Subscribe to our free, weekly email newsletter!


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).


Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Last week, the United States Department of Transportation took further steps to address various issues identified in recent train accidents involving crude oil and ethanol shipped by rail. The announcement was made by DOT with other DOT agencies, including the Federal Railroad Administration (FRA) and the Pipeline and Hazardous Materials Safety Administration (PHMSA).

Logistics Management Group News Editor Jeff Berman had an opportunity to interview Derek Leathers, President and Chief Operating Officer of Werner Enterprises, at this month's NASSTRAC Shippers Conference and Transportation Expo in Orlando. They discussed various aspects of the truckload market, including prices, fuel, and regulations.

During this webcast our presenters will apply the findings of the 23rd Annual Trends & Issues in Transportation and Logistics Study to the world of shipper-carrier decision making. They'll examine the primary aspects that will influence the future direction for shipper-carrier decision-making.

For February, the month for which most recent data is available, the SCI dropped to -1.0 from January’s 2.6, with FTR explaining that the short term positive impact from one-time adjustments for rapidly dropping diesel prices and the suspension of the 2013 motor carriers hours-of-service expires later this year.

Seasonally-adjusted (SA) for-hire truck tonnage in March was up 1.1 percent on the heels of a revised 2.8 percent (from 3.1 percent) February decline, with the SA index at 133.5 (2000=100). This is off 0.3 percent from the all-time high for the SA of 135.8 from January 2015 and is up 5 percent annually.

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA