Knowing the score
Smart shippers are monitoring their third-party vendors' performance by the scorecard. Careful evaluation against clearly defined standards helps ensure that they get their money's worth.
By James A Cooke -- Logistics Management, 2/1/1999
Four times a year, the staff of the North American field operations of Enterprise Services, a division of computer giant Sun Microsystems Inc., meets with its third-party logistics provider (3PL) and reviews its performance against stated goals. Sun's 3PL, USCO Distribution Services of Naugatuck, Conn., manages two distribution centers, a call center, and more than 80 regional stocking locations to provide after-sales systems support to the computer company's customers. The third party also delivers parts to field engineers and handles returns.
Sun rates the contract distribution company on three performance objectives: cost, availability, and quality. "We have scorecarded USCO for the past few years," reports Peter Pazmany, senior director of Enterprise Services' North American field operations in Palo Alto, Calif. "The scorecards are routine evaluations given every quarter."
Sun's practice of "scorecarding"--rating the 3PL's performance on pre-established criteria to ensure that the company is getting its money's worth--remains unique despite the growth of contract distribution over the past decade. "My impression is that most companies are not doing this [scorecarding] at the level they should do it," says Rick Tullio, a senior manager in Andersen Consulting's supply chain practice. "They should have a regular status meeting with their 3PL provider."
How should a company go about evaluating its 3PL's performance? What follows are some guidelines from leading industry experts.
Set Targets in Advance
Before they even sign a contract, shippers should determine what performance criteria are required for the outsourcing assignment and discuss the measures with the prospective provider. "Hopefully, a company would establish service targets or metrics prior to entering a relationship," says Tullio. "These should be clearly defined service targets like on-time delivery. And they have to be under the third party's control."
When determining those measures, says CSC Consulting's Dave Durtsche, a company should have a clear understanding of its goals. "Are you going for asset reduction, service improvement, or market penetration? It's a point that's often missed," says Durtsche, a partner in CSC's global supply chain practice. "You need to define up front what you're going to go after."
Up-front deliberation on the performance metrics prevents problems down the road, notes consultant Joe Martha, a vice president and leader of Mercer Management Consulting's supply chain practice. "You can never spend enough time up front getting things right," he says. "Once you get this stuff defined, things work a lot more smoothly over the long haul."
If the third-party balks at the inclusion of performance metrics in the contract, the shipper should probably look for another vendor. "The very best 3PL providers realize that they have to prove their worth," says Tullio. "They have to have metrics in place."
The metrics, of course, will vary, depending on the nature of the tasks that the third party will perform. "You have to determine the key metrics for what you want out of the service provider," Tullio explains. "The metrics will be different based on the outsourcing relationship. But regardless of the type of relationship, you want the third party to be proactive and innovative. If your provider isn't making key suggestions for improvement, it's missing the boat."
Ocean Spray Cranberries Inc. of Lakeville, Mass., for instance, has just started outsourcing transportation management to a 3PL, but it's already determining the criteria it will use for its quarterly performance review. "You can't manage what you don't measure," points out David Aukstikalnis, Ocean Spray's manager of physical distribution services. "And you don't want to assess based on emotion. So you have to do scorecarding in some shape, way, or form based on data."
Rating the Carriers
Generally, users of third-party services measure both service and cost. Other metrics vary according to the type of task that the contract distribution company is providing for the shipper.
If the contract distribution company provides transportation management services, a shipper should consider such metrics as the 3PL's percentage of on-time deliveries. The shipper should track whether carriers under the 3PL's control make deliveries on the day and at the time requested by the customer. The time of arrival would be measured at the moment the truck shows up and is prepared to be unloaded. The margin of error for measurement could be defined as plus or minus 30 minutes.
Other service metrics would include shipment-tracking accuracy and the percentage of damage-free shipments. Ed Gort, president of the Logistics Consulting Group, suggests that companies send out customer surveys to check up on the 3PL's performance.
