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Outsourcing, Insourcing, Offshoring, Onshoring
Supply Chain - Logistics - Warehousing - Transport

We assist our customers to determine whether Supply Chain, Logistics, Warehouse or Transport Outsourcing is an appropriate strategy and if required, provide specialist support through to implementation. Logistics Bureau's consultants do not have commercial relationships with any service providers and so we provide a totally objective and unbiased approach.

It is estimated that over 80% of companies globally now outsource some or all of their logistics activities, but outsourcing does not suit all companies.

Outsourcing Experience                            Outsourcing Video

Our consultants outsourcing experience also relates to offshore sourcing with a number of recent projects related to product sourcing in China and evaluating the down stream Supply Chain benefits.

The Logistics Bureau outsourcing approach provides our customers with the following benefits:

1. An ethical and thorough evaluation process.
2. Finding the right cultural 'fit' with potential outsourcing partners.
3. Getting the best value for money from the outsourcing contract rather than the lowest price.
4. Providing professional assistance and methodologies in the outsourcing process.
5. When required, throwing the net wide, including new and developing companies.
6. Evaluation of varied 'types & styles' of outsourcing partners.
7. Providing essential decision support during the outsourcing decision, which should never be a forgone conclusion

And providing all of this, in a structured, objective and unemotional process.

Our specialist outsourcing consultants have been involved in hundreds of outsourcing related projects across many industries. Our thorough and meticulous approach to outsourcing ensures success for your business.

Outsourcing Stages

Here is an example of the typical stages our consultants use in an outsourcing project, whatever the level of focus. Supply Chain, Logistics, Distribution, Warehousing or just Transport.

 

Performance Based Contracts

There is a great deal of interest in the use of Performance Based Logistics (PBL) contracts, stemming mainly from the use of such contracts within the US Department of Defence. Logistics Bureau's consultants have been very successful in taking this approach to industry, and we have been pleased with the high degree of acceptance by many of the major Third Party Logistics (3PL) companies. of this style of contract. Simplistically, our approach is to reduce as much of the logistics costs as possible to variable costs, and link elements of the 3PL's rewards to achieving specific service and cost outcomes.

3PL Contract Support

As part of our outsourcing related services, our consultants also assist third party logistics (3PL) companies in developing solutions for customers, improving current contract performance and integrating/implementing new contracts.

 

For more details on our outsourcing services, feel free to contact the following senior Staff who all have considerable outsourcing experience.

 

Sydney - David Riddle Tel: +61 417 486 166 Email	Melbourne - John Cole Tel + 61 411 706 726 Email
SE Asia - Colin Airdrie Tel: +66 819 464 490 Email

Logistics Contract Mediation - Logistics, Warehousing or Transport

Outsourcing Logistics operations is generally very successful, but like any commercial relationship things can deteriorate.  Sadly for both parties, this can often mean the termination or at least non renewal of a contract, which can be a costly and disruptive process for all involved.

Logistics contracts may deteriorate for a number of reasons, that typically include:

• Poor service performance
• Cost escalation
• Poor resolution of issues
• Poor communication with outsourcing partner.

But perhaps the greatest issue, is the inconsistency in outsourcing expectations.

Logistics Bureau's consultants are able to provide a 3PL contract mediation / facilitation service that can often avoid the need for contract termination and get things back on track.

This service brings together a mix of qualifications, skills and experience, that include a team of outsourcing consultants with the following:

• A former Corporate Counsel, Arbitrator and Mediator who understands and is experienced in ADR (Alternative Dispute Resolution) methodology– thereby avoiding complicated, time and resource consuming legalistic issues.
• Qualified accountants with many years experience in Supply Chain and Logistics environments.
• Senior Logistics Bureau staff (Partners) with many years of experience in outsourcing.

It is this mix, that has proven to be so successful in repairing and restoring an excellent level of service or at worst, coming to an ordered (and probably amicable) parting of the ways.

For more details on our mediation services, feel free to make direct contact with Rob O'Byrne at +61 417 417 307 or Email

Outsourcing Articles - By Rob O'Byrne

Third party warehousing contracts – Heading North or rapidly South?

As I sit at the Airport awaiting my flight, I ponder over the meeting I have just had with yet another company, who is dissatisfied with their Third Partly Logistics (3PL) service provider and outsourcing contract.

Some times I feel like a marriage counsellor as I listen to these tales of woe. “They don’t understand us, they don’t respond to our needs, our customer service levels are way below expectation”. Sound like a similar outsourcing story? Well take heart, the future need not be doom and gloom.

I have heard many similar stories over the years that I have been consulting in the area of Logistics outsourcing. When I hear these stories, it is often because the customer has reached such a stage of frustration that they want to re-tender their logistics contract, and are seeking assistance through the outsourcing process. Such was the tone of the meeting today. But at the close of the meeting, the customer was feeling more optimistic about the future of his 3PL warehousing contract.

Firstly, most 3PL contracts that appear to be underperforming, can be resurrected. It just takes open communication, willingness, and a focus on the key issues. An independent audit of the contract, is in itself, often a sufficient wake up call for the parties involved to improve. But in 90% of cases, I would say that contract under performance, does not lie solely with the 3PL.

