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  - January 16, 2008 -  

Distribution and Material Handling News: Getting 3PL Collaboration Right


Annual 3PL Study Authors Share their Insights Beyond the Report; “It’s the Only Way,” many Companies Say


SCDigest Editorial Staff

SCDigest Says:
While in theory many parties would like a simple contract, working through the details in the end is usually the best approach.

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The annual study on 3PL practices and relationships was released as always in October at the CSCMP conference in Philadelphia. The theme that emerged from this year’s results was collaboration between companies and 3PLs, and the report includes an interesting maturity model for assessing collaborative relationships along people, process and technology dimensions (See Annual 3PL Study Finds Opportunities for Collaboration and Annual 3PL Study Finds Relationships and Value are there, but Projections for Increased Outsourcing Have Not Materialized.)

SCDigest recently discussed additional insights from the research with report authors Dr. John Langley of The Supply Chain and Logistics Institute at Georgia Tech, Erik van Dort, Vice President Logistics for Capgemini Nederland, and Rod Strata, Industry Principal in SAP’s Industry Marketing group. The research work involved not only analyzing the great volume of survey data obtained as part of the research, but participation in three group sessions with shippers and 3PLs at Capgemini’s Accelerated Solution Environment, one each in the US, Europe, and Asia.

Collaboration Imperative

Dr. Langley reiterated the report’s message that collaboration between 3PLs and shippers isn’t just nice to have – it’s becoming a competitive necessity. But he said there is sometimes a belief that pursuing collaborative relationships has to come at a cost.

“No one would suggest that collaboration should come at a net cost to the company,” Langley said. “If done well, collaboration ought to result in measurable benefits that easily exceed the costs.”

van Dort said that going in to the research, he was a little wary about collaboration, concerned that it might be more buzz word than reality. He was surprised, however, to find that at the accelerated solution lab meetings, almost every one of the participants believed the collaboration opportunity was real and significant.

“We did a one question survey at the beginning of the meetings, and almost every single attendee selected the choice ‘Collaboration is the only way to make real and sustainable improvement in the supply chain,’” he said. “While by virtue of their participation these were probably pretty advanced thinkers on this topic, the level of agreement about the importance of collaboration surprised me.” (con't below)


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Some Progress, but a Long Way to Go

The survey did not specifically try to identify what percent of companies had reached the “Leadership” level in the collaboration maturity model, but van Dort said in his estimation, it’s probably less than 10% - a level Langley thought was also about right.

Strata also agreed. “From a people and process side, I think there is still some ironing out to do about what the real value is and what is the true nature of a collaborative relationship,” he said.

Langley said the study does ask companies about another aspect of their relationships with 3PLs, which is what percentage would be characterized as being strategic in nature, and what percentage are more tactical/operational. Similar to the 2006 results, about one-third were characterized as strategic, and two-thirds as tactical.

“What we’ve come to realize though is that you can have a collaborative relationship with a 3PL at both the strategic and tactical levels,” Langley said. “The nature of the collaboration might be a bit different, but it can work well at either level of relationship.”

Strata noted that part of the challenge is the level of technology support a 3PL brings to the table. Lack of the right tools and sophistication can be a barrier to collaboration. Conversely, having the right technology enabled can accelerate collaboration by enabling the 3PL to actually help the company better integrate with the shipper’s own network of trading partners and service providers.

“Too many 3PLs still have technology silos that inhibit the level of process integration shippers would like to have,” he said.

van Dort noted the example of a European manufacturer that had traditionally bid out its freight to a variety of carriers. One 3PL approached the company, and said it thought it could reduce the shipper’s costs substantially over three years through a managed program.

Some in the manufacturing company were uncomfortable with the idea, believing the traditional bidding process would deliver the best result. Nevertheless, the company did contract with the 3PL, and substantial savings were achieved in the first three years of the relationship, as promised.

Pick Your Partners Wisely

van Dort noted that it isn’t possible or wise to get collaborative with all your 3PLs.

“Large companies may have dozens of third parties across the globe,” he said. “You can’t develop a collaborative relationship with all of them. Some you will just want to perform a specific, tactical job. But for others, you look to see the ones where you have confidence you could do more beneficial things, and drive real value as a result.”

Of course, probably all of the 3PLs a company uses will want to be in the list of the ones with which a company intends to get more collaborative. van Dort, however, cited another example where the process itself help winnow the field.

A Dutch dairy producer was using 20 carriers literally to do milk runs to various manufacturing customers. It wanted to cut the number of carriers to 5, and have each of those become more strategic partners and shoulder much more responsibilities.

At first, all 20 existing carriers wanted to be among the five logistics service providers (LSPs) selected. But when they all better understood the level of capabilities and technology needed for the role, many dropped out of the process, and a few others joined forces to offer a combination proposal.

Getting 3PL Contracting Right

Sometimes, there can be barriers to collaboration based on the different objectives of each side. For example, reducing costs for the shipper might mean loss of business for a 3PL.

Langley said to combat that it’s important to get the objectives of each party on the table during discussions and negotiations.

“You have to start by having a real dialog,” Langley said. “If a 3PL wants to get a greater share of the company’s business, that should be a highly acceptable idea.”

van Dort said, “The contract shouldn’t be a barrier to being collaborative. For example, if it’s based on square meters or pallet positions used over a two-year period or something, the 3PL has little incentive, say, to share ideas for reducing the client’s inventory levels.”

“Also, if the contract is structured in such a way that there is, in effect, a penalty for the 3PL to save the company money, something is wrong. There has to be shared benefits,” he added.

While in theory many parties would like a simple contract, working through the details in the end is usually the best approach.

“It’s important to be clear about what your really trying to accomplish though with a minimum of legalese,” Langley said, noting that in some cases the procurement or legal organizations can poison a good understanding with a contract that ends up “offensive to the 3PL.”

70% of respondents actually favored a contract that had carefully crafted details. But Langley stressed the need for the contract to be a “living document” that is relatively easy to amend if the situation, environment, or requirements change.

van Dort emphasized that the real value is in using the contracting process to better understand the requirements and responsibilities at a business level. “It’s critical for both sides to clearly understand what the expectations are and how they are going to be measured,” he said.

van Dort added, “The key point is that if either side is frequently running back to the terms of the contract to settle disputes or performance issues, the relationship is already broken no matter what the contract says.”

What’s your take on 3PL collaboration and the comments of this year’s report authors? What would you add to the discussion? Let us know your thoughts at the Feedback button below.

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