Logistics and supply chain outsourcing is an area of fast change and rapid growth. With increasingly globalised markets, combined with faster lead-time expectations, reduced working capital deployment and lower operating costs, supply chains are ever more complex and the opportunities for third party logistics providers (3PLs) to bring value are ever more numerous.
I have worked both as a solution designer in the 3PL sector and as a consultant managing the tender process for many clients with annual contract revenues ranging from £500k to £50m. I know from this experience that engaging a 3PL is not the same as purchasing commodities; you are buying a solution and putting in the foundations of a potentially long-term professional partnership. Unless you are tendering straightforward freight lanes, then some of the normal rules of procurement do not apply.
Firstly, you should avoid price based tendering using procurement software. It is likely that your requirements will not translate into a neat and tidy ‘x’ price for ‘y’ service. There will potentially be different solutions and different approaches by some 3PLs. Perhaps some have the network to offer you a solution based on multi-user facilities, whereas some may define a more efficient solution using a dedicated network. These differences in solution will not translate into commercial procurement software, and especially not into an ‘open-book’ costing which is probably what you will want to see.
Secondly, it is important to engage potential providers on a face-to-face basis. Whilst I do not advise that all participants have open access to your team and your operation in the early stages, I would recommend that you meet with potential providers before issuing the tender and engage those providers with your rationale for outsourcing your operations.
Be cautious using a ‘Pre-tender Qualification’ (PTQ)
For logistics outsourcing, this is the step in the typical procurement process that I believe brings the least value. In the 3PL sector, and especially if your contract is for dedicated operations of £2m+, it is unlikely that you will receive any more than 10 responses to your tender. 10 participants and 10 responses are not difficult to manage, so why would you seek to reduce them through pre-tender qualification? Of course, you could argue that you only want certain providers that meet specific criteria, but it is much better to apply those criteria when you have 10 fully costed proposals in front of you. You never know, some of the criteria you thought were critical may not be so important when you see the prices!
Instead of a traditional PTQ, I advocate issuing an initial information pack. Tell potential providers what you are looking for, why you are looking for it and what your tender process will be. Where there are likely to be small number of potential providers, it is also sensible to invite them to your site for an introductory briefing.
Determine your schedule
Be realistic about how long it will take to engage 3PLs in the opportunity and about how long it will take them to design a solution for you. Be aware that 3PLs do not have development teams sitting idle waiting for your invitation to tender. Most 3PLs receive high volumes of enquiries and many will apply an opportunity scoring system to your invitation. They will consider many factors including strategic fit, competitor analysis, level of contact, credit scoring and deadline requirements. A rough guide to the response times you should allow are:
- Outsourcing an existing multi-user operation – 4 weeks response time;
- Outsourcing an existing dedicated operation – 8 weeks response time;
- Outsourcing an existing dedicated operation that requires consolidation/optimisation – 10 weeks
By being generous with the response times means you maximise your chances of getting as many of the 3PLs to respond as possible. Remember, this is a comparative exercise and the fewer companies that respond, the less competitive your results will be.
Avoid use a tendering process to benchmark
Of course, this happens and 3PLs are very aware of it. However, experienced 3PL development teams have a sixth sense for detecting a benchmarking exercise and it will only damage your ability to engage them in a competitive exercise in the future. It is key to remember that the best 3PLs in the UK are rarely short of contract enquiries.
3PLs are, nevertheless, quite philosophical about benchmarking. A 3PL commented to me recently that, “they’re only benchmarking until you give them the right price!” That is undoubtedly a good attitude to take, but I would suggest that if you need to benchmark your current cost you should openly engage one of the leading 3PLs honestly. Tell them why you want to benchmark and what your concerns are; sometimes good, forward thinking 3PL teams will be happy to help in order to build a relationship for the future.
Be open – do not hide the detail
Designing some logistics operations can be a complex process, requiring highly detailed and advanced analysis. The more complex your logistics needs are, the more room there is for error in the design. Consequently, if it is an existing operation, be open with participants about the level of resource you currently deploy. This helps them to calibrate their design and also gives them the opportunity to focus on areas where they feel they can bring value.
Provide opportunity for participants to visit site
Designing a logistics solution, especially a dedicated solution, can be a complex process. There is often significant time required to undertake route scheduling, location optimisation, facility sizing and layout design. These tasks are likely to be achieved in a much more effective manner if the participant’s design team are allowed access to the current operations, so they can gain a tangible understanding of your business.
Engage participants within a structured and clear procurement process
Provide a clear and concise Invitation to Tender (ITT). Avoid filling the ITT with numerous appendices of your corporate policies. It is better to drip feed non-critical data through the process than load it all into an unmanageably large ITT.
Principally the ITT needs to cover:
This should cover the history of your business, your markets and planned progression.
In this section you need to answer what your key drivers are for outsourcing; is it cost reduction, service improvement or expansion support? Also, cover the scale and scope of the opportunity with direct reference to a data profile (which should be supplied as appendices).
Explanation of tender process
Provide a timetable covering Q&A deadlines, site visit opportunities, ITT deadline, decision time frame and opportunity for due diligence post decision.
You should reiterate the terms of any non-disclosure agreement you have put in place, but also the approval process required if the participant wishes to engage sub-contractors.
Opportunity for questions and answers
Outline a fixed time frame for posing questions and when you will provide the answers. Also stipulate if the questions and answers will be provided openly to all participants.
Be clear on what your requirements will be in terms of the commercial framework, account management reporting and IT integration.
Evaluation and selection criteria
Provide the participants with details on how you plan to select the provider, i.e. price, cultural fit, financial probity etc.
Data profile (as a supporting appendix)
Provide, if you can, a data profile that shows the last 12 months of activity, i.e. receipts, despatches, delivery points, inventory profile etc. If a full 12 months is too large a dataset then provide 3 weeks, reflecting your low, medium and high seasons. This data should be supported by information on your fixed logistics profile, i.e. logistics unit sizes, product volumetric and pack configurations.
We hope this brief guide has provided you with some insight. We have extensive experience in outsourcing logistics operations and we are available to manage the full tender process on your behalf. If we can be of assistance then please don’t hesitate to contact us.