3PL Contracts – Are you Unhappy?
Unhappy with your 3PL contractor? Many people are. There are some ideas on this Video that might help you with your 3PL relationships.
“Hi, I’m Rob O’Byrne, group managing director of Logistics Bureau. I was sitting at the airport the other day waiting for my flight and I was pondering over the meeting I just had with the yet another company who’s dissatisfied with their third party logistics, or 3PL, service provider. Sometimes I feel like a marriage counselor 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 familiar story? Well take heart, the future need not be all bad.
I’ve heard many similar stories over the years as I’ve been consulting in the area of logistics. When I hear these stories, it’s often because the customer has reached such a stage of frustration that they want to retender their logistics contract and are seeking assistance through the process. Such is 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 under performing can be resurrected, it just takes open communication, willingness and a focus on the key issues. An independent order to the contract is in itself often a sufficient wakeup call for the parties involved to improve. But in 90% of cases, I’d say, that the reasons for contract under performance don’t 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 the responsibility on this account. But rather than give up on the existing 3PL and retender the contract, I was pleased that the customer was willing to first carry out a thorough order to the contract to seek appropriate improvement.
Retendering and potentially relocating a warehouse operation is not without risk in terms of business disruption and transition cost. So these steps should only really be taken once other avenues have failed. I feel confident that the customer will retain their current 3PL once the order is complete and they see improvements in costs as well as customer service.
The audit process they’ll follow with their 3PL will focus on 6 key areas:
1. Commercial arrangements – How’s the contract resourced and costed? And what pricing mechanism is in place to ensure cost feasibility as well as incentives for operational improvement?
2. Contractual arrangements – Are the expectations of the customers clearly articulated in the contract along with the appropriate key performance indicators? Does the contract term fairly reflect the required investment and commitment? What are the business risks involved in termination?
3. Service and cost performance – What’s been the real performance of the contract when compared to expectation? What’s contributed to underperformance?
4. 3PL processes – Is the 3PL adopting appropriate processes in fulfilling the contract? Can these be jointly improved?
5. IT systems – Are there IT issues that impact the performance of the contract? And are there some easy fixes that can be employed?
6. Customer-3PL relationship – Of 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 and in cooperation with the 3PL management. It’s an important first step in the process to gaining the 3PL contracts that you really need and want. Ultimately, some companies may find that they still need to retender the contract, but at least they can do so with confidence and understanding where they went wrong first time and with a clear plan for future success.
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