Lessons learned
By examining the reasons behind recent outsourcing failures, smart shippers and third-party providers are finding new ways to make these relationships work.
By Thomas A. Foster -- Logistics Management, 4/1/1999
The pundits that compare partnerships between shippers and third-party logistics providers (3PLs) to marriages may be closer to the truth than they realize. Like husbands and wives, not all shippers and 3PLs that tie the knot end up staying together. A remarkable number of these so-called partnerships are stormy affairs that start out with high hopes but end up in ugly court battles. In fact, the failure rate for third-party partnerships is similar to that of marriages. According to a recent survey conducted by the New York-based Outsourcing Institute, 55 percent of third-party partnerships fail within five years.Much like married partners, shippers and third parties also try hard to make troubled relationships work. Of those that do manage to stay together, however, 12 percent are unhappy with the partnership and regret ever consummating the deal, according to the institute's research.
Michael Corbett, executive director of the Outsourcing Institute, says that third-party partnerships generally fall apart for the same reason that so many marriages do: failure to devote the resources necessary to managing the relationship.
Vincent F. Gulisano, executive vice president of third-party provider USCO Logistics in Naugatuck, Conn., puts it even more emphatically. "If shippers and 3PLs do not do everything they can to create an honest and genuine relationship from the day of the first sales call through to total integration, the whole arrangement is likely to fail," he says. "You can have the best systems and the most efficient processes, but without a solid relationship, you do not have a long-term partnership."
Secretive Shippers
Gulisano believes that the tone of a shipper-third party relationship is set right from the start, during the initial sales contacts. Even at that early stage, the third party needs detailed information about the shipper's operations. Unfortunately, the USCO executive says, shippers often will not share information if they think it will be used to increase the proposal's ultimate costs.
"We have had prospects that will only show us through their facilities at night, so we cannot count the workers," says Gulisano. "We have even had prospects that have hidden their equipment, so we can't extrapolate [the amount of] resources they currently use."
Holding back such information prevents the 3PL from developing accurate and realistic proposals, he explains. "Unless we have good data, the best we can accomplish is to replicate the existing situation," says Gulisano. "That is not worth [the prospective customer's] trouble or ours. We will walk away if the customer will not provide the information we need."
Sometimes shippers fail to provide that information because they are not being honest, says Richard Hallal, president of Logistics Development, a consulting firm based in Cleveland, Ohio. Other times, though, the shipper doesn't have the necessary data because of ignorance or lack of preparation. "Often, the shipper really has no idea why it is outsourcing its logistics [operations]," says Hallal, whose company helps shippers prepare to outsource. "They can't tell the third party what it needs to know because they don't know their own goals, their own costs, their own level of commitment.
"It's embarrassing for shippers to admit that they don't really understand their own operations, but this is often the case," Hallal continues. "Large shippers sometimes turn to consultants to gather this information, which can be an expensive proposition. If the shipper wants to do the job in house, a great source of data is its freight-payment company, assuming the company uses one. These companies have a complete history of all freight movements, costs, transit times, and often much more."
That type of information is critical to an outsourcing arrangement's success, confirms Joseph Nicosia, president of third-party provider GATX Logistics in Jacksonville, Fla. Without the right data, it's difficult--if not impossible--for the 3PL to do the job the shipper is asking it to do. "I don't understand how anyone seeking outside logistics assistance could select a logistics-service provider without knowing exactly what their own costs and service levels have been," he says.
Hidden Agendas
Sometimes the problem is less a lack of critical data than of conflicting or ulterior motives and unrealistic expectations. According to Hallal, CEOs and CFOs often hear about how much money can be saved by outsourcing or how staff can be reduced. Perhaps on a whim, they have lower-level managers solicit proposals from 3PLs. Internal conflicts and power struggles are unavoidable in these situations, he says, and third parties recognize the tension the moment they arrive on the scene.
"Third parties have learned to walk away from situations where line managers oppose outsourcing and where top management is not fully involved," says Hallal. "A third party will spend at least $50,000 to do a proposal, and maybe much more for a really large project. They cannot afford to waste that kind of money on fishing expeditions or situations that are a disaster waiting to happen."
In other cases, the shipper's true motivation for outsourcing may be something other than what it claims. Robert Spira, a Cleveland-based attorney who specializes in third-party logistics contracts and negotiations, cites the experience of one third-party provider he represented. The service provider was awarded what it believed to be a long-term contract for trucking and distribution services by a shipper that operated a private fleet with union drivers.
"The third party allowed the shipper a very reasonable rate, with the understanding that the [fees] would be adjusted as the operational costs became better documented," says Spira. "The problem was that this shipper was only interested in honoring the contract long enough to get [out] from under the union situation."
As soon as the union's hold on the shipper's operations was broken, Spira reports, the shipper canceled the contract and started its own non-union operation. "The shipper had an ulterior motive," he says, "which essentially wasted a great deal of the third party's time and resources." Unfortunately, he notes, the third party's experience was not an isolated case.
Shippers aren't always at fault when things go wrong in 3PL relationships, of course. Third parties, in fact, can be their own worst enemies when they oversell a prospective customer.
