Achieving Success in Logistics Outsourcing
June 21, 2010
How’s Your Chemistry With Your Outsourcing Provider?
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Discussion Outline
Session Objectives
The Environment Today
A Look at Outsourcing
Managing Performance Expectations
Governance Best Practices
Strategies for Success
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Copyright © 2010 Tompkins Associates. All rights reserved.
Session Objectives
Examine the State of Outsourcing Today
Review Best...and Worst Practices
Share Ways to Get More Out of Your Outsourcing Relationships
Have Fun!
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Copyright © 2010 Tompkins Associates. All rights reserved.
The Environment Today
Impact of the Recession – 2009 was the first year of negative growth for LSPs
– Companies need to shrink and grow at the same time
– Continued uncertainty
– Lack of talent
M&A Activity in the LSP Space
Globalization and Emerging Markets
Shippers’ Organization Structure and Strategy
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Why Do Companies Outsource? Reason for Outsourcing Importance to Them
(1-5 scale) % of Respondents That
Favor Outsourcing for That Reason
Flexibility to Grow Capacity 3.9 83%
Improved Service 3.8 78%
Peak Season / Overflow Capacity
3.8 79%
Lower Cost / Rate Structure 3.6 61%
Reduced Capital Investment 3.3 79%
Workforce Issues 2.9 62%
Initial Entry into Market 2.8 64%
Access to Skills Not Available Internally
2.6 52%
Access to Technology Not Available Internally
2.2 64%
Local Regulatory Requirements
1.7 57%
Source: Tompkins Supply Chain Consortium
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They Need New Technology
Source: Supply Chain Digest
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Understanding When to Outsource
Steps In Evaluating Outsourcing Decisions and Outsourcing Partners
1. Outline Areas of Opportunity » Current and Future
» Define Core versus Non-Core
2. Realistically Outline Your Strengths and Weaknesses » Skill Set (distribution, compliance)
» Regional Expertise
» Existing Infrastructure
3. Define the Scope of Services » Distribution Services
» Transportation Decisions
» Sourcing/Payment Control
4. Identify Providers Capable of Meeting Your Needs » Experience, Infrastructure, Cost, References, etc.
5. Select a Partner, Not a Service Provider » Outsource for expertise and flexibility
» A lower cost must come with improved service and commitment
Core Competency Matrix
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Understanding When to Outsource
Some Key Benefits to Outsourcing? – Focus on Core Competency
– Reduction in the Cost of Logistics Operations
– Reduction in Head Count
– Improved Accuracy
– Flexibility and Wider Range of Services
– Access to Global Networks and Superior Technology
– Improved Service
– Improved Quality
– Reduced Capital Investment and Increased Cash Inflow
– Ability to Rapidly Expand and Handle Peaks
– Ability to Tap into Transportation Synergies
Common Drivers for Outsourcing?
• Desire to focus on your core strengths
• Inefficient and costly operations • Failing to meet service requirements • Evolving market dynamic (i.e. shift
from manufacturer to importer) • Outdated technology requiring
upgrades • Require flexibility in capabilities and
space • Entry into an emerging market • Lack of internal expertise in
markets/regions • Capital constraints • Need for rapid expansion
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Identify an Executive Sponsor
Set Objectives Quality Requirements
Service Level and Delivery
Requirements
Prepare RFI/RFQ
Perform A Market Evaluation of
Service Providers
Map Current Key Functions or Processes
Define Customer Service
Requirements
Develop a Baseline Model
Identify Total Cost of
Operations
Create Your Outsourcing Plan
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Lack of Adequate Scope Definition
Source: Supply Chain Digest
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Determine Your Evaluation Criteria
Ability to demonstrate proven methods Best-in-breed systems, easy to interface Defined scope of work Metrics and KPIs Program management Formal business review process Continuous improvement and innovation Cultural fit
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Logistics Provider RFP & Solicitation Process Suggested Performance Categories and Weightings (Example)
Cultural Fit Criteria • Do they share your organization’s values?
• Have they been open during the process?
• Has working together been easy?
• Have your interactions been natural or forced?
• Are they excited about partnering with you and your company?
Category Category Rating Weight
Category Score
Maximum Score
Financial Stability 5 15 75 75 Service Offerings 4 15 60 75 Culture 4 15 60 75 Customer Satisfaction 3 15 45 75 Operations 3 10 30 50 Technology 4 10 40 50 Cost 2 10 20 50 Flexibility 3 5 15 25 Control Systems 5 5 25 25
Total Rating 100 370 500
LSP Provider X - Final Evaluation
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Managing Performance Expectations
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Gaps Still Exist between LSPs and Shippers
TOP SEVEN Continuing Problems Percentages Reported By:
Shippers 3PLs
Lack of continuous, ongoing improvements and achievements in offerings
Service level commitments not realized
Information technology capabilities not sufficient
Cost reductions not realized
Lack of project management skills
Unsatisfactory transition during implementation stage
Lack of global capabilities 30%
17%
25%
21%
46%
43%
36%
35%
46% 31%
19%
31%
34%
31%
Source: 2009 14th Annual Global Third Party Logistics Study
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Incentives and Gain-Sharing
Penalties Assessment on overall
performance
Lost and damaged product
Contract specific metrics
Reduction in volume stored, handled and produced
Incentives Bonus for exceeding
overall performance – Service levels
– Quality, responsiveness
– Delivery
Formal recognition programs
Gain-sharing plans
Source: Tompkins Supply Chain Consortium
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Over Promising and Under-Delivering
Source: Supply Chain Digest
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Governance Best Practices
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Don’t End Up in Court!
