, you should hold a pre- proposal conference to invite qualified providers to:

• Discuss expectations

• Hold a question and answer dialogue

• Exchange feedback prior to submission of their proposal.

As you formulate your bid/proposal package for qualified provider sources, you should also include an information gathering template, where each LSP or 3PL can insert detailed data that allow you to make “apples-to-apples” comparisons. In addition to providing clear instructions concerning the information you want the provider to include, we recommend attaching a copy of the anticipated contract’s terms and conditions, up front, to avoid surprises later in the process. The RFP should establish what is considered to be a responsive bid/proposal and the deadline date.

SELECT

Now you’re ready to take all the responding bid/proposal submissions and to verify the documentation submitted. At this point, it’s also wise to review any noted exceptions or modifications to the proposed terms and conditions of the contract, especially considering how these might require further adjustment, compromise, or negotiation. As you analyze each bid or proposal, you may note areas that require more investigation or clarification, such as:

• What type of turnaround time is offered?

• Does the provider have sufficient capacity to accommodate increased demand?

• Is there sufficient alignment between their capability and technology roadmap and yours?

• What is their commitment to good practices, process improvement, and value added opportunities?

• What are the acceptable negotiation criteria for the length of contract; delivery terms; service levels, price, quality, and so on?

Essentially, your assessment and final selection of a contract provider should include these 5 Critical Consideration Criteria:

1. Financial strength

v  Total annual revenues

v  Annual revenues in contract logistics services

v  Total assets

v  Assets employed in contract logistics services

v  Financial rating

2. Business experience

v  Years providing contract logistics services

v  Number of clients in your specific industry

v  Depth of management experience

v  Strength of operating management

v  Quality of work force

v  Labor management

3. Business development

v  Corporate commitment to contract logistics

v  Overall corporate strategy

v  Leading accounts

v  Trends in business development

v  Accounts lost

4. Support services

v  Can human resources be phased in and out?

v  Is the insurance program adequate?

v  Does the safety program support the insurance strategy?

v  Are information systems robust?

v  Are communications state of the art?

5. Business arrangements

v  Open book cost disclosure

v  Incentives for performance

v  Recapture of excess profit

v  Provisions for replacement

v  Independent financial audits

Finally, you’ll want to consider conducting a site visit in order to narrow your alternative to a short list. Using a cross-functional team and a formal checklist, talk with local management or those responsible for your outsourced operation. Review the candidates’ qualifications, finances, management philosophy, and their “strategic fit” for a long-term relationship in order to finalize your selection.

SECURE

This final step focuses on providing the contract to the selected provider and reviewing the measures of agreed performance that you will use to monitor their costs and service level commitments. Remember, the emphasis is on LTR – Long-Term Relationship, where you will seek continuous improvement and incorporate provider feedback. Most LSP or 3PL outsourcing contracts cover a range of 3-10 years, so we recommend that you schedule and conduct frequent in-progress reviews (IPRs), at least on a quarterly or semiannual basis. Additionally, a contractor performance report card should be issued on a monthly or quarterly basis.

It’s important to consider that both parties share in the risks and rewards. Both invest time and resources in the relationship. So, just as in any supplier relationship, there has to be mutual benefit.

CONCLUSION

How comfortable you are in applying the Four S’s to your outsourcing decisions will depend heavily on your experience in applying the steps successfully in other contexts. In other words, if you have the “know-how” to purchase services effectively, you can probably use the same practices to contract with an LSP or 3PL provider. But why not make the outsourcing selection process less daunting? A qualified, experienced consultant can round out the experience by furnishing you with the outsourcing-specific criteria you need for constructing an effective BPO template and for lining up prospective providers. It’s a winning combination for outsourcing success.

 

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