Third party warehousing contracts – Heading North or rapidly South?
As I sit at the Airport awaiting my flight, I ponder over the meeting I have just had with yet another company, who is dissatisfied with their Third Party Logistics (3PL) service provider. Sometimes I feel like a marriage counsellor as I listen to these tales of woe. They don’t understand us, they don’t respond to our needs, our customer service levels are way below expectation. Sound like a similar story? Well take heart, the future need not be doom and gloom.
I have heard many similar stories over the last 10 years that I have been consulting in the area of Logistics. When I hear these stories, it is often because the customer has reached such a stage of frustration that they want to re-tender their logistics contract, and are seeking assistance through the process. Such was the tone of the meeting today. But at the close of the meeting, the customer was feeling more optimistic about the future of his 3PL warehousing contract.
Firstly, most 3PL contracts that appear to be underperforming, can be resurrected. It just takes open communication, willingness, and a focus on the key issues. An independent audit of the contract, is in itself, often a sufficient wake up call for the parties involved to improve. But in 90% of cases, I would say that contract under performance, does not lie solely with the 3PL. In many cases, contracts have been awarded in haste, without the necessary attention to detail that underpins success. Such was the case today. The customer had provided inadequate information regarding their needs to the 3PL, who in turn had under resourced the contract. The result? Escalating costs and finger pointing. Both parties needed to shoulder responsibility on this count.
But rather than give up on the existing 3PL and re-tender the contract, I was pleased that the customer was willing to first carry out a thorough audit of the contract, to seek appropriate improvement. Re-tendering, and potentially relocating a warehouse operation is not with out its risks, in terms of business disruption and transition costs. So this step should only really be taken once other avenues have failed.
I feel confident that the customer will retain their current 3L once the audit is complete, and see improvements in costs as well as customer service. The audit process that they will follow with their 3PL will focus on 6 key areas as follows:
- Commercial arrangements. Firstly, how is the contract resourced and costed? And secondly, what pricing mechanism is in place to ensure cost visibility as well as incentives for operational improvement.
- Contractual arrangements. Are the expectations of the customer clearly articulated in the contract, along with appropriate Key Performances Indicators (KPIs)? Does the contract term fairly reflect the required investment and commitment? What are the business risks involved in termination?
- Service and Cost Performance. What has been the real performance of the contract, when compared to expectation? What has contributed to under performance?
- 3PL Processes. Is the 3PL adopting appropriate processes in fulfilling the contract? Can these be jointly improved.
- IT Systems. Are there IT issues that impact the performance of the contract, and are there some easy fixes that can be employed?
- The Customer – 3PL Relationship. At both the operational and account management level, are there issues with the relationship? These might be due to a mismatch of culture, or more often due to individual clashes.
This simple six-point audit plan is an effective framework to apply to a poorly performing contract. It needs to be undertaken objectively, in co-operation with the 3PL management. It is an important first step in the process to gaining the 3PL contract that you really need and want. Ultimately, some companies may find that they still need to re-tender the contract, but at least they can do so with confidence, understanding where they went wrong first time, and with a clear plan for future success.
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Rob O’Byrne is the Managing Director of Logistics Bureau, an International management-consulting firm based in Australia. He has personally been involved in over 100 logistics outsourcing contracts over the last 10 years.