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Transportation Best Practices/Trends: 3 rules to change 3PL contracts

By Peter Moore, Adjunct Professor of Supply Chain
September 01, 2012

At a recent industry workshop on third-party logistics provider (3PL) contracting, there were about a hundred participants split evenly between buyers and suppliers of services. 

The desired outcomes of the buyers of services included learning how to increase transparency to costs and further drive efficiencies across their supply chain organization. On the flip side, the 3PL participants wanted to know how to engage the C-level shipper executives and put themselves in a better position to add value to their customers and be viewed as less of a commodity.

Within weeks of that meeting we were asked to review a current multi-year contract between an industry-leading manufacturer and the 3PL in their largest market.  This was a chance to apply the combined ideas of “vested outsourcing”—a hybrid contracting model with mutual profit improvement built in—and what we learned in the workshop to improve this critical relationship where the shipper was asking if it was time to put the deal back out to bid after only three years. 

Like many shippers, they were frustrated with the lack of innovation and risk-taking on the part of their 3PL. Previous studies lead by Georgia Tech have identified that after an initial contract period a major gap in expected capabilities—particularly in technology and visibility—often emerges in a majority of 3PL contracts. 

When the “honeymoon” ends there seems to be just a transaction-based relationship, even though the intent was to drive innovation and expand capabilities. Far from getting to talk to the C-level execs, the 3PL often finds that they are marginalized even from their counterparts in the buyer’s supply chain organization and frustrations run high for everyone involved.

We looked at a number of deal reviews and have read dozens of contracts.  Workshops and interviews with buyers and providers bear out a few things. First, 3PL contracts should not be based upon expanding traditional warehousing and/or transportation contracts.

Second, 3PL services are in a unique position to be transparent and to clearly articulate quantitatively the value they add through innovation. Third, shippers and 3PLs need a new contract structure that is a hybrid of performance-based contracts and business partnership agreements. 

The result of this new approach for the buyer of 3PL services is to reduce anxiety about the performance/price ratio. Transparency, incentives, and metrics tied to business outcomes will encourage innovation while ensuring high levels of daily performance. This fresh way of thinking also provides opportunities for the 3PL to move “up market” through demonstration
of value to the customer’s executives.

On this second point, I can remember getting a call as a 3PL founder from the CEO and CFO of my largest customer. They wanted to invite my key team members to lunch in their executive dining room to thank us for delivering the highest return on investment of any initiatives at the company that year. The message here for 3PLs is clear: Do it right and you don’t have to worry about the C-level sales calls—they will call you. 

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).

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