In many cases, contracts have been awarded and outsourced in haste, without the necessary attention to detail that underpins outsourcing success. Such was the case today. The customer had provided inadequate information regarding their needs to the 3PL, who in turn had under resourced the contract. The result? Escalating costs and finger pointing. Both parties needed to shoulder responsibility on this count.

But rather than give up on the existing 3PL and re-tender the contract, I was pleased that the customer was willing to first carry out a thorough audit of the contract, to seek appropriate improvement. Re-tendering, and potentially relocating a warehouse operation is not with out its risks, in terms of business disruption and transition costs. So this step should only really be taken once other avenues have failed.

I feel confident that the customer will retain their current 3L once the outsourcing audit is complete, and see improvements in costs as well as customer service. The audit process that they will follow with their 3PL will focus on 6 key areas as follows:

1. Commercial arrangements. Firstly, how is the outsourcing contract resourced and costed? And secondly, what pricing mechanism is in place to ensure cost visibility as well as incentives for operational improvement.
2. Contractual arrangements. Are the expectations of the customer clearly articulated in the outsourcing contract, along with appropriate Key Performances Indicators (KPIs)? Does the outsourcing contract term fairly reflect the required investment and commitment? What are the business risks involved in termination?
3. Service and Cost Performance. What has been the real performance of the outsourcing contract, when compared to expectations? What has contributed to under performance?
4. 3PL Processes. Is the 3PL adopting appropriate processes in fulfilling the contract? Can these be jointly improved.
5. IT Systems. Are there IT issues that impact the performance of the outsourcing contract, and are there some easy fixes that can be employed?
6. The Customer – 3PL Relationship. At both the operational and account management level, are there issues with the relationship? These might be due to a mismatch of culture, or more often due to individual clashes.

This simple six-point audit plan is an effective framework to apply to a poorly performing outsourcing contract. It needs to be undertaken objectively, in co-operation with the 3PL management. It is an important first step in the process to gaining the 3PL contract that you really need and want. Ultimately, some companies may find that they still need to re-tender the contract, but at least they can do so with confidence, understanding where they went wrong first time, and with a clear plan for future success.

Warehousing Contracts – The Options

Introduction

The outsourcing of Logistics services continues to be a growing trend, and can encompass a very broad range of services. This article will focus only on outsourced warehousing contracts, and is intended to be a guide for those companies considering the outsourcing of warehousing or indeed those companies that may wish to review and renegotiate existing outsourced warehousing contracts. The specific focus of this article, is on traditional Third Party Logistics (3PL) contracts and the types of pricing mechanisms available for use within warehousing contracts, and does not cover other very important aspects such as:

• Planning and management of the selection process.
• Contract negotiation.
• Implementation and ongoing contract management.

 

Outsourcing Logistics services continues to grow globally and probably now stands at about 80%.

The reasons for this growth are many, but primarily, that Logistics Service Provider’s (LSP) customers believe they will gain benefits such as these shown here.

 

Whilst reducing cost, is generally a major objective in outsourcing, it may often not be achieved, as simplistically, it may not be possible for the LSP to carry out the same operation as the customer currently conducts in house, at a reduced cost, whilst also making a profit margin. Where the existing in-house operation is very inefficient, inappropriately resourced or could gain significantly from being incorporated into a larger operation, then of course savings may be possible.

From this point on, when referring to outsourcing, it is the outsourcing of warehousing only that is being referred to.

The primary benefit of warehouse outsourcing should probably be thought of as gaining flexibility. This can relate to being able to handle peaks and troughs in demand, acquisitions, geographic and product line expansion and the like.

A critical stage in the outsourcing process is the structure of the contract and in particular the pricing mechanism. Research has shown that up to 80% of Supply Chain costs may be locked in at the design stage of the Supply Chain. So reducing costs post implementation can be very difficult. Most of the post implementation problems that LSP customers face can probably be traced back to poor contract structure and negotiation. It is the contract and the joint process of constructing the contract that will set in place the expectations of both parties and of course the drivers of behaviour. Typical post outsourcing implementation issues can range from poor service to increasing costs, often all put down to the non disclosure by the customer of critical information.

Cost v Price

One of the key aspects of structuring an outsourcing contract is understanding the resources and hence the costs involved in its performance. This is best achieved by open discussion and analysis of the activities and product volumes involved. Storage requirements at various times through the year are one element, but the detailed picking, packing and despatching activity can be a significant cost driver.

Detailed information on SKU (Stock Keeping Unit) numbers, size and weight are important, as are the details of past and forecasted order profiles, right down to order line items. This level of detail enables the LSP to profile the number of pick locations required, and the actual number of picks being made, on a SKU by SKU level. Accurate calculations of storage and handling equipment needs as well as labour requirements can then easily be established, which all underpins more accurate contract costing.

With a high degree of confidence in the resources required and hence the costs involved in providing the service, it is then a comparatively easy step to structure the commercial framework of the outsourcing contract.

Each Parties Objectives
It is not uncommon, for each party in an outsourcing contract can have objectives or agendas that conflict.

