3PL performance metrics: Michelin keeps it simple
David Hannon, News and Transportation Editor -- Purchasing, 7/17/2003 2:00:00 AM
Outsourcing logistics to a third-partly logistics provider (3PL) is a big step and most organizations taking that step want to ensure that they are tracking the performance of that provider adequately. But developing metrics for evaluating 3PL performance can quickly spiral out of control to the point where there are more measurements and data than most organizations can actually analyze, especially in the early days of an outsourcing partnership. According to a 2002 study by Northeastern University and Accenture, the third most time-consuming activity in bringing on a 3PL is developing performance measurement standards and 40% of respondents to that survey said the transition to a 3PL took longer than they expected.
This is what concerned Bob Brescia, vice president of North American logistics for Michelin North America (Greenville, S.C.), most about handing over control of Michelin's 18 U.S. distribution centers (DCs) to TNT Logistics North America (Jacksonville, Fla.) in August 2002. Signing a six-year contract for TNT to handle all operations within those DCs was a big leap of faith for Michelin and Brescia wanted to be sure that he was accurately tracking TNT's performance. Michelin had little experience with 3PLs in the past , the company decided that its business was making tires, not logistics.
"We just didn't want to follow a general trend and outsource because it seemed the thing to do," says Brescia. "While logistics is a critical function of the supply chain, it is usually not a core competency of a manufacturer. So we asked ourselves if this was something we want to retain in-house at any cost. And the answer was no. We felt that professional logistics companies like TNT should be able to handle the logistics for us better, faster and cheaper. So we decided we would look to a larger, well-established company that is up to the task—someone who could provide logistics services consistently better than we could handle them in-house."
With that decision, Michelin began evaluating 3PLs big enough to handle everything that happens within the four walls of the DCs and even acquire the DCs and associated real estate. The purchasing of transportation services was kept in-house because Michelin felt it had more leverage with its spend than most 3PL providers.
"We have benchmarked with the industry and we know we're doing an excellent job of purchasing transportation through partnerships and long-term contracts, so we kept control of that aspect," says Brescia.
At the same time the company was evaluating 3PL providers, Michelin was also busy developing the processes and metrics to track the performance of its future 3PL provider. With so much riding on this move, Brescia was not leaving anything up to chance. He designed a system of metrics that provides less detailed information on a more frequent basis for the early transition period to a 3PL. The four primary metrics established were: 1) on-time shipping, 2) unload time, 3) over, short and damage, and 4) block and search effectiveness, which defines how quickly parts can be quarantined for quality issues.
"These metrics were established several months before the culmination of the contractual phase, before we went into the operational phase with the 3PL," says Brescia.
Once TNT was selected to manage the DCs, an even more simplified method was put in place to track performance and increase communication within Michelin about the project. From that point, Brescia only tracked throughput in the DCs and ignored more subjective issues of quality, so he could assure Michelin's management that the DCs were continuing to function at the same level of effectiveness under the 3PL. All of the stakeholders in the outsourcing project were kept informed with daily updates on throughput via a color-coded measurement and executive summaries were sent regularly. The daily updates helped minimize the phone calls coming from higher-ups inquiring about the progress of the project. Once TNT was up and running for a few weeks, the system moved to weekly updates.
Michelin built a common-use server to store the metrics information so both Michelin and TNT could view the data at any time. DC managers can view metrics pertaining to their individual DC and compare those to an average of all other DCs in the company. Key metrics are reviewed and replaced annually as needed to keep the information useful and timely.
"I would recommend to anyone going through this to do something similar," says Brescia. "Have a transitional system that has some summary metrics but not too much detail. Too many times I see people presenting reports with many different metrics and they start going through them and by the time you get through the list, no one can tell if the transition has been a success or failure. You have to keep it simple and send it to each stakeholder every day."
Michelin also implemented a "three ups, three downs" reporting method where each day, logistics managers report the three best points of the day and the three worst points. Brescia says faithfully compiling this type of report every day during the early transition period provides the basis for an after-action review. It also forces people to be concise and keeps them from reporting on too much information.
Another technique Brescia calls "ghostbusting" was implemented to delegate responsibility during the transition period. "I know that I can't be everywhere at once, so in effect I clone myself by deputizing several people and entrusting them with intimate knowledge of the contract and operation so that if a problem arises at any of the DCs, they can go there. They have the knowledge to understand the problem and possibly solve it or bring it back to headquarters very quickly and a solution can be found quickly."
Overall, the outsourcing has allowed Brescia's staff to spend more time identifying and developing strategic ideas and initiatives for Michelin's logistics operations, in areas such as reverse logistics, dormant stock management, and recycling/after-use of its product. But such a deep level of outsourcing requires a good deal of established trust.
"You can't really trust a 3PL you don't know," Brescia said. "You need to know the management team and live in their world. I did that and they lived in our world. Now there is more reliance on mutual trust and most times verbal agreements will suffice for a lot of what we do."
Brescia cites three major lessons learned through the outsourcing project. First, the logistics manager needs to emphasize and prioritize the actions that would lead to faster ramp-up and fewer quality problems. "What differentiates the good 3PLs is how they lead you through the transition," he says.
Lesson number two: You can never over communicate when implementing a 3PL contract.
And lesson number three is that a logistics organization needs to provide training on managing the new 3PL contract to all stakeholders prior to the contract going into effect. "A lot of companies say 'Thank God the contract is now in effect' but find they wished they had spent more time training their people," says Brescia.
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