Managing 3rd Party Logistics Service Providers


In theory, the decision to outsource is driven by the company’s choice to focus on core competencies, or in its quest to improve customer service levels, or as it strives to develop more efficient processes. In reality, it is mostly driven by cost, more specifically, a need to reduce the existing cost base. Irregardless of the driver, entering the world of outsourced logistics activities can be a challenging exercise even for those who are well prepared or have had previous experience.

The establishment phase commences with the initial “go or no go” decision making process and extends through to the actual implementation and change  IT Managed Services London management processes required to transition to the outsourced model. The management phase encompasses the processes required to ensure the successful operational management of the business relationship with the service provider. The development phase involves the transition from an operational business relationship to a more strategic and collaborative business relationship.

The following paragraphs will address each phase of the outsourcing life cycle and are intended to provide some guidance for those that have already outsourced, or are considering outsourcing, all or part of their logistics functions.

Establishing the relationship – Key Success Factors

Far too often the importance of a properly defined scope of work (what it is you want the service provider to do) is overlooked. One of the greatest frustrations of logistics service providers is the lack of quality information that is provided as part of the tender process. Each task within each process should be clearly documented. This is particularly important where you have specific requirements outside of what would be normally considered standard practice. Providing detailed information should extend beyond a thorough definition of the processes to be performed. It should also include the provision of sufficient shipment and throughput data. This will enable the supplier to prepare the best possible and most cost effective response to your requirements.

The less data the higher the cost is likely to be – the supplier will always add a premium to cover the uncertainty.

It is important that service level expectations are clearly articulated. There should also be a differentiation between your standard requirements and any non-standard requirements. Even if 99% of your orders are dispatched as standard shipments you should still have all non-standard services included in the scope of work and in the costing schedule.

Establishing well defined performance measures will have two major benefits. Firstly it will ensure that there is no ambiguity as to what the service level expectations are. And secondly, and as importantly, it will ensure that the service provider knows exactly how the performance measure is determined and how it is to be calculated. As an example DIFOT performance, when calculated on order line fill rate can paint a very different picture than DIFOT performance when based on the complete order fill rate. 9 out of 10 lines delivered in full on time gives a DIFOT performance of 90% when calculated on a line item basis. When calculated on the complete order the DIFOT is 0%.

A disciplined supplier management process is essential. There is a perception that once you outsource, you will loose control. Reality is, that if done properly, control is increased, not diluted. In order to maintain control, the customer must take responsibility for the supplier management process. They must define the reporting methodology and format; they must set up the reporting schedule and timetable; and most importantly they must measure and monitor performance diligently and consistently.


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