Hello, my name is Jim Tompkins and I am the CEO of Tompkins Associates and Tompkins International. I am pleased to be with you today to present our 8th part of our 3rd series of the Global Supply Chain Podcast. This 3rd series is on the topic of Supply Chain Cost Reduction.
We have been working our way through the major costs of the supply chain, and today we turn our attention to outsourcing logistics.
To help us out here is the past Chief Operating Officer of YRC Logistics and present Partner of Tompkins Associates, Valerie Bonebrake. Welcome Valerie.
Valerie, as I think about this subject I see that many companies have utilized outsourcing as a strategy to reduce costs for years. But I wonder, is that trend still continuing?
Valerie:
It sure is, Jim. According to data from the Supply Chain Consortium, companies are very interested in lowering their costs, and rate that high in their decisions to outsource, but the good news is many also view it as a way to improve their service levels and gain capacity quickly.
Jim:
Why do some logistics outsourcing arrangements yield incredible results and strong partnerships while others fail?
Valerie:
No matter who you talk to, you can find a wide cross-section of people with strong feelings about logistics outsourcing. Sometimes you'll hear companies complain they have not achieved the benefits they expected from outsourcing and other times, you’ll hear great success stories from companies who have achieved significant gains -- not only cost reduction, but also improved service levels, increased flexibility and higher customer satisfaction.
I decided to Google “reasons to outsource logistics” and “reasons not to outsource logistics.” The result was 118,000 hits on reasons to outsource and 383,000 hits on reasons not to outsource. So people obviously have strong feelings on this subject. But rather than debate who’s right and who’s wrong, I’d like to talk about some ways to ensure a successful outcome, because for this critical business process I, like most people, believe, “failure is not an option.”
Jim:
What are the ingredients for success, and how can you ensure a successful outcome to your logistics outsourcing efforts?
Valerie:
You’ve probably heard it said before that going through the process of outsourcing is sort of like a courtship. During the sales process, the parties are dating. Then the two parties make a commitment and sign a term sheet -- they get engaged. Then the start-up occurs and now they’re married. Maybe the contract isn’t “til death do us part” but let’s just say annulment is not an option and divorce can be really, really expensive.
To carry this analogy a little further, a big fancy wedding doesn’t ensure success; marrying for money and fame doesn’t ensure success. But, choosing the right partner, making a commitment to each other, keeping the lines of communication open, working through problems together -- and celebrating the good times -- are ingredients for success in marriage, and in outsourcing arrangements.
Logistics outsourcing is not new, but the service industry is still relatively young, and shippers are still learning how to effectively select the right partners and how to manage those partner relationships. I think most people will agree that logistics service providers have made steady improvements and that’s good news for shippers and providers.
So, if you’re a shipper who’s outsourcing for the first time, or you tried it once and didn’t like it, or it’s been a while since you examined your current outsourcing arrangements, now is a great time to determine your goals, evaluate your options and set your house in order to be prepared for the future, especially as the economy begins to recover. If you’re a logistics service provider, it’s also a good time to examine your client portfolio, your target markets and your goals and expectations for the future and go after the right kind of business where you can create value and make money.
In terms of ensuring success, let’s assume that both parties are committed to the ingredients we already talked about, and let’s focus on making them a reality. But before we get there, we need to backtrack a bit because for the most part, we already know the reasons for courtship and marriage, but let’s talk about the reasons for outsourcing.
Jim:
Okay Valerie, when should you consider outsourcing?
Valerie:
Before taking the leap, it's important to develop a well thought out strategy that is aligned with the company’s goals and objectives.
For example, for most companies, the global marketplace is today's reality. This can mean serious changes in the way business is done. Consider what it means to source globally or to launch a new product halfway around the world. The logistics talent and infrastructure that once served a US-centric business may have evolved out of necessity to meet global requirements -- with good intent, but no strategic plan.
In today’s environment there is pressure to improve responsiveness, maintain operational flexibility, and reduce costs, so looking or re-looking at your overall logistics plan for the business is critical.
In terms of approach, a good way to begin is by asking a series of questions and Jim, I think the ones you wrote in your 2005 book on outsourcing still hold true.
Those questions are:
What is the science of our business?
What functions are core to our success?
What functions are required but are not core?
By further dividing these functions into primary focus and secondary focus, you can begin to shape your strategy for what is important to do yourself and what is important to manage really well.
