it, a dollar to pack it, and 10 cents for each label.”
The problem is, there’s no incentive for the 3PL to make
the business more efficient—which often involves elimi-
nating activities. In other words, if you’re paying the
provider on the basis of pallets of inventory stored, the
contractor is hardly going to suggest ways to reduce that
inventory.
A better approach, says Vitasek, is to contract for—and
pay for—results. That is, structure the agreement so that
the 3PL gets paid not for storing 1,000 pallets but for
reducing the total cost of distribution by 3 percent, or for
achieving 99 percent compliance with Wal-Mart’s routing
guidelines.
This concept of paying for results is known as perform-ance-based outsourcing, or vested outsourcing. The
approach originated with the Department of Defense.
Vitasek and others are now trying to apply it in the private
sector. (Vitasek has a book coming out this month on
making that transition, called Vested Outsourcing: Five
Rules That Will Transform Outsourcing.)
Although the movement is relatively new, a few 3PLs
have already adopted this approach, according to Vitasek.
One example is Unipart, a 3PL that provides automotive
parts service for Jaguar in 60 countries. Unipart is
involved in almost all aspects of its customer’s business,
from the development and launch of new models through
aftermarket support, and is privy to such confidential
information as Jaguar’s vision, business plan, and strategies for specific markets. Richard MacLaren, general manager for Unipart Logistics North America, says the two
companies have a “shared destiny.”
It takes time
Creating this sense of shared destiny is not easy. According
to MacLaren, you can’t expect to achieve this type of rapport in the first three years of a business relationship, even
if you set out with that goal in mind. Although Unipart
aims to develop long-term partnerships with its customers, all of its business relationships start off at a transactional level. Then, says MacLaren, you move on to offering the customer practical suggestions for improvements
before developing a business partnership. “You have to get
to know each other first,” he says.
Adrian Gonzalez, director of logistics viewpoints for the
consultancy ARC Advisory Group, agrees that perform-ance-based outsourcing is a long journey. He says the “sweet
spot” is usually the fourth or fifth year of the arrangement,
by which time the two companies have developed a good
how to take it to the next level
Looking to get better results from your 3PL? It all starts
with building a better relationship. Here are some tips.
1. Remember that continuous improvement requires
continuous attention. If your 3PL is performing to expectations, you might be tempted to back off and get out of
its way. But that’s a mistake, says Zasimovich of APL
Logistics. He advises shippers to sit down regularly with
their 3PLs to review goals and set new objectives.
Companies like APL rely on that feedback to fine-tune
their services, Zasimovich explains.
2. Tackle the KPIs right away. The advantages of
establishing key performance indicators (KPIs) at the
outset might seem obvious, but many times, companies
sign the contract and leave the KPIs to be determined
later, says O’Shea. That can lead to disputes about performance down the road. Make sure both parties agree
to the KPIs before the deal is inked.
3. Pay your 3PL to solve problems, not put a butt in a
forklift. Vitasek urges shippers to stop writing contracts
that specify how something should be done and focus
instead on what should be done. It shouldn’t matter
how many forklifts the 3PL has or how many picks it
makes per day as long as it achieves—or exceeds—the
desired outcome.
4. Make sure that there’s something in it for the 3PL.
Taking performance to the next level often requires
some investment on the 3PL’s part—whether it’s in
equipment, technology, or a network analysis. The
provider is likely to be more receptive to the idea if you
offer to share some of the resulting savings or profits.
5. Commit to the long term. You can’t expect your 3PL
to invest a million dollars in systems and equipment to
serve your account unless you show that you’re in it for
the long term—say, seven years or more. “If the provider
knows that the business is just going to be put out to
bid again in two years, there are no long-term incentives
… to take that risk,” says Gonzalez.
6. Have a third party review your contract. After months
of hard-fought contract negotiations, you can’t be expected to render an objective opinion on the fairness of the
deal. That’s where an outsider’s unbiased opinion can be
valuable. Some colleges and universities offer this type of
service. The University of Tennessee, for instance, will
launch a “deal review” service beginning this spring.
working relationship and are starting to develop synergies.
It may require some patience, but building long-term
partnerships is worth the effort, adds MacLaren. These relationships foster the type of innovation and creativity that
propels companies out of the financial doldrums and onto
the global stage. ;