Failure to Align Expectations
Failure to Provide the Reality of What is Needed
Secrecy
Lack of Transfer of Knowledge
Lack of Agreement on KPIs
Not Agreeing/Addressing Modifications Over Time
Not Turning over Responsibility but Expecting Different Results
Unrealistic Implementation Schedule
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Contract Negotiation
Steps to Success Joint Operational and Legal team
Involve experienced legal counsel early in the process
Ensure that legal counsel understands the objectives in the outsourcing initiative and the company’s negotiating position
Avoid heavy handedness, focus on mutual benefits
Maintain leverage (i.e. back-up option)
Key Questions to Ensure Counsel Is Up to Speed on: What is driving the decision to outsource – commercial, financial, technological?
What departments are impacted and what are the consequences to each?
How can the objectives be utilized in negotiations with the provider?
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Copyright © 2010 Tompkins Associates. All rights reserved.
Unrealistic Expectations
Source: Supply Chain Digest
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Copyright © 2010 Tompkins Associates. All rights reserved.
Contract Negotiation
A good starting point for the negotiations is through a binding or non-binding term sheet which establishes the terms of the deal without legalese.
Term sheets should address at minimum the following areas: Integrate commercial, legal, technical, and financial issues
Balance risk and reward
Balance certainty and flexibility
Service levels
Performance Metrics
Provide price predictability
Plan for exit
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Global Standard Contract Components
Key Components of a “Global Standard" Distribution Site Contract: Scope of services – transition, warehousing and/or transportation and value
add
Facility – address, size and general configuration
New equipment – statement of acquisition and ownership
Transition schedule – target dates and responsibilities
Lien waivers – it is important that the provider not be able to make any claim against the client’s inventory
Service levels
– Critical service levels will have non-compliance penalties attached
– Key performance measures are meaningful metrics but do not accrue penalties
– Measurement and monitoring tools
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Global Standard Contract Components
Key Global Standard Components (continued) – Pricing
– Staffing
– Ownership and confidentially of data
– Performance Incentives
– Business Recovery
– Audits – particularly important in a “cost plus” arrangement
– Termination – conditions for termination and termination transition period
– Dispute Resolution
– Other areas of note are: payment terms, tax responsibilities, insurance responsibilities
– Master Agreement
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Post Contract Relationship
Establishing the Relationship and Handing Over the Operation
Set initial expectations
Jointly identify resources up front
Establish operational baseline (current)
Establish future goals and destination
Plan for resistance
Determining the Relationship Structure
Metrics and reporting
Communication plan
Problem resolution
Change orders
Steering committee
Invoicing format
Fee Structures • Fixed Cost
• Transaction Fee
Cost Plus • Activity Based
• Management Fee
• Combined Structures
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Strategies for Success
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Keys to Success
Partnering – Joint goals
– Continuous improvement
Managing – Performance metrics
– Two-way communication
Nurturing – Ongoing involvement
– Celebrating mutual success
Perfect Relationship Recipe
Shared Vision Shared Values
Shared Expectations Shared Commitment Shared Confidence
Shared Responsibility A dash of Cooperation
A pinch of Collaboration
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EQ Matters!
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Relationships Matter
What’s Your EQ? – Self-awareness
– Self-management
– Social awareness
– Relationship management
Leadership: Attitudes and Behaviors that Relate to Humanity
“It’s About the People Stupid”
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Begin with the End in Mind
HIGH VALUE LOW DIFFICULTY
HIGH VALUE LOW DIFFICULTY
LOW DIFFICULTY LOW VALUE
HIGH DIFFICULTY LOW VALUE
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Don’t Get Out of Balance
CHANGE ONE PARAMETER AND THE OTHER TWO ARE LIKELY TO CHANGE AS WELL
TIME SCOPE
COST
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Don’t Be Like This Guy! Stay Engaged
Source: Supply Chain Digest
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Copyright © 2010 Tompkins Associates. All rights reserved.
Contact Information
Valerie Bonebrake Senior Vice President 6870 Perry Creek Road Raleigh, NC 27616
(913) 393-1051 Office (913) 219-6768 Mobile [email protected] www.tompkinsinc.com
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