Maximizing value of outsource partners requires new skills
David Hannon -- Purchasing, 9/4/2003 2:00:00 AM
The increasing use of third-party logistics providers (3PLs) is changing the duties and skills required of today's logisticians. No longer are logistics managers responsible only for making sure inbound and outbound freight gets to where it is supposed to be. Today, logistics managers are expected to track and maximize the value of their outsourcing partners, which puts a much greater emphasis on skills like accounting, human resources, and business relationship management.
The challenge, then, is to develop logisticians that are versed in the old-school transportation basics, but also have MBA-type business backgrounds so they can manage business relationships with 3PLs. Developing these types of skills does not happen overnight, but it is happening in the colleges and universities training future logistics professionals. Logistics professors today—many of whom were logistics professionals themselves at one time—are charged with giving current and future logisticians the combination of skills needed to handle both internal and outsourced logistics work.
"In many cases, the logistics intelligence is moving away from the [shipper] company because they don't have an internal logistics department or it's a limited logistics department," says Dale S. Rogers, professor of supply chain management at the University of Nevada, Reno (UNR). "But what they understand is project management, program management and financial controls. The systems to monitor costs and compliance to contracts are better than ever, but understanding the nitty-gritty of what a third-party can do is worse than it has ever been. Many of the people that are running logistics outsourcing projects now have never actually been that close to it."
View from the classroom
Rogers says historically many of the logistics graduates from UNR would become transportation analysts or materials analysts after graduation. Today, more of them are going into program management or project management and don't have the functional responsibility their predecessors had within logistics organizations.
Garland Chow, associate professor in the division of operations and logistics at the University of British Columbia (UBC) in Vancouver, agrees with that assessment, saying the responsibilities being outsourced in logistics are changing.
"Management is three things: planning, execution and monitoring/control," Chow says. "The outsourcing done in the past focused mainly on execution, calling up a carrier and telling what you wanted picked up, when, and how it should go. That was a transactional relationship. Today, you're outsourcing not only the execution, but some of the planning and even some of the control."
Chow says asking a 3PL to select carriers, negotiate shipments, make payments, and sign contracts means outsourcing a part of the logistics planning function. And in doing that, often carrier performance measurement is left to the 3PL, which is outsourcing the control function as well and requires even more attention.
As an example of this, Chow cites a mid-sized high-tech firm in the late 1990s that decided to outsource its Canadian logistics operations and monitor the 3PL provider from its U.S. headquarters. Perceived advantage at the time was that the 3PL could combine the company's volume with the volumes of other shippers, and negotiate lower rates with carriers. For a while, the plan worked well.
But by the end of 1999, with the high-tech industry booming, the shipper was receiving customer service complaints about delivery and realized quickly that its newly increased volumes were simply overwhelming the cross-dock operations the 3PL had set up in Canada.
"They were not monitoring the capability of the 3PL well," says Chow. "Of course, it was easy to identify the problem. The shipper needed someone doing inspections of the warehouse and the facilities. This company realized after the fact that the ability to deliver on-time was compromised by the increased volumes. At that point, it tried to re-evaluate and even asked us to benchmark the going transportation rates."
The shipper was shocked to find that with its dramatically increased volumes, the rates it was paying for truckload shipments were roughly $1,000 more than the average. While the company was happy to find the cost savings, the logistics manager that failed to find these savings earlier was quickly looking for a new job.
"If you're going to outsource logistics, it does not mean you get rid of all your logistics people," says Chow. "You still need people that are going to perform the management function of control."
These are the types of issues that UBC is stressing in its logistics course work—part logistics, part business management. At the undergraduate level, what used to be a transportation management course at UBC is now a course on logistics service providers, recognizing that it is not just carriers that provide logistics services these days, but 3PLs, consultants, software providers and more.
UBC also added a supply chain management course. Students now take a logistics course, which teaches them about managing internal logistics operations, then a course on logistics service providers, which teaches them about the various suppliers and partners in the logistics environment.
"In the supply chain management course, the two fields intersect and we teach the principles of outsourcing and concepts of partnerships and alliances and interfirm communication, IT and strategic sourcing," explains Chow.
UBC logistics majors are also encouraged to get some background in activity-based costing, because "most of the good 3PL contracts are volume-variable and based on activity-based costing," according to Chow. At the MBA level, the program encourages courses in negotiation, cost accounting and information systems so the general manager in supply chain will not only know the management processes, but also how to build relationships, measure performance and recognize how IT and the Web can facilitate these processes.
Karl Manrodt, assistant professor in the department of information systems and logistics at Georgia Southern University in Statesboro, Ga., says people skills have been pushed in academic logistics for years, but the increasing reliance on 3PLs has brought the issue to the forefront in both the professional and academic worlds. Logistics managers today have to be able to maintain strong relationships with their outsourcing partners, but also must motivate their internal people to perform new tasks and change focus to maximize the value of outsourcing partners.
