Introduction
In theory, the decision to outsource is driven by the company’s choice to focus on core competencies, or in its quest to improve customer service levels, or as it strives to develop more efficient processes. In reality, it is mostly driven by cost, more specifically, a need to reduce the existing cost base. Irregardless of the driver, entering the world of outsourced logistics activities can be a challenging exercise even for those who are well prepared or have had previous experience.
The outsourcing life cycle has three distinct phases as represented by the diagram below.
The establishment phase commences with the initial “go or no go” decision making process and extends through to the actual implementation and change management processes required to transition to the outsourced model. The management phase encompasses the processes required to ensure the successful operational management of the business relationship with the service provider. The development phase involves the transition from an operational business relationship to a more strategic and collaborative business relationship.
The following paragraphs will address each phase of the outsourcing life cycle and are intended to provide some guidance for those that have already outsourced, or are considering outsourcing, all or part of their logistics functions.
Establishing the relationship – Key Success Factors
Far too often the importance of a properly defined scope of work (what it is you want the service provider to do) is overlooked. One of the greatest frustrations of logistics service providers is the lack of quality information that is provided as part of the tender process. Each task within each process should be clearly documented. This is particularly important where you have specific requirements outside of what would be normally considered standard practice. Providing detailed information should extend beyond a thorough definition of the processes to be performed. It should also include the provision of sufficient shipment and throughput data. This will enable the supplier to prepare the best possible and most cost effective response to your requirements.
The less data the higher the cost is likely to be – the supplier will always add a premium to cover the uncertainty.
It is important that service level expectations are clearly articulated. There should also be a differentiation between your standard requirements and any non-standard requirements. Even if 99% of your orders are dispatched as standard shipments you should still have all non-standard services included in the scope of work and in the costing schedule.
Establishing well defined performance measures will have two major benefits. Firstly it will ensure that there is no ambiguity as to what the service level expectations are. And secondly, and as importantly, it will ensure that the service provider knows exactly how the performance measure is determined and how it is to be calculated. As an example DIFOT performance, when calculated on order line fill rate can paint a very different picture than DIFOT performance when based on the complete order fill rate. 9 out of 10 lines delivered in full on time gives a DIFOT performance of 90% when calculated on a line item basis. When calculated on the complete order the DIFOT is 0%.
A disciplined supplier management process is essential. There is a perception that once you outsource, you will loose control. Reality is, that if done properly, control is increased, not diluted. In order to maintain control, the customer must take responsibility for the supplier management process. They must define the reporting methodology and format; they must set up the reporting schedule and timetable; and most importantly they must measure and monitor performance diligently and consistently.
The most critical factor that will determine the success or failure of any outsourced process or activity is the selection of the person that will be given responsibility for managing the relationship with the service provider. It should be recognised that the skill set required to manage supplier relationships is quite different to the skill set required to manage the day-to-day activities of a logistics operation. This is not to say that the existing skills are not transferable, nor is it being suggested that the required skills can not be learned, it is however recommending that the selection criteria should not be based on operational knowledge alone. The candidate’s suitability with regard to communication, negotiation and facilitation skills should also be carefully considered.
Common Pitfalls
Far too often the structure of the agreement between the parties is developed in a manner that will not necessarily support the dynamic business requirements of the relationship. The traditional method of embedding the business requirements within the contract tends to restrict the amount of operational flexibility of the relationship. One of the best ways to achieve this is to actually separate the terms and conditions from the business requirements. This can be done by including the scope of work, the pricing schedule, the service level expectations and the performance measures as addendums to the contract. Not withstanding specific corporate governance requirements of the organisation, segmenting the contract may also remove the need for legal and senior management approval of changes to the business requirements that are immaterial to the terms and conditions of the agreement.
