Outsourcing logistics operations is an upward trend in the UK, with the UK Logistics sector now seeing revenues of £55bn per year. If you are one of the many companies that are considering outsourcing their logistics operations to a 3rd party logistics provider (3PL), or retendering their existing outsourced operations, here are five key points that you should consider.
Firstly, it’s important to remember that you are buying a service and not a commodity. Be realistic with your savings target (if that is one of your drivers). The 3rd party logistics industry, especially for transport, is a low margin high volume market. Each provider is exposed to a very similar cost base in terms of assets, people and fuel.
Unless you are looking at straight forward transport lane rates, don’t focus simply on a like-for-like cost comparison, but rather focus on the business fit and potential savings that the provider can bring through innovation. On like-for-like comparisons, given the parity of costs in the logistics industry, savings of less than 5% are the reality. However, giving the providers opportunity to innovate may bring significantly higher savings combined with the potential to improve service.
It is through innovation that 3PLs will aim to differentiate. This may come in the form of a total network redesign, added value services or utilisation of different fleet profiles and warehouse configurations. To design these changes, it is critically important that the 3PLs are provided with accurate and meaningful data to model their solutions against.
It is also important to identify in advance what are the fixed ‘non-negotiable’ elements of your supply chain and what elements are open for change. A complete change to the fleet profile, or relocation of a warehouse, may not be viable if you have just entered into long-term lease contracts. Ensure you supply the provider with visibility of your commitments, alongside operational data, and furthermore, ensure you provide sufficient time in the tender process for modelling of multiple scenarios.
Modelling logistics operations takes time and careful analysis. To facilitate this, you need to ensure that sufficient time is allocated to the logistics tendering process. Give the 3PLs every opportunity to model and assess all potential scenarios, and ensure that there is an opportunity for them to question and validate the data and information you have provided.
The market for outsourced logistics is growing at a rapid rate and consequently tender opportunities that 3PLs are presented with are numerous. It is ill-advised to approach the market with a tender timeline that is too short. This may not only preclude some 3PLs from responding, but it may also compromise the solution design and ultimately the integrity and cost of the solutions offered.
You are buying a service and consequently a working partnership. As part of the tendering process, you need to ensure that you meet the key operational team that will implement and manage the contract on your behalf. It’s important that you can build a relationship with the operational team. Also, you need to understand the culture of the 3PL – how well do they look after their staff? How good are they at staff retention? How do they train and develop people? This is important, the last thing you want is a revolving door of people coming in to manage your logistics contract.
Remember, the business development team who model and submit the proposal are unlikely to be the same team that implements and manages the contract. In the shortlisting process make sure you meet the operational team and get their feedback on the viability of the solution being offered. It’s not uncommon for a business development team to overpromise, so make sure the operations team are 100% behind the solution.
Never assume that the provider has done their numbers correctly, mistakes happen. Designing logistics operations can be a complex process and errors in analysis or incorrect assumptions happen regularly. It’s too easy to think, especially within a fixed price arrangement, that if the provider has made errors it is their problem. It is, but it will fast become your problem when the provider loses focus on your operation or is financially forced to breach contract.
Of course, due diligence applies not only to the 3PLs analysis, but also to the operational data that you have supplied. Check this data, and then check it again. Does it truly reflect the realities of your business? Are there exceptional events within the data? The number one reason for failure in 3PL contracts is due to solutions being designed against inaccurate operational data.
Here at Paul Trudgian we have extensive experience of both logistics solution design and managing logistics outsource tenders. We also hold an extensive database of logistics providers, and we have a comprehensive understanding of provider abilities across all sectors. If you would like to discuss how we can support your business in tendering logistics operations, please contact one of our consulting team today.