What's Important in 3rd Party Logistics Service Provider Relationships--and
How They Can't Work Without Active Relationship Management
by Art van Bodegraven, S4 Consulting
Testing the Premise
We shamelessly took advantage of a recent 3PL Summit conference in Atlanta to evaluate how 3PL providers and their customers might view the importance of relationship management in their worlds. (3PL is shorthand for Third-Party Logistics, and a 3PL is often called an LSP, Logistics Service provider.) We began with a workshop designed to discuss what's important in these business arrangements, and how they might be codified for inclusion in contractual language.
Our general experience has been that many players on both sides talk a good game, but wind up in adversarial, lowest-price deals. This is sometimes referred to as the "commoditization death spiral." To digress for a moment, in a commoditized universe, there is always someone willing-- even eager-- to sell goods at a lower price. Worse, the approach can carry over into labor, with low hourly rates, neo-piecework pay, and minimal benefits to allow offering lower-priced alternatives.
So, we, with some trepidation, embarked on a thrill ride during which we led issue identification, discussion, and debate for a group of about 80 logistics and supply chain professionals equally divided among service providers and customers.
What’s Important
The list following was the joint development of providers, customers, and us. It is comprehensive, but probably not complete. It does, we believe, amply illustrate the breadth and complexity of those factors that are make-or-break for success in the 3PL components of supply chain relationships. In no particular sequence, they are:
- Industry experience (same or related)
- Functional experience (nuts and bolts of handling, storage, movement)
- Geographic footprint (national, global)
- Scope and scale (volume and velocity)
- Satisfied customers
- Relevant process design and improvement (track record of kaizen in appropriate functions and industries)
- Valued discussion partner--logistics and business issues
- Educating you about new developments, possibilities, obstacles and opportunities (e.g., what to do about rising fuel prices, or off-shore wage increases)
- Collaborative problem-solving
- Performance to meet or exceed agreed KPI (Key Performance Indicator) targets
- Understanding and buying into your business strategy
- "Getting" what's unique about your company, operations, strategy and customers
- Understanding, valuing and supporting your customer relationships
- Cost (as differentiated from unit or transaction pieces
- Values (behaviors and culture-- and compatibility)
- Reputation (perceptions in the broader community)
- Financial stability (staying power and profitablity)
- Organizational stability (turnover at all levels)
- Information systems (technology investment and capability)
- Ease of doing business
- Robust service recovery when trouble strikes
- Implementation and project management (organization, planning, resources)
- Time frame (response, planning, implementation, performance up-ramp)
- Compliance (environmental and ethical--Green and Sarbanes-Oxley)
A daunting list, to be sure. Were they serious? We think they were. Although the critical relationship factors are skewed toward customer interests, the 3PLs in the audience raised no objection, and actively participated in discussion. It’s difficult to imagine that no one publicly disagreed, if there were reservations. And, in the two days following the workshop we received no negative feedback.
The tough question is: who pays for all this? That may be a debate for another venue and date. In the abstract, customers understand that 3PLs need to make enough money to make intelligent investments in the critical relationship factors. On the other end of the teeter-totter, and gaining heft daily, sit the procurement folks who find it easier to focus on short-term costs and prices than on long-term relationships and benefits.
What About Contracts?
The truly telling workshop outcome was the strong conclusion that only a handful of these vital factors could be built into contractual relationships. Things like initial and on-going costs, scope of services, reporting and control activities, and KPI identification (with targets) all need to be included in regularly updated attachments to contracts. The body of a contract, then, gets fairly slim, including such things as agreement duration, definitions of terms, liability language, termination arrangements, force majeure and Acts of God exclusions – all the things lawyers love to hang your hat on.
Sometimes, in cynical moments, we suggest that a document over ten pages in length isn’t really a contract, but is, instead, a collection of loopholes.
The End Game
The inescapable conclusion for us – and one the workshop attendees quickly reached, too – was that getting the most out of a 3PL relationship and leveraging the power of the important factors in the deal can’t be built up from the execution of a contract. They demand active and customized relationship management from the 3PL, as well as genuine partnership behaviors from the customer.
We recognize that not all customers will warrant, or benefit from, a one-size-fits-all relationship process. And, few service providers have infinite resources to manage relationships. So, there is a vital first step of understanding the profiles of different customer types – and, therefore the kinds of relationships that make sense for each, as well as for the service provider.
But, we do believe, based on decades of experience in logistics and supply chain management, decades of experience in unleashing the power of business relationships, and the current example of a broad-based workshop, that 3PLs and their customers have the potential to seriously grow:
- their businesses,
- their profit margins,
- their relationship longevity, and
- their sustained organizational performance
© S4 Consulting