The value of ensuring that adequate training has been undertaken prior to the transition is frequently underestimated. This applies equally when moving from an in sourced to an outsourced operation for the first time or when moving from one supplier to another. Far too often we take for granted the amount of operational knowledge that is held by a limited number of key staff. Not even the best and most thoroughly documented processes will capture this type of information. It is essential that there is a process to transfer this knowledge prior to the transition.
Not enough time and effort that is invested in planning for the transition. A project manager should be assigned and detailed project plan prepared in order to facilitate the transition. The plan should not only include the physical aspects of the move but also include such items as communication and training tasks. It is far too easy to overlook any number of tasks – many of which have the potential to impact on the success of the transition.
Managing and Developing the relationship
Although Diagram A shows the “manage” and “develop” phases as independent activities they are certainly not mutually exclusive. A disciplined supplier management process will be the catalyst for developing a strong business relationship.
The linkages are best illustrated in the following diagram:
Developing sound management techniques will allow you to monitor and measure the costs and the efficiency of the processes that are being employed to meet the service level expectations. Developing a strong business relationship with your service provider will allow you to effectively collaborate when developing and implementing new strategies and solutions.
Management techniques
The most important thing to remember about managing a supplier relationship is that it is a process and should be treated as such. As previously mentioned the customer should take responsibility for this process and they should measure and monitor performance diligently and consistently.
When determining the type of performance measures that are required to manage the relationship it is extremely important to differentiate between the operational data and measures that the supplier will require to manage the business and the key measures that will be used to manage their performance. From a suppliers perspective it is virtually impossible to avoid having to collect substantial amounts of data or have multiple operational measures to successfully run an efficient operation. From the outsourcers perspective there has been is a tendency to do the same. The trick however is to have as a few as possible – therefore we need to try and identify what are really the key measures – those that have the potential to keep you awake at night if they are off track.
When establishing the management process, serious consideration should be given to trying to obtain a commitment from the supplier to provide a dedicated program manager. Ideally this person should not have any direct sales or any direct operational responsibilities. The person can act as a single point of contact for all of your communication, internal coordination and escalation needs. More importantly however, they can become your representative within their organisation. It could be argued that this type of arrangement is only possible if you are a large organisation dealing with large service providers who, in theory, are more likely to have the necessary resources. The resources required, however are relative to the size of the businesses and the importance that each party places on the relationship. A small or medium sized organisation will be better served by seeking a relationship with a small or medium sized service provider whereby both parties can grow and develop together.
The frequency and the format of the interaction between the customer and the service provider can vary but as a simple rule – more is better. A best practice supplier management process will include daily, weekly and monthly operational reporting as well as a corresponding face to face or teleconference meeting.
The daily interaction could include a scheduled telephone call or voicemail from the operations manager summarising the activities of the previous day and how things are looking with regard to the day ahead. A daily report can be sent via email to all stakeholders which lists all orders shipped and more importantly those that were not shipped and the reasons why.
A weekly operational review is undertaken to ascertain the supplier’s performance in key areas. The weekly meeting is not as detailed as the monthly meeting but essentially focuses on the same three areas. These being throughput volume, process performance and process cost. The throughput volume is simply data used to monitor business activity, process performance and process cost measures are used to monitor service level attainment and the cost effectiveness of the outsourced operation. The majority of these measures should be set with upper and lower limits and from a management perspective you should only be interested in those measures that are off track – management by exception. Given the proper process, these reviews can be effective regardless of wether they are held face to face or by teleconference.
Where possible the monthly operational review should take place as a face to face meeting. This meeting should be a summary of the previous weekly meetings but includes more emphasis on examining and validating the operating costs and addressing any issues relating to service levels expectations not being met.
A common downfall of many supplier management processes is the failure of both parties to ensure that the actions arising form the reviews are actually completed. There should be a formal process to capture and monitor the assignment of tasks or actions originating from the weekly and monthly operational reviews. This process should list the task, the person accountable and the time frame for completion. All task owners should then be required to attend the various review meetings to provide an update of their progress. Although primarily used as a tool to monitor the supplier’s tasks, this process can also be used to capture tasks for which the customer is responsible.
