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5 Steps to improving your 3PL relationships

Members of the University of Tennessee's center for Executive Education share their five steps and a series of tips to improve your outsourcing relationship right from the start.
By Kate Vitasek, Pete Moore, and Bonnie Keith, University of Tennessee Faculty Members
February 24, 2011

Step 1: Lay the foundation
The first thing a company should do before ever lifting a finger to outsource is to thoroughly understand if outsourcing is right for their operations. Management consultant Peter Drucker famously stated: “Do what you do best and outsource the rest.”

The problem is that far too many companies jumped on to the outsourcing bandwagon without realizing if outsourcing was right for them.

The October LM case study on Armstrong raised a red flag for us when we read the statement: “Managing transportation was once a core competency of Armstrong.” If managing transportation was a core competency, why did Armstrong outsource in the first place? This leads to our second tip: Don’t outsource what is core. A company should only outsource when a service provider can do the work better, faster, or cheaper.

When Armstrong’s 3PL relationship began failing early on they decided to move the work back in house. Because they brought the work back in house, we believe that Armstrong did not follow our second tip.

Step 2: Understand the business
Once a company has properly decided that outsourcing is the right choice and has done its homework associated with laying the foundation, it should take the time to establish a baseline that both benchmark the potential cost, service, or other opportunities.

Which leads us to our third tip: Understand your baseline and benchmarks before you outsource. In the Armstrong case study, one of the key decision makers said: “When we priced it out we were shocked to learn that we were less than half of what everyone else was charging.”

The article explains that the Armstrong team discovered this after they realized that their 3PL was failing. If Armstrong had done sound baseline and benchmarked cost and service they would have realized that they had an outstanding team that would not have benefited from outsourcing; in turn, they would have prevented themselves the pain of transitioning the work only to bring it back in house.

Armstrong also pointed out that “there was a failure by the 3PL to understand Armstrong’s customer requirements” and “the biggest flaw was that our 3PL took a one-size-fits-all approach…We have specialized needs, and they did not appreciate the complexity of our business.”

 Tips to better outsourcing
decision making
 

tip #1: slow down and take the steps to get outsourcing right before you start any work.

tip #2: don’t outsource what is core.

tip #3: Understand your baseline and benchmarks before you outsource.

tip #4: ensure potential suppliers understand the business.

tip # 5: develop clearly defined and measurable desired outcomes.

tip #6: identify risks before you transition the work.

tip #7: establish a pricing model with incentives that encourage service providers to put skin in the game.

tip #8: develop a governance structure based on insight versus oversight.

That sets up our fourth tip: Ensure potential suppliers understand the business. Our research and experience says that many companies are poor at stating their requirements. In fact, we often see service providers forced to “understand the business” based on a poorly written RFP and incomplete and inaccurate data.

One way to overcome this is for companies to open their doors and let service providers in to look around and explore the details of business. Let them ask for data—after all they’ll need this to run your business effectively.

Once service providers have had a chance to thoroughly understand the business, the companies and the service providers should mutually agree on cost and service goals. We call these desired outcomes. If the service provider understands the baseline costs and service levels clearly then they can feel more comfortable about signing up to achieve your desired outcomes.

And this takes us out fifth tip: Develop clearly defined and measurable desired outcomes. You are outsourcing because you have gaps in where you are today and where you want to go (your desired outcomes). It is important to make sure the service providers understand those gaps and knows what success is (your desired outcomes).

The Armstrong case study pointed out that the arrangement was not meeting Armstrong’s established costs and service goals. As researchers and educators, we love to review RFPs and poke holes in how poorly requirements are often stated and how few clearly state their desired outcomes.

Our experience is that service providers do not sign up to take on a client’s business with the intent to fail. As such, we strongly recommend that all companies take the time to work with service providers to ensure they understand the business and communicate the desired outcomes and gaps.

About the Author

image
Kate Vitasek, Pete Moore, and Bonnie Keith
University of Tennessee Faculty Members

Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of the popular book Vested Outsourcing: Five Rules that will Transform Outsourcing. Pete Moore and Bonnie Keith are Program Faculty members for the University’s Vested Outsourcing and Air Force Strategic Sourcing programs. Moore is also author of LM’s “Moore On Pricing” column.


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