AS I WAS SCANNING MY DAILY ACCUMULATION OF E-MAILS
last week, I happened on one with the subject line “Do you really know
what is in a $5 footlong?” Since I did not, I decided to take a quick
look and found, not surprisingly, that some of the subs sold by a well-known chain contain as many as 100 different ingredients. Even in this
age of nutritional enlightenment, most of us still confine our sub due
diligence to such matters as wheat vs. white, Swiss vs. cheddar, or spicy
mustard vs. regular. Rarely would we ask for even a partial list of the
other 97 or so ingredients.
I bring this up because all too often, companies select logistics service providers (LSPs) based on an evaluation that’s
not much more sophisticated, then wonder why the
relationships fail. Although the LSP industry for the
most part consists of strong, competent providers,
not every potential partnership will be a good fit for
both parties.
Much has been written about the selection criteria for LSPs, and it is not my intention to review all
these checklists here. Still, there are two areas that
I believe require extra effort. As with the footlong
selection process, sometimes we just do not dig deep
enough.
The first potential troublespot is financial stability. This should be at the top of everyone’s list of selection criteria.
Many providers are privately held, and some owners may be reluctant
to reveal financial information. Yet it is absolutely critical that the prospective client satisfy itself of the provider’s financial stability before
a contract is signed. For one thing, it will want assurances that the
provider will be around for the long term. For another, if it’s signing
a sizable contract (as is common today), it’s important to ascertain
that the LSP has adequate financial resources to provide the required
support and services. If a provider is financially healthy, responsible,
and capable of handling the business, it will find a satisfactory method
of demonstrating this to a serious prospect.
Depending on the size of the contract, the client may also want to set
some financial eligibility criteria for prospective partners. For instance,
it might decide to establish minimum limits on financial assets—in
other words, the company might stipulate that it will only enter into a
relationship with a provider that meets a certain net worth threshold.
It might also want to establish a policy of awarding contracts only if the
total value of the deal is below a certain percentage of the provider’s
total revenue. An LSP should not be too reliant on one or two clients.
BY CLIFFORD F. LYNCH fastlane
Do you know what’s in
a $5 footlong?
The second potentially risky area is information technology (IT). In any logistics operation,
state-of-the-art systems are critical, and in
such specialized areas as cross docking, order
fulfillment, and freight bill payment, they are
an absolute necessity. Any involvement with
electronic commerce will require systems much
more sophisticated than those usually available
from logistics service providers. Up-to-date
order processing systems, including such functions as the ability to verify
credit cards, will be a must.
The evaluation of IT assets
will require knowledgeable
experts from the outsourcing
company to ensure important details aren’t overlooked.
The due diligence should
include such areas as hardware, software, operating
systems, bar coding, imaging, handheld devices, sen-sor-based systems, satellite
and other tracking systems, and Internet access.
A particularly important consideration will be
whether the provider’s systems are compatible with the client’s existing ERP (enterprise
resource planning) system and other software.
Obviously, there are many other important
considerations in choosing a provider, and
due diligence should be thorough and detailed.
Outsourcing will always involve some degree of
risk, but particularly close attention to financial
stability and IT capabilities will go a long way
toward minimizing that uncertainty.
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider
of logistics management advisory services, and author of Logistics
Outsourcing – A Management Guide and co-author of The Role of
Transportation in the Supply Chain. He can be reached at cliff@
cflynch.com.
