First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  February 7, 2008  

The Real Barriers to Collaboration with 3PLs and CMs

Gilmore Says:
We rarely discuss some of the real barriers to these sorts of collaborative efforts. And the failure to do so is, in fact, a prime reason the collaboration doesn’t happen. .

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There seems to be general agreement that improved collaboration can benefit both companies and their 3PL or contract manufacturing (CM) partners. But a recent conversation has caused me to think about this from another direction.

Shortly before Christmas, I received a call from Jack Crumbly, who is working on a doctorate at Jackson State, and doing his dissertation on 3PL collaboration. In fact, he is trying to extend some of the fine research Dr. John Langley of Georgia Tech leads each year with the annual 3PL study, which we previously covered in several SCDigest On Target edition stories (See Annual 3PL Study Finds Opportunities for Collaboration, 3PL Study Finds Relationships and Value are There, but Projections for Increased Outsourcing Have Not Materialized, Getting 3PL Collaboration Right).

A couple of subsequent emails and phone calls with Jack led me to suggest to him the following: We rarely discuss some of the real barriers to these sorts of collaborative efforts. And the failure to do so is, in fact, a prime reason the collaboration doesn’t happen.

To kick that proposition off, I’d like to relate a quick story of an industrial company I recently spoke with. They have outsourced a large portion of their supply chain, and have recently come to the insight that products going to large customers could often be shipped direct from their factories, rather than shipping first to the DC and then to customers. They estimate the total logistics costs savings at more than 20% from such a program.

They suspect the 3PLs knew about this all along, but failed to suggest the strategy for a very practical reason – it would mean a significant loss of business. The 20% savings would come out of their services for transportation and distribution management. More on this below.

From another perspective, I think the reality is that the reason many 3PLs and Contract Manufacturers want to be “collaborative” is that they hope to gain insight into a client that can lead to additional business. In other words, “Please share more information about your transportation challenges, so we can offer a program to help you fix that.”

Now, as Dr. Langley noted, “If a 3PL wants to get a greater share of the company’s business, that should be a highly acceptable idea.”

I totally agree. But when the goal (perfectly logical as it is) at its core is often not “Improve the client’s supply chain,” but rather “Increase our billings with the client,” then the collaboration element I think starts off a little tainted. In many cases, “Collaboration” equals business development.

For this column, I asked an old friend who spent many years in the 3PL world what would happen if an account manager perceived a strategy that could reduce the client’s supply chain or logistics costs.

He said, “There would be two questions: “What kind of opportunity is there for us?” and “Would this reduce our billings under the current contract?”

Now let’s look at the company/client side. Whether we’re shopping for clothes in the department store, or supply chain services at work, there is simply an inherent tendency to hold our cards. Why? In part because we understand that the more information we keep to ourselves rather than share with the other side, the more advantage we have in controlling the relationship.

To put it in an outsourcing context, the reality is, especially for companies working with multiple 3PLs/CMs, that the company or individuals within it believe they have a handle on things, and are the best ones to decide when and if they want to share information with the outsourcers about potential opportunities.

Which is why the annual 3PL study generally finds 3PLs would like to get more “strategic” (code word “Get More Business”), and customers/clients tend towards establishing more tactical relationships (“We know best what information the 3PLs/CMs need to operate effectively and they shouldn’t get anything much more.”).

So what’s the point of all this?

  • While gain-sharing contracts can help, especially at a tactical level of relationship, it is asking a lot to expect outsourcers to find ideas that will be good for the client but mean a loss of business revenue and profit for themselves.
  • 3PLs would love to have clients share information about anything and everything. Clients would rather keep the information advantage, out of natural tendencies to do so, a belief that they know best where 3PLs/CMs might next help best, and in some cases the legitimate concern that they just might outsource my current job.
  • Because we don’t really bring these two realities to the table, less information sharing and collaboration is achieved than might otherwise be the case, even if it can never be at a level that may, in theory, be ideal.

I asked our Gene Tyndall about this, who among his many accomplishments was a senior executive at Ryder, and he both agreed and disagreed with me, specifically commenting on the situation of an idea for supply chain improvement that will cost the 3PL/CM billings.

“Logistics Service Providers [a term Gene prefers over “3PLs”] should always bring innovations to their clients, even if it means loss of revenue” Gene said. “The good client will reward them for this. We did this at Ryder, but only for the Automotive industry clients, who value the relationships and knowledge. Yes, some of these had gain-sharing contracts, but not all. By so doing, we got other business from them, often with higher margins.”

On the other hand, Gene added, “First, there is the issue of the type of relationship.If the client really doesn't value it, then the LSP knows the idea will be a win-lose proposition.Unfortunately, too many relationships are like this. Second, what is the incentive? Contracts are often written too narrowly, and changes in the flow of goods would require a new contract, and who wants to raise that ugly event?”

So, I’ll use the example of Toyota, which in North America uses a small group of LSPs. One a variety of initiatives, the team of LSPs is brought together with Toyota logistics managers, and they pound through an issue, such as reducing transportation expense. Often, the net result in the short term is that one or several of the LSPs do lose some revenue.

But there is one key variable – the LSPs also know with certainty that they are on the Toyota team for the long haul.

And that makes all the difference.

What’s your take on collaboration opportunities between companies and their outsourcing partners? Are the issues Dan’s cites important? Could getting them more clearly on the table actually help drive better collaboration? How have you achieved success?

Let us know your thoughts at the feedback link below.

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