Supply chain functions have grown increasingly complex with globalization, technology, and competition advancing at a rapid pace. Thoroughly examining the motivations, expectations, and justifications for outsourcing critical supply chain functionality enables companies to make effective decisions which generate incremental profitability and shareholder value.
While these and other valid and appropriate motivations drive outsourcing decisions, some companies use inappropriate reasons to justify their decision to outsource. Some companies choose to outsource simply due to lack of understanding of logistics processes. Other companies justify their outsourcing decision on the ability to better identify the true cost of supply chain operations.
Companies should first seek to understand their true logistics costs prior to outsourcing in order to make better decisions and build better relationships. Some companies want to off load the problems and issues associated with managing logistics operations. They mistakenly believe they can transfer the inherent problems and shift responsibility to a partner for resolution and not be involved with the detection, communication and decisions required to effectively resolve and reduce problems and performance issues.
Some companies never consider outsourcing or eliminate the strategic option of outsourcing too early in the supply chain strategy development cycle due to reasons that can be just as inaccurate or inappropriate as poor reasons to outsource. In-sourcing rationale may include an unconfirmed perception that cost will increase if an operation is outsourced. In many cases, this view is expressed by companies that do not know their true cost of supply chain operations. Another popular perception is that customer complaints will automatically increase due to decreases in overall service levels if an operation is outsourced. The belief is that the partner will not care about the business as much as internal employees do. This perception is based on the assumption that 3PL providers only care about their revenue which will not be the case if requirements are properly defined and contracts properly structured.
Managing the relationship
Here are some points the companies outsourcing their logistics should do and manage regularly:
Define management roles & responsibilities. Make sure you define a competent and strong management team with deep experience in managing a 3PL relation. Defining all sort of rules and KPI is necessary, but making sure the 3PL perform according to expectation is the most important element of success.
Define KPIs. Develop a set of highly descriptive key performance indicators (KPIs) that include precise times, quantities and other numerical measurements so that everyone is on the same page about what it will take to achieve acceptable on-time, accurate and cost-effective performance levels.
Establish a reporting schedule. In addition to giving you consistent access to the measurements you value most, the consistency with which your 3PLs stick to this reporting schedule is another good measurement of their ability to meet your company’s needs.
Take advantage of visibility systems. Have your 3PL set up visibility tools to prompt your company anytime there’s a notable exception to a delivery schedule, fulfillment rate or inventory level. That way you can easily pinpoint any minor performance glitches before they result in supply chain disruptions.
Continuous improvement. Many 3PLs now participate in continuous improvement programs such as lean. Encourage your 3PL to include your company in these programs, because the tools these programs rely on usually include a variety of detailed performance measurements — and improvements.
Perform operation audit and compare with best in class references. Consider compiling a set of performance reports that rank all of your 3PLs based on the same metrics — and then share the results with all of them. Knowing how they stack up against the competition can be a powerful incentive for 3PLs to either improve what they’re doing or keep up the good work.
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