Logistics Services

Best Practices for Managing Outsourced Logistics Services

  • Are you sure how to manage your relationship with your third-party logistics service provider?

    His market research was highly accurate: he imports a component of high demand in the industry, and his team identified the best logistics companies in Mexico.

    But there is a popular phrase: bread is burnt in the oven door.

    The Global Supply Chain Institute of the University of Tennessee states that outsourcing companies are rapidly evolving from being tactical providers of logistics and transportation services, "to becoming true collaborative partners, who deliver a wide range of products."

    So, what practices should you consider to improve the relationship with your logistics provider?

    1. Identify the specific needs of your company first

    The British consultant Martin Murray explains that the decision to hire a 3PL company depends on several factors, which depend on the company. "The decision to outsource certain functions will depend on the plans of the company; future goals, production lines, expansion, acquisitions, etc.”

    But any company needs to understand exactly what it needs before requesting a quote. Chuck Franzetta, a renowned logistics consultant in the United States, comments to Inbound Logistics:

    "He understands his logistics operation better than anyone else but he may not fully understand what a relationship with a third party provider means for his operation, and his profitability."

    This consultant is worried about the situation. In his experience, I rarely noticed that the relationship involved a true process, clarity in the expected results or a good order in which both parties review their goals.

    2. Negotiate a fair and balanced contract

    For the Global Supply Chain Institute, good contracting practices allow the agreement with the outsourced logistics company "to be fair and balanced, both for those who make the import and their logistics provider." His research recommends that companies ask:

    Who should negotiate the contract?

    Should it be a centralized relationship with the company's supply area?

    The academics of this institute suggest that both the supply and functional management areas negotiate the contract together to perfect the clauses and terms.

    Martin Murray also recommends that, before choosing a 3PL, the requests for information or quotes are detailed to the maximum.

    "The company you choose should be able to meet all your logistical requirements. You can only ensure that if each required service communicated well to potential suppliers."

    The Global Supply Chain Institute adds that contracts must be administered collaboratively, to allow both parties to achieve their respective goals. This includes the termination clauses of the contract, as well as the terms and conditions of payment.

    The latter becomes especially relevant when the liquidity of your company depends too much on your distribution plan, exchange rate or management of a fiscal deposit.

    On the other hand, patience is important in countries like Mexico.

    "People from other countries know the impatience of American culture, and use that to their advantage. It is clearly important to understand the nuances of cultures in Asia, Latin America and Europe when negotiating contracts in these regions."

    Therefore, we recommend that you make a list and check how to evaluate the providers. Remember, you must hunt with your own needs and priorities.

    3. Be sure to generate a good performance measurement and management model

    Hau L. Lee, professor of operations at the Stanford Graduate School of Business and a collaborator of the Harvard Business Review thinks that if the interests of one party are different from the rest, it will not be possible to maximize the performance of the entire logistics operation.

    Of course, since our suppliers usually focus on several stages of the logistics chain, companies usually ask for different management indicators.

    For the Global Supply Chain Institute, preparing good performance management "involves looking at how both will measure their work, in terms of metrics, and performance, with a dashboard, to assess the effectiveness of the supplier."

    "Identifying the appropriate metrics should be a collaborative process with the 3PL provider. This is the first stage to discuss and clarify the criteria for success."

    They suggest, for example, preparing service level agreements (SLAs). They are usually "metrics controlled by the provider and documented in the service contract".

    4. Deliver an appropriate address to the management of your relationship

    John Blanchard, transport manager and logistics consultant, tells Industry Week that the industry is full of "failed relationships between suppliers and manufacturing companies. In many cases, these problems were generated early in the process. "

    Thus, companies must find suppliers that live with their culture. As Inbound Logistics suggests:

    "Any importer should ask 'Does my company and my supplier share the same values, such as ethics and responsibility? Can we understand and agree on the specific nature of the agreement for our relationship?'"

    The research of the Global Supply Chain Institute concluded that the micromanagement of outsourced suppliers "is a problem". They have seen that most people consider it a problem to have two managers in the same building. On the other hand "even logistics providers do not want to have a very distant relationship."

    "The key to managing this relationship well is to collaborate and agree on the management style that respects both the culture and the strengths of the provider."

    5. Promote the continuous improvement of both parties

    A process of continuous improvement is the key for any of the parties. However, it becomes more important when managing a business relationship. Do not expect everything to fit at the beginning. If the relationship does not evolve and improves in terms of performance and communication, it is doing something wrong.

    The Global Supply Chain Institute thinks that a more strategic relationship should "increase the number of interactions and include a relationship between the highest levels of the executives that allow directing the strategic alignment of the alliance".

    How have you managed your relationship with your outsourced logistics providers?