Even for large companies, more and more the answer is to outsource non-core functions and to also outsource core secondary processes. Depending upon the industry, logistics may be non-core or core; that’s why this exercise is so valuable. If you go through this process and ultimately outsource, then you will be able to leverage the talent, scale and experience of a logistics service provider for selected functions to outsource and you will become really, really good at supplier management.
Jim:
What functions should you consider for outsourcing?
Valerie:
Once you have completed the evaluation of core and non-core activities, you have a base of activities to look at. At this point, if you haven’t already done so, it’s a very good idea to benchmark your performance in key logistics functions. By doing this, you now have a good idea of where you stand in terms of performance and cost.
For example, your performance may be at parity, but your costs are too high. In that scenario, you may want to look at an outsourcing solution that would deliver the same or better levels of service, but at a lower cost. Talent is another important consideration, not only in terms of existing talent in your organization, but your ability to attract, develop, retain and train logistics talent for the future.
Another area for consideration is the company’s stance on capital investments, especially for non-core or non-primary functions. New technologies for effective supply chain management are coming to the desktop; they are scalable and integrated. Having access to these capabilities may be more attainable through your LSP where you are paying a share of the cost, vs. ownership or developing the systems on your own that you need for today’s global supply chain.
So, whether you’re looking at distribution operations, transportation planning and execution, global trade management or other related functions, by applying this process you will get to the right answer.
Jim:
Valerie, once you’ve decided what functions to outsource, what capabilities should you look for when selecting a partner?
Valerie:
This is another area where I would say doing your homework will really pay off. You need to look not only at the functional capabilities of the LSP, but other criteria such as global coverage, account management and organizational design, executive commitment, market fit, financial stability, technology strategy and platform, talent, and culture.
There are a number of ways to conduct this evaluation, including the issuance of an RFI. I can’t over-emphasize how important this step is, and it should produce a good short list of qualified candidates.
Jim:
How should our listeners be evaluating potential providers?
Valerie:
Most companies today utilize an RFQ process. One caution I would comment on here though Jim: I’ve seen companies take 3 months to prepare an RFQ and then allow only 2 weeks for providers to respond. Service providers want and need the opportunity to thoroughly evaluate your opportunity and to ask themselves some of the same questions that you may have asked regarding strategic intent, global requirements, investment requirements, financial stability, competitive environment, executive support, fit, and culture.
And, depending upon which services you decide to outsource, the LSP may have assets and infrastructure that might not meet 100 percent of your requirements, but will meet 90 percent, at a lower cost and easier transition, because now they are operating to their strengths. If you are willing to make some trade-offs you may realize better performance, greater savings and perhaps even a better overall solution by letting each provider put their best foot forward.
Bottom line, don’t pin the competing LSPs in such a tight box that you end up making a price-only driven decision. Be willing to look at the whole picture.
Jim:
How do you ensure you select the best partner?
Valerie:
Well, we haven’t talked at all about existing partners, but they may very well be the best partners to grow with. It is important to consider the cost to manage multiple relationships. While many believe this is the best way to keep the LSP rates competitive, you may very well be sacrificing the benefits of building a partnership that will yield more significant and sustainable results.
This may default to a company’s philosophy and past practices, but if you go back to what we discussed regarding benchmarking, you may very well find that strategic partnering with fewer providers will yield the greatest benefits.
I’m not suggesting that you need to eliminate your regional or niche providers. Just make sure that the needs they fill are truly unique and, if so, the business should expect to pay a premium for that unique value delivered.
Make sure you are evaluating existing providers on their total capabilities, not just what they are doing for you currently. LSPs evolve over time and most likely they developed additional capabilities during this time of your contract. I find oftentimes the strategic conversations are not occurring and that may limit the value the client could be receiving. Finally, I believe that developing a decision support matrix prior to publishing your RFQ will aid in the objectivity of your decision.
Jim:
What other factors with respect to outsourcing logistics should our listeners be thinking about?
Valerie:
There are many issues that we haven’t even touched on -- how to develop a term sheet, how to ensure a successful implementation, how to establish metrics and KPIs, best practices for managing outsourcing relationships; just to name a few. I will close by saying that good planning and preparation across the full spectrum of logistics services you require, backed up by the ingredients for success we talked about, should result in the positive outcomes that both parties deserve.
Jim:
Thank you Valerie, I have been really excited about this series, and now with only one segment left, I feel really good about the content we have shared with our listeners.
Stay tuned in two weeks when we cover in our last segment: energy cost reduction in the supply chain.