"Buyers want to hear that everything is going to be perfect starting on Day One, and salespeople are only too happy to reassure them," observes USCO's Gulisano. "This is impossible, and third parties hurt themselves badly by setting unrealistic expectations. Third parties have to be honest about the amount of time it will take to bring an operation up to the desired [service] levels."
Being candid about setting service expectations can actually improve the relationship between a shipper and 3PL, Gulisano believes. He relates the tale of a computer-chip manufacturer that had a customer-service crisis and contacted USCO. A defect in the product had suddenly come to light, and customers were demanding replacements and online support. The chip manufacturer wanted USCO to set up a returns and service center that included high security and a trained staff of customer-service representatives in less than three weeks. The request seemed impossible, so instead of promising service it could not deliver, USCO declined the business.
"We received a call from a top executive, who said 'We decline your offer to refuse our business,'" Gulisano recalls. "He would not take no for an answer, so we mutually set the expectation of success very low and insisted on lots of help. There were problems, but in a shorter time than we ever expected the operation was running very well. The company was delighted, and we have since received considerably more business. The key was setting the expectation correctly."
A Dynamic Process
If an outsourcing arrangement is to succeed, shippers must appreciate the important differences between 3PL projects and standard transportation operations, Gulisano says. "Third parties provide a dynamic service that is constantly being crafted to meet the customer's needs," he explains. "It is very different from the standardized services that carriers provide. When a shipper sends an overnight package, he accepts the established performance standard and the price. As soon as the carrier picks up the package, the shipper is out of the process."
In an outsourcing relationship, by contrast, there is no standard service, Gulisano continues. It is constantly being shaped to meet the shipper's changing needs, so the shipper must remain very much involved--a fact they often forget.
For that reason, it's vital that a shipper track and measure a 3PL's performance on a regular basis, says Joe Dumford, materials manager for the Drive Systems Division of Siemens Corp.'s Energy and Automation Group in Alpharetta, Ga. Dumford measures his provider's ability to ship orders the same day, store imported goods within 24 hours after receipt, ship emergency shipments within four hours, maintain inventory accuracy of at least 99.5 percent, and show continuous improvement in all areas.
"By measuring these five items, we achieve 99 percent of what we need," says Dumford. "Monitoring this process keeps us involved and on top of areas that we want to tackle next. We don't believe in shuffling off the responsibility to the third party."
David Ruby, general manager of logistics and sales administration for Thomson Consumer Electronics in Indianapolis, agrees that success depends on the shipper's staying involved. "You have to view [outsourcing] as an evolving day-to-day process and agree that, as you encounter problems, you will seek solutions to them together," he says.
"There has to be a commitment, and you need to think of your third party not as an outside source but as part of the company," Ruby says. "That means totally sharing your objectives with the third party and working together with it to develop a plan. It has to be a situation of total involvement."
This process can be an eye-opening experience, because the shipper often has to face up to weaknesses and failures in its own operations. "No matter how painful it is, honesty with yourself is always the best policy in an outsourced logistics relationship," Ruby says. "If a service provider doesn't know where a company's Achilles heels are, it can't protect them. And if it doesn't know where a shipper is hoping to take its company, chances are it can't help it get there."
Hope Springs Eternal
Despite all of the things that can go wrong in their relationship, shippers and third parties have not given up hope. The Outsourcing Institute's survey reports that, despite the high failure rate of existing contracts, 60 percent of shippers and 3PLs expect both the number and scope of their relationships to grow.
As we have seen, when partners recognize the source of a problem and work together to resolve it, they can quickly put themselves back on the road to mutual success. Says Gulisano: "The opportunity for large-scale success in third-party logistics arrangements is just too great for anyone to be discouraged by mistakes. The secret is to learn from our failures, not to deny them."
The Devil's in the Details
Sometimes even the smallest details can derail a relationship between a shipper and a third-party logistics service provider (3PL). That nearly happened to the Drive Systems Division of Siemens Corp.'s Energy and Automation Group and its third party, USCO Logistics.
In 1997, Siemens was forced to consider outsourcing because it was so cramped for space. The division was using other Siemens facilities as well as trailers and containers to store imported materials from Europe. The division's freight forwarder suggested that it use a 3PL to receive the imported materials, warehouse them, and ship the orders.
The company took the forwarder's advice and began working with USCO Logistics. But problems quickly arose. reports Joe Dumford, materials manager for the Drive Systems Division. "When our marketing people started complaining about the quality of service, we were sure that we had made a big mistake by outsourcing."
It didn't take long for Dumford to find out what the problem was--and determine that it was not with USCO. In order to save time and money when starting up the operation, Siemens had insisted on using a fax system to send orders and other information to USCO's facility. Unfortunately, the faxes were practically illegible because of the background color of the documents. As a result, the shipping process was slowed to a crawl. Order-picking errors were high. There was no integration of order information, which left sales and marketing in the dark.
To solve the problem, USCO suggested a direct electronic linkage between the two companies' systems, and Siemens tied its order-entry system directly to USCO's facility. Later, the 3PL linked up directly to a portion of its client's enterprise resource planning (ERP) system.
Service problems immediately disappeared, and operations now run smoothly. In fact, Dumford reports, USCO's cycle counts for Siemens are so accurate, they now are exempted from the company's inventory audit.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