"We've also seen writing skills increasing in importance as well," Manrodt says. "In my course, students spend a lot of time writing one-page memos and working on PowerPoint slides. It teaches them what a good memo looks like and to make their points in a very concise manner."
Benchmarking and metrics
Benchmarking is not a new topic for logistics professionals, but the concept takes on a new spin with 3PLs taking on more supply chain responsibility. No longer are companies only benchmarking their logistics operations to other companies. They are now comparing the combination of their internal logistics operations and the performance of their outsourcing partners to those of other companies, which is significantly more involved.
Mark Kadar, senior partner in the transportation and logistics practice at New York's Mercer Management Consulting, says the easiest thing to measure in transportation is cost. How much were you spending then vs. how much are you spending now? More complicated measurements include inventory carrying costs or error ratios that change depending on how often the inbound process has to be altered because of a mistake along the way, either with the 3PL or the transportation provider.
Chow recommends comparing process to process and not getting too concerned with the size or industry of the company being benchmarked. Find a company that has a similar mix of internal and outsourced operations and processes and work from there.
"I always felt the best 3PL service benchmarking starts with the 3PL selection process," says Chow. "You are basically asking three or four companies to make a bid and it's the comparison among them that provides your initial benchmarking. And you should not only measure your current performance, but measure your prospective performance after you've gotten rid of the low-hanging fruit. A lot of 3PLs can come in and save you a good bit of money off the bat by spotting some real obvious changes that can be made—10-15% that you should have been able to do yourself and didn't for some reason."
Designing metrics for 3PL evaluation is a constant effort, according to Rogers, who adds that many of the big ERP systems will prescribe financial metrics for cost analysis, but do little to help optimize specific operations.
Clarifying metrics used in benchmarking is an important first step in evaluating a 3PL relationship. Making sure the company and its partner are tracking apples to apples is the key to making metrics work.
"I have seen cases where 3PL clients think they are measuring something, but in reality they are not," says Manrodt. "Or they have a much more optimistic view of how they are performing. You just have to go back and forth and standardize the measurements. The problem is it will vary so much, even internally within a single company."
Manrodt says in a study he was involved in four years ago, companies were asked how they defined very specific measurements like on-time delivery. They were asked if the metrics were defined mutually, by the customer, by the 3PL, or they did not know. The results found that more than 60% of respondents were in the process of defining that metric or did not know how it was defined, showing that even the most basic metrics needed to be reviewed closely so all parties would be on the same page.
Once the metrics are clear, gathering data and reviewing it becomes the priority. Surprisingly, Chow says companies often get complacent in this area and do not review the data they work so hard to gather. Scheduling daily or weekly reports and face-to-face meetings with the 3PL will force the issue. Too many companies put too much trust and control in their partners' hands and do not have a set of checks and balances in place to identify and rectify issues quickly. Knowing there will be an in-person meeting on a regular basis encourages both sides to do their homework.
Mapping out processes is an often overlooked early step in benchmarking according to Manrodt.
Talking to suppliers and customers about who their best business partners are is also a good way to find out what companies may be good benchmarking candidates. To find these candidates, ask customers and suppliers who is the easiest company to do business with and why.
"If it is a noncompetitor then try to understand what they do," says Manrodt. "If it is a competitor, then you have to look at them and figure where they are better than you."
Parting words
"You can't use a 3PL just because you think it will save money," says Manrodt. "You have to look at the advantage to using a 3PL and ask what do you gain if you insert a 3PL and don't change any of your processes? Outsourcing can make organizations better, but, in the end, you have to change internally as well to gain efficiency. Sometimes the 3PL can do things better because they are the outsider, they don't have a stake in the politics and can give an unbiased view, much like a consultant would."
Kadar says the most important quality to review when selecting and maximizing a 3PL partner is the company's financial statement. If a company is planning to build a long-term relationship with a logistics company, outsourcing function and possibly even planning and control to the 3PL, it is definitely worthwhile to make sure the company is fiscally sound.
Rogers says it is important to treat a 3PL like an internal logistics organization and not like an outside supplier constantly trying to sell new services whether or not they are needed.
Average improvements with 3PL use
| Source: 2002 Cap, Gemini, Ernst and Young/Georgia Tech 3PL study |
|
| Logistics cost reduction using a 3PL | 7% |
| Fixed logistics asset reduction | 16% |
| Avg. order length | 2.2 day reduction |
| Overall inventories reduced | 9% |
| Cash-to-cash cycle reduction | 20.4 days to 16.4 days |
| Service improvement | 63% |
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