There is also a need to undertake a strategic review of the business relationship. These reviews are best performed on a quarterly basis and will include a brief summary of the quarter’s operational performance but the main intention of it is to create a forum for both parties to share their strategic initiatives. Apart from being less tactically focused one of the key differences of these meetings is that the next level of management of both organisations should participate in the reviews. These meetings are the building blocks that provide the framework for developing long-term relationships and will hopefully foster a collaborative approach to achieving common goals.
Developing relationships
A successful supplier relationship will never develop if there is not a mutual benefit for both parties. At the end of the day, the goal of both parties is to make a profit. If you have high service level expectations you cannot realistically expect the cheapest cost solution to consistently meet these expectations. Nor can you realistically expect to add additional processes to a scope of work without expecting an increase in cost.
Ensuring that there is open and honest communication will help to expedite the process of developing trust between the parties. There will always be information that cannot be shared but in all other cases both parties should endeavour to be as transparent as possible. Any change in circumstances that may potentially impact on the success of the relationship should be communicated and discussed as early as possible. These principles are applicable not only to the strategic aspects of the business but should also be adopted when addressing operational elements such as changes to performance levels and costs. This approach may result in some difficult discussions but the quicker that these changes are addressed the more likely a satisfactory resolution will be achieved.
The supplier should strive to obtain a thorough knowledge of the business. This does not just apply to the process for which they are responsible; it should also include both upstream and downstream activities. The process of gaining or transferring this knowledge should be the responsibility of both parties. The customer should also make every effort to share as much information as possible with the supplier as doing so may help identify any cost reduction or process improvement opportunities. At the end of the day – there is still a vested interest in ensuring that the outsourced operation is functioning as efficiently as possible.
With the knowledge comes the opportunity for the supplier to add significant value. Let then help you to improve your processes and solve your problems. Involve them as soon as possible in the development of strategic initiatives. Consider it as free consultancy but don’t underestimate the value that they could potentially add. Don’t forget the fact they will have an abundance of other customer solutions to draw from. This approach will also ensure that there is shared ownership and responsibility for the solution.
It is important to respect the expertise of the supplier. We sometimes forget that as a result of our decision to outsource we are by default acknowledging that our supplier can perform the process better or cheaper than we were able to do ourselves. There is a tendency, particularly for first time outsourcers, not to want to let go of the operational reins. Let the supplier do what they have been engaged to do and focus your energies on developing the more strategic aspects of the business.
The old adage that customer is always right should be actively challenged by service providers when it comes to assessing the validity of their customers current or future supply chain initiatives. The last thing you should want from a supplier is for them to go ahead and implement an initiative just because you believe it is the right solution. If they see that there are risks or there is a more viable solution then the supplier must have the courage to at register their concerns and offer an alternative solution.
A concerted effort should be made to establish a number of relationships within the supplier’s organisation. In addition to the normal peer-to-peer relationship, it is also important to develop relationships at both the more senior levels and at lower levels within organisation. The lower level relationships will help to create operational benefits whereas a relationship at the CEO level for instance, will result in more strategic benefits. It is also reasonable to expect that the service provider may want to adopt a similar strategy within customer’s organisation. The previously discussed strategic reviews are the perfect forums for establishing and fostering a number of relationships within your supplier’s organisation.
At the other end of the scale a final word of caution – avoid relationship fatigue. Relationship fatigue will occur in otherwise successful and long-term supplier relationships when both parties start to become complacent about the disciplines required to sustain an effective supplier management process. Symptoms of this “condition” manifesting include the cancellation or postponement of operational reviews on a regular basis, letting time lines slip for the submission of performance reports or accepting reports that are incomplete. The conundrum of relationship fatigue is that it will most probably start to occur when the operational performance is at its peak.