In addition, companies should assess transportation costs. "In transportation, cost per mile is a good starting benchmark," says Thomas L. Freese, president of the consulting firm Freese & Associates, which is located in Chagrin Falls, Ohio. "You could use cost per mile as a beginning point, then use cost per stop, and then cost per case delivered."
Evaluating Warehousing Service
If, on the other hand, a 3PL has been hired to manage warehousing, a shipper should look at service measures related to order fulfillment. The shipper, for example, can check on the percentage of orders that the third party ships in the exact quantity shown on the order.
Consultant Martha of Mercer Management suggests that a company compare the percentage of product lines picked completely vs. the total number of lines that were picked. (For more on Mercer's list of rating criteria, see the box on Page 52.) He adds that this should be reported each month for each warehouse location in the company network.
In the warehousing area, Gort advises companies to measure 3PLs on whether the contract distribution company is able to move goods "from dock to stock" within eight hours. In other words, the third party should put away all the incoming merchandise within an eight-hour period.
In addition, the shipper should monitor the 3PL's cost of operating the warehouse. Freese recommends that companies rate third parties on their cost for handling an order. Other standard measurements for warehousing activity include the number of cases handled per hour and the number of cases handled per employee.
Whatever the rating system used, it should measure what's important to the shipper. "If it's a cost-driven operation, the system should focus on order accuracy and cost per case," says Tom Speh, director of the Warehousing Research Center at Miami University in Ohio. "If it's a supply production operation, your concern should be with orders being complete and on time and not so much on the cost measures."
Outside Evaluation
When it comes to the evaluation, Durtsche advises the evaluating companies to form a cross-functional team of executives from various departments affected by the third party's performance. "You need to get the stakeholders involved--the beneficiaries of the service," he says. "I would bring together a steering committee with somebody from sales and marketing, finance, operations, and even human resources."
Another consultant suggests having an outsider conduct the evaluation to ensure fairness and objectivity in scorecarding. "We believe an independent company should monitor performance to ensure that the provider has met the contractual matrixes," Gort says. He notes that he's surprised by the extent to which shippers allow contract distribution companies to undertake self-assessment. "Nine times out of 10, the [3PL] company monitors itself," he says. "That's like giving the fox the key to the henhouse."
Even if the company doesn't hire an outside auditor, at a minimum it should grade and issue report cards to its third party. "If you're going into a relationship that will save you X amount of dollars," Gort asks, "isn't it important to see how the third party performs?"
Finally, shippers have to decide what action to take if the 3PL is getting a failing grade. "You need a resolution process if it is not hitting the targets," says Martha. "Usually, there's a clause that the 3PL has so much time to remedy the situation."
Martha adds that it's in the shipper's interest to ensure that the contract distribution company makes the grade. The shipper should use the measuring process to improve performance rather than to punish the provider. "Remember," he cautions, "it's costly to switch from one third party to another if these guys aren't filling orders."What measurements should appear on a third-party provider's report card? Mercer Management Consulting advises its shipper clients to use the following criteria to gauge a third party's performance.
Performance Measure Definition
On-time shipment Percentage of shipments that leave the designated location on the required, specified,
or agreed-to ship date.
On-time delivery Percentage of shipments delivered to the customer location on or by the required, specified,
or agreed-to delivery date. This should be reported monthly by location in total and by customer.
Picking accuracy Percentage of lines with errors vs. the total number of lines. Shipper feedback to 3PL is
required for this reporting loop. This should be reported monthly by location in total and by customer.
Order fulfillment Percentage of orders shipped complete vs. the total number of products. This should be reported
monthly by location in total and by customer.
Item fulfillment Percentage of lines picked complete vs. the total number of lines picked. This should be reported
monthly by location.
Inventory accuracy Percentage of cartons cycle-counted without corrections vs. cartons cycle-counted with corrections.
This should be reported monthly by location.
Loss and damage Loss and damage occurring in a designated location due to contractor negligence as a percentage
of total throughput. Throughput is calculated as the average of cases received plus cases shipped.
Source: Mercer Management Consulting Inc.
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