Governance Practices in Logistics Outsourcing

The decision to outsource supply chain management and logistics practices must create significant
financial and strategic value for all partners, which calls for greater focus on governance of these
areas of business. Here’s an instructive overview of how to manage this transition.

Warren Sarafinchan

The decision to outsource an element of your logistics operation must be directly aligned with your firm’s strategic vision. An outsourcing decision will directly impact your financial performance and should enhance your customer service levels. This decision should be viewed using a holistic perspective to ensure the financial impacts are understood across the entire manufacturing and distribution network. Importantly, the decision to outsource must create significant financial (P&L impact, return on investment, etc) and strategic value for all partners to the agreement. As a result, it is crucial to employ strong governance for the activities to both make the outsourcing decision as well as to successfully implement and manage the change. This article outlines and discusses these key governance activities.

(1) Executive Endorsement
Executives must support the decision to outsource and be prepared to visibly lead the change across all functions of the organization, particularly in those directly impacted by the change. A comprehensive change management strategy should be developed to effectively manage the myriad of stakeholders impacted by an outsourcing decision. Examples of activities typically found in a change strategy include a communication schedule, stakeholder engagement plans, training and development strategies and, where required, organizational design.

(2) Utilize a Disciplined,
Fact Based Selection Process

The selection team should have cross functional representation including logistics, sales, customer service, supply chain planning and finance. It is also valuable to include purchasing early in the request for information (RFI), request for proposal (RFP) and contract negotiation processes.
During the selection process, it is important for all stakeholders to clearly define the requirements of the business. This includes tactical, day to day operating requirements, service standards, pricing / cost levels, quality guidelines and communication expectations. It is equally important to evaluate the vendor’s ability to:

  • Manage your forecasted volume and product growth, including having the ability to raise sufficient capital to support expansion plans.
  • Support global sourcing strategies and new market entry plans.
  • Meet changing customer expectations (e.g. reduced order lead times, expanded product base, etc) and market conditions (e.g. increasing cost of fuel, labor shortages, etc).
  • Stay current with enabling technology (e.g. RFID)
  • Provide expanded, value added services to drive further financial and strategic benefits. For instance, the ability to integrate both inbound and outbound shipment activity for an operation.
  • Meet your minimum liability insurance expectations. Additional actions that should be undertaken as part of the selection process include:
  • Site visits to perform quality assurance inspections at potential vendor sites. This should include a review of quality programs (e.g. HACCP, ISO, etc). These visits create an opportunity to meet a cross section of team members from the potential supplier, providing useful data points on their organization. These interactions can validate information discussed during the sales and negotiation cycle. Equally, there may be some areas identified that require further discussion in advance of completing a formal agreement.
  • Perform reference checks with current customers. This may provide insights into qualitative characteristics of a supplier, including service orientation, company culture and trustworthiness to name a few. Consider requesting references where there may have been issues with the supplier under consideration. This may provide some useful insights on potential risk points that should be discussed in advance of entering into an agreement.
  • Evaluate the financial stability of potential vendors to understand their current financial strength and potential to make future investments.
    The vendor evaluation and selection process should be fact based and transparent to all stakeholders to maximize process credibility. There are a number of tools that can be utilized to successfully manage a selection process.

    One such example is a Six Sigma tool known as a Characteristic Selection Matrix (CSM). This tool lists the various evaluation points that will be used in the supplier comparison, agreed to importance weightings and scoring completed by internal stakeholders involved in the selection decision.
    This analysis will create a weighted supplier ranking that can be used to drive the final supplier selection decision.

(3) Develop a Contract that
Drives the ‘Right Behaviors’

As part of the negotiation with the selected out-source provider, consider expanding the terms and conditions to go beyond the typical cost, service and quality elements. Include performance incentives to drive the desired behavior by all partners. Examples include:

  • Reward performance by allowing partners to share savings in the event agreed upon performance targets are exceeded.
  • Flexible cost structures that allow the partners to share savings and risk on specific cost areas.
  • Create opportunities to reward innovation. Examples where this concept can be applied include operational productivity improvements, product loss /waste reduction and fluctuating fuel pricing.

(4) Implement for a
Successful Start-Up

The successful implementation of an outsourcing change is an important step in building the partnership between vendor and supplier. Important points to consider as part of the implementation plan.

  • Assign an experienced project manager to develop detailed implementation plans with input from all partners. Recognizing the duration of an implementation will vary, a key to the successful implementation will be to allow sufficient time to complete all transition activities, including information systems set-up and testing, development of standard operating procedures and employee training.
  • Include a tightly integrated communication plan. A communication ‘playbook’ can be utilized to ensure executives and operating managers understand and execute their communication responsibilities. Consistent with any change initiative, it is imperative all stakeholders receive timely information on the status of the project. It is critical not to underestimate the importance of regular communications.
  • There needs to be recognition that there are some typical start-up challenges as the organizations begin to work together. Regular communications focused on resolving issues must be included as part of any integration plan. Given the objective to have operational transitions be seamless to your customers, it is also appropriate to create a contingency plan in the event there are more significant issues experienced.

(5) Establish a Plan to
Manage the Partnership

On completion of the successful start-up, it is important to have processes in place to ensure the expectations of all partner organizations are achieved. Consider utilizing the following approaches:

  • Executives from the partner organizations should collaboratively develop targets and operating priorities for the outsourced operation.
  • Create a joint management team with key stakeholders from all partner organizations. This team should develop operating plans to identify and implement key priorities to achieve the shared objectives. This includes collaboratively developing key performance indicators that will be used to measure results and drive performance.
  • Regular operating reviews with representation from all partners, including "top to top" meetings with senior executives. The discussions should be candid and transparent in the spirit of meeting shared expectations of the outsourcing agreement.
  • Alignment between the partners to use the same performance standards to drive incentive programs. Executives and operating managers with shared objectives linked to compensation programs will drive behaviors consistent with the goal of building a successful partnership.
    Recognizing the significance of a decision to outsource your logistics operation, it is imperative that financial and strategic benefits for all partner organizations are achieved. Utilizing a disciplined, fact based assessment and implementation methodology coupled with a well executed change and communication strategy will position your organization to successfully implement the change and take advantage of the expected benefits.