Ensuring Successful 3PL Partnerships and Performance
Avoid downstream inefficiencies, “Band-Aid” fixes, and hidden incremental costs that can result when your outsourcing strategy is not managed for success from the outset. By following a simple set of success criteria, companies can fully leverage the capabilities of 3PLs to ensure a robust logistics infrastructure, improve productivity, and realize significant cost savings. This article looks at the five factors that can help ensure successful 3PL partnerships and top-notch performance.
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. In the last few years in particular, the demonstrated importance of the value chain – which influences all activities, from order fulfillment through to order delivery – focused efforts on ensuring that the end-to-end supply chain is both efficient and effective in seamlessly delivering products to customers.
A critical function influencing an efficient supply chain is logistics and, by extension, a successful, high-functioning partnership with the 3PL as a key member of that value chain is paramount. Five criteria can help achieve successful 3PL partnerships and pave the way to significant performance and productivity benefits. These criteria are:
• Understand your customers’ requirements and the capabilities of the 3PL;
• Develop a working environment based on trust and collaboration;
• Don’t restrict the 3PLs by insisting they use your legacy systems and internal processes;
• Transfer knowledge of the operation to the 3PL;
• Don’t micro manage – logistics is the 3PL’s core competency.
Understand the requirements and capabilities
The first criteria is to understand your customers’ requirements, and bridge any gap that may exist between those requirements and the capabilities of the 3PLs, and any existing constraints. Bridging these gaps (ie. processes, systems, requirements, etc.) through communication and common understanding of the objectives is a continuous process that must be managed internally to ensure that your end-to-end supply chain delivers the value you require. The internal focus should be on strategic planning and relinquishing operational responsibilities to the 3PLs.
Develop a working environment based on trust and collaboration. Critically important to a successful partnership is trust. Trust determines the level of flexibility you will give the 3PL in running the operation to the best of its capability, which, in its own right, should exceed your own. You’ve chosen a 3PL that has agreed to the performance and cost goals, and has demonstrated it can deliver best-in-class processes and solutions. By acknowledging the 3PL’s capabilities and expertise, and agreeing on a mutually beneficial business arrangement, you are implementing the foundation for a trusting relationship that will serve your best interests.
An important factor in reinforcing this trust is to create a strong collaborative environment with your 3PL partner(s). Collaboration is critical in defining the roadmap 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, and change is constant. In a collaborative working relationship, both parties need 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 clearly understand 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, establish realistic performance targets that will deliver the desired result, and ensure that these targets are SMART (specific, measurable, attainable, realistic and timed). Most importantly, 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 to ensure the ownership is in the right hands and positive results are achieved. These collaborative metrics should be managed internally to ensure achievement of the required results.
Don’t impose legacy systems
Linked with the importance of establishing a trust-based relationship and collaborative working environment is the need to ensure that you do not restrict your 3PL providers from delivering the most efficiencies they can by imposing your own tools and processes into their operations.
Various aspects of logistics within a supply chain are standard practices, but everyone has different ways of achieving the same end result, some more efficiently than others. Many companies outsourcing their logistics activities to 3PLs request that they continue to manage the warehousing activities using legacy systems with well established interfaces. However, many legacy information technology systems are costly and cannot be replaced easily, and they can represent an infrastructure that lends itself to potentially huge inefficiencies. For example, legacy inventory management systems that replicate the functions of warehouse management can restrict the 3PL from achieving efficiencies in the warehouse. Other 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. 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.
Transfer knowledge
The fourth key success factor is to effectively transition and integrate knowledge of the operation 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, consider a requirement where Company ABC utilizes a 3PL provider to manage warehousing on its behalf for the purposes of marshalling finished goods assigned to customer orders.
To fulfill the complete order, the 3PL provider must receive product from various supply sources, as well as 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 ABC. Company ABC has defined a standard kit from these products with a unique part number, as they regularly order it in this form. 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 ABC; if it consists of more than one Stock Keeping Unit (SKU), then the unique, individual package identification numbers would be 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. In the example above, a recommended solution would have the OEM prepackage this kit into unique container identifiers to minimize discrepancies in the receiving process. Failure to implement such logical solutions will require “Band-Aid” fixes 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. You can avoid these complications by transitioning this operational knowledge to your 3PL partners, enabling you to work collaboratively in implementing the right process change, at the right time, within your supply chain.
Don’t micro manage
Finally, the role and responsibility of the 3PL provider should be focused primarily on executing the operational activities within the logistics network. Continuously remind yourself of the reasons for outsourcing in the first place. Micro management has been identified as the major issue in many outsourcing initiatives, and can stand in the way of achieving the desired efficiencies and productivity gains. Many companies constrain the 3PL’s ability to manage operational activities by continuing 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.
Adhering to these five fundamental factors for success will help ensure that 3PLs are empowered to do what they do best, and that you are positioned to realize the benefits of an efficient, well-run value chain and logistics infrastructure. Logistics outsourcing generally fails if the logistics service provider overstates its capabilities and commits to unrealistic performance targets that it cannot deliver, 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.