During the last decade, companies have seen dramatic changes in the type and scope of logistics and supply chain services that are available to them. This has made the process of selecting transportation and logistics service providers more complex and challenging than ever.

With such a wide array of offerings, logistics managers today must be as systematic and thorough as possible in determining their service needs as well as in identifying, selecting, and managing their service providers. This applies to all transportation modes and services, including everything from domestic and international transportation, warehousing and distribution, and packaging to freight-payment services, customs brokerage, and trade compliance.

How can you be sure to select the best logistics service providers to fit your company's business needs? Follow the five steps outlined below, and you'll greatly improve your ability to make the right choice.

While this may sound like common sense, many people overlook this important first step. Prior to investigating any service providers, the sourcing team (or responsible individual) will need to put together a profile of the company's actual and future service requirements. At a minimum, this profile should include the following types of information: scope of services required, shipment and product volumes, expected service levels, information and data requirements, internal and external business processes that will be affected, expected dollar value of the contract, expected length of the contract, and possible alternative services.

It's wise to also meet with the managers of the affected business processes and functions to learn about their issues, wants, and needs. At the same time, explore any potential synergies with other business units that might increase the size of the buy and thus increase the leverage you could exert on the supplier to reduce costs.

Many companies still rely solely on a leveraged or cost-based sourcing model for all logistics services in the mistaken belief that cost should override all other factors. In reality, the direct cost of a logistics service constitutes just one of several factors that impact a company's total costs as well as its ability to attract and retain customers.

Service quality, reliability, trustworthiness, and the financial health of a supplier also need to be considered, and their importance weighed against the cost of the service. The sourcing model you use, moreover, needs to be appropriate both for the type of service you're evaluating and for the business situation at hand.

There are four different sourcing models: Spot, Leveraged, Critical, and Strategic purchasing. Each one is appropriate for a specific type of procurement and business situation.

• Spot purchasing
  Spot purchases are used for services that are at least somewhat "commoditized." This means that the service can be obtained from multiple suppliers with no significant differences other than cost. Spot purchases may be made either beforehand or at the time a service is needed, and should require little if any technological help from the purchaser.
  This is the simplest type of purchasing activity. Because spot purchasing procedures can be standardized throughout a company, they can reduce the administrative workload and the complexity of the purchasing process, thus reducing costs and increasing flexibility. An example of spot purchasing activity would be arranging for a courier service to handle a single shipment without establishing a long-term contract with it for all of your express shipments.
• Leveraged purchasing
  Leveraged purchasing minimizes the cost of a service by grouping similar procurement needs together to increase their value to suppliers. In return for a larger volume of business, those suppliers increase the level of discount they are willing to offer you.
  For leveraged purchasing to be effective, the sourcing team needs to ensure that service providers understand both your value as a customer and the fact that they are competing for your business.
  Keep initial contracts with service providers short. Follow-on contracts with known suppliers can be somewhat longer, but still short enough in duration to allow you to react to changes in the market or your business situation. Further, it's a good idea to review your business needs and ask for new bids on a regular basis. It's also helpful to use "blanket" purchase orders and/or standardized contract terms whenever possible.
  Note also that Internet-based auction tools are exclusively used for leveraged purchasing. One example would be using an Internet auction tool to purchase services for a specific mode of transportation. If you ensure that the bidders know your company's total buy for that particular mode, that should encourage them to lower their price and improve service levels, even on low-volume lanes.
• Critical purchasing
  Critical purchasing primarily is used to reduce risk when there are a limited number of companies available to provide services that are essential to business operations.
  Because you're often dependent on time-specific, absolutely reliable services in this type of a situation, pricing tends to be high. It makes sense, therefore, to consolidate procurements whenever possible to increase pricing leverage. Further, if you can group strategic services with other, leverage-purchased services, you can use that clout to reduce costs and improve service levels.
  To minimize risk, you can also research alternative services, put contingency plans in place, and include specified service levels in all contracts.
• Strategic purchasing
  Strategic sourcing can maximize cost reductions, minimize risk, and create competitive advantage. Because this type of sourcing has a direct impact on the profitability and overall success of the business units involved, it requires a high level of trust between service provider and customer. Trust alone isn't enough, though, so it's important to use a formalized sourcing process that addresses your company's strategic business needs. As part of that process, companies typically establish cross-functional procurement teams that develop long-term programs to increase service quality and business performance while reducing overall operating costs.
  This type of sourcing agreement can incorporate "supplier partnering" arrangements that include gain-sharing and performance metrics. Such arrangements may also involve joint ventures and extensive supplier assistance from the customer.
  Finally, it's incredibly important to immediately address a supplier's poor performance. When trust has been compromised, purchasing activity should return to a leveraged model until you have either restored confidence in that supplier or have found a new, trustworthy service provider.

Be sure your sourcing team is knowledgeable about the supply base—the pool of suppliers that's available. It's important that they have a solid understanding of the actual capabilities of current and potential service providers. They'll also need to know about any developments that could affect pricing and service in relevant industry segments.

With that kind of information, you're less likely to miss su