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February 7, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

The Real Barriers to Collaboration with 3PLs and CMs

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.

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."

What do you say?

Send us your comments here

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 button below.

Let us know your thoughts.

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Dan Gilmore


Videocast Series

Optimizing Supply Chain Performance with On-Demand Transportation Management and Vendor Compliance Technology

Part 1: Achieving Actionable Supply Chain Visibility and Improved Vendor Compliance

March 10, 2008

Part 2: Using On-Demand TMS to Power Inbound and Outbound Transportation Excellence

March 24, 2008



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This Week’s Supply Chain News Bites – Only from SCDigest

February 7 , 2008
Supply Chain Graphic of the Week – Dual Buyer-Supplier Scorecards

February 7 , 2008
Supply Chain by the Numbers: February 7, 2008


It was a week of rebounding for most U.S stocks.

Our Supply Chain and Logistics stock index was also in rebound mode.  In the software group, Logility recovered much of the previous weeks’ losses.  In the hardware group, both Intermec and Zebra again concluded the week with positive results. The transportation and logistics group had a particularly profitable week with good earning news from both Burlington Northern and UPS.   

See stock report.

Discussion Question:

Out-of-Stocks Cost Retailers $93 Billion

Why Have Out-of-Stocks Remained Such a Big Issue in Retailing for So Many Years with So Little Apparent Progress? What Has to Happen to Finally Make this a Minor if not a Total Non-Issue?

Sorting it Out

by: Cliff Holste

My Lessons in Sortation Systems for Distribution

Batch Order Picking and Downstream Sortation Benefits are not Obvious at First


Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Read it Now

Weekly On-Target Newsletter
February 5, 2008


Q. Who is Chris Anderson and why is he important to the supply chain?

A. Click to find the answer below


Reader Question: Can Bucket Brigades Work with Mechanized Order Picking?

Reader Question: Is there a True Global RFID Standard?

See our expert answers at the links above. Share your knowledge or perspective.

Or, ask your question


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We're really behind again - bear with us. But keep the letters coming! In the next few weeks, we'll start adding feedback right on specific story pages, so you can see what others are saying.

More great letters this week. Our Feedback of the Week is from Damon McDaniel of
Alcon Manufacturing, who argues passionately that RFID time in manufacturing is really starting to come. You will really want to read this letter.

Also, Bob Dodge of LaMarsh & Associates reacts to our piece on Managing Supply Chain Change, suggesting more emphasis is needed on understanding the history of past change initiatives. John Grundy of Schneider National liked Dr. Don Ratliffe's 10 Rules for Supply Chain Optimization, and Scott Stephens has some interesting experiences with who controls the supply chain software buying decision, the operations team or IT.

All are good - take a look.

Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedbacks of the Week - On RFID ROI

We hear much in the press about no ROI for RFID and everyone's reluctance to go full scale because of the cost with "little" benefit - it's refreshing to see more articles that mention significant positives in terms of increased efficiencies as well as increased profits or increased revenues (usually what you get with revenues - yes?). 

In most circles you continue to hear "there's very little return for RFID, unless you have closed-loop and that's not a definite".  If not for outlets like SCDigest and others, the manufacturing market would really be in the dark about the capabilities/feasibilities and payback over investment in these sensor technologies.

RFID growth in the supply chain areas, however, do have more challenges.   But in my opinion this will be where supply chain finally catches on.  Think about it - if most companies tag for internal uses at the item level for internal handling, etc. - then, the product is tagged as it exits the Manufacturing plant and starts through the distribution channels.  This still may be for internal use for some time.  Once the goods get forwarded to customers - if readers were multi-frequencied and standardized - reads could happen regardless of the source tagging.  This would allow the recipient companies to still "use" RFID (or related technologies) as they process goods through their own channels. 

There may need the ability to write new information to tags without overwriting any original data in the tag if the originator did not associate the goods with the actual customer order.  However, with most requiring ASN's, pharma requiring pedigrees, etc. odds are that the compliance functions will still continue to expand. 

Consider the recent Sam's developments.   Also consider that for retail SC to expand ubiquitously - there may be the possibility that the Walmarts of the world might have to consider having the ability to work with multiple technologies to truly come across as "retail partners".  Some customers may legitimately be able to show that for them to get "on-board" they must use LF or Rubee or Zigbee or HF PJM-modulation or something else (organics?) vs. UHF Gen 2 (or 3).  If the retailers could accommodate those uniquenesses - watch out.  The industry would be set to explode.

Alcon is my employer, but these comments are entirely my own and should not be construed as Alcon's statements on any ideas expressed in this email.   

Damon S. McDaniel
Alcon Manufacturing, Ltd.

On Managing the Change:

I like much of the model shown, but would suggest there are some missing elements. One must consider the history of changes and the effectiveness of sponsorship. Both of these are sources of significant resistance, which if not addressed, will minimize the potential gains realized from the change. 

Bob Dodge
Director of Consulting Services
LaMarsh & Associates, Inc

On 10 Rules for Supply Chain Optimization:

As usual, Don adds insight gained from his long years, and varied experience. To expand slightly on his first point. During the dot com boom supply chain optimization efforts tended to be about improving service. After reality returned post bust, these studies tend to be about minimizing cost (total logistics cost, transportation cost, inventory cost, etc.). Service has become a constraint, and also must be clearly defined as the minimum acceptable level.

Defining an acceptable service level is an executive level issue, and may mean trouble for mid-level sponsored optimization initiatives. Also, defining the service level may present some implementation traps. Service of 80 percent of the customers by some elapse time, leaves open which 20 percent do not get this minimum standard - and therefore gets lower service. Customer's whose business depend on getting the higher service will cause implementation problems for an optimized supply chain solution.
During implementation the competition for with customers get stuck with the lower service will mutate the solution into a higher cost, higher service network. Top management's goals of lower cost while maintaining a defined service standard may never be realized.

John R. Gundry
Engineering & Research
Schneider National, Inc

On Who Controls the Buying Decision:

The Warehouse Management System case in your story illustrates the situation I saw repeatedly in the ten years I was the CTO of the Supply Chain Council.  The business unit identifies a shopping list of software functionality but fails to specify real, measurable performance requirements (the business outcomes that will be realized by the project).  The IT department compares the technical specifications between the software vendors and makes a reasonable software engineering estimate based on cost.  The CFO makes a financial decision – selecting the low cost alternative.  In the end, the business unit improves marginally.  The IT department overruns its budget and delivers late as it attempts to deliver a solution that provides value to the business.  The software vendor is blamed for a product that doesn’t work or was “over” sold. 

In most cases, operating units are not experts in software technology and if they smart enough or lucky enough to find a “solution” they are probably not prepared to consider its integration into the supply chain environment nor the life cycle costs of the data.  IT organizations normally don’t have accountability for the business requirements (revenue, service level, margin, etc).  They are measured on cost. 

Who controls the buying decision is far less important than specifying and agreeing upon the business criteria for the decision upfront.  Key performance objectives or indicators coupled with a cost analysis gives the CFO the ability to make a better decision.          

Scott Stephens



Q. Who is Chris Anderson and why is he important to the supply chain?

A. He is the editor of Wired magazine, who in 2004 wrote an article called "The Long Tail," which subsequently became a book. The original concept primarily had to do with the notion that in the internet age, companies could make money by selling products for which, at an individual SKU level, there was comparatively low demand (amazon.con, netflix, itunes). The idea has morphed, in part, to companies taking a stronger look at how to optimize their low demand SKUs, as product proliferation is for many confounding the Pareto Principle.

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