A well constructed contract and pricing mechanism will go along way to mitigating these potentially conflicting agendas.

General Principles

There are some general principles and considerations that should be accounted for in structuring the commercial part of the outsourcing contract. These will include the following:

1. The LSP will require a base level fee, or agreed minimum level of income that is not volume related, in order to cover some fixed costs. To do otherwise exposes the LSP unfairly.
2. The fee for service paid, should fairly reflect the resources required and costs being incurred by the LSP.
3. The fee structure should encourage improved service performance.
4. The fee structure should encourage a cost reduction culture.
5. The fee structure must be sustainable, through changes in the customer’s operating environment.
6. The LSP should have the opportunity to improve profit margins through adding value and innovation beyond the basic services required.

Sadly, many companies approach a LSP outsourcing contract as procuring a commodity and the over riding goal becomes the achievement of the lowest possible unit cost. This approach can be extremely counter productive and costly in the longer tem.

Types of Outsourcing Contract Pricing Mechanisms

There are broadly three types of outsourcing contract pricing mechanism that can be used, with variations that can be bolted on. These are:

• Percentage of Sales. Whereby the LSP fee for service is based upon an agreed % of the sales value of the product handled.
• Cost Plus. Whereby the LSP declares what resources and costs are required to conduct the service and an agreed profit margin (the plus) is added.
• Rate Based. Whereby a rate or price, is agreed for each of the activities and services to be performed.

Variations that can be applied to these basic contract forms can include:

• Gain Sharing. Whereby cost savings initiated by the LSP or customer will be shared.
• Performance Based Logistics (PBL). Whereby fees or more likely contract profitability, are directly linked to agreed performance targets.

Percentage of Sales
This type of outsourcing contract is still widely used, particularly with distributors rather than LSPs. It might be considered as a rather ‘lazy’ approach by the customer to outsourcing contract pricing, as it may bear no relation to the resources and costs of the services being provided. The greatest criticism of this type of pricing is that it offers no benefit to the customer should volumes increase, and the LSP benefits from economies of scale. The reverse is also true of course.

Where this form of pricing is used, it is important to establish limits or parameters to the service that will allow fee percentages to be adjusted if required. It is also vital that the customer is involved in the analysis of the resources and hence the costs required to perform the service. Traditionally, the customer has often not been included in this process.

The actual percentage charged can vary significantly from industry to industry, and is obviously heavily dependant on the value of the product being handled. But wide variations within the same industry have been observed and would tend to indicate that the percentage charge established may in some cases not be related at all to the cost of the service being provided, but more aligned with what the market will bear.

Cost Plus

This form of pricing is still widely used and is favoured by some of the major LSPs. It can tend to favour the LSP rather than the customer and may lead to outsourcing contracts being loaded up with resources that are not really required or at least not fully utilised by the contract concerned. It can also drive undesirable LSP behaviours in that for the LSP at least, a situation may arise in a poorly constructed contract, that the more resources that are consumed, be that storage space or labour, the better.

In its favour however, this form of pricing can often be the only way of pricing an outsourcing contract at least in the short term, where it may be very difficult to establish the precise services required or the detailed volumes and order profiles to be handled. This could be the case for example in a new business start up, entry into a new market, during an acquisition, following a major new product introduction and the like. However, it is recommended that the pricing mechanism be moved to some form of rate based fee as early as possible.

Rate Based
A rate based fee structure tends to offer the best mix. This is due to the detailed work required to establish the rates and also the volume related break points that should also be incorporated. It should result in a fee for service that fairly reflects the work being carried out, as well as protection for both parties, should the customer’s business change, in relation to volumes or order profiles. These types of change can have a significant impact on the LSPs resource needs and costs.

The basis of this pricing mechanism should be an open and shared analysis of the activity to be carried out and the resources required to provide the full range of services required. Often, a fixed monthly fee is utilised to help offset the LSPs fixed costs, with a variable fee structure then being applied for the various activities being carried out. These activities might include receiving and putaway, picking, despatch and the like, with different rates being applied for unit, carton and pallet picks.

Consideration must be given to the impact of increases or decreases in storage needs, in throughput volume and changes in the picking profile. All of these can be adequately catered for within the fee structure if based on sound analysis, forecasts and fairness.

Gain Sharing

A gain sharing formula can be applied to any outsourcing contract type. The basic concept is that should the LSP, or indeed the customer, identify opportunities to improve the operation and reduce costs, that those cost savings should be shared. The exact percentage split of the saving is debatable, but it could be argued that 50/50 is the fairest.

Without some form of gain sharing incentive, there may be limited ways of encouraging innovation and cost saving within the contract. In fact it could be argued, that without such a formula, there is a disincentive for the LSP to seek performance and cost improvement.

Performance Based Logistics (PBL)

Performance Based Logistics or PBL is a term that has evolved from the US Defence industry, and as the term suggests rewards and penalises the LSP based on performance against agreed service targets.

It should not be seen as yet another adversarial means of managing an LSP, but as a genuine means of encouraging and rewarding superior performance.
This pricing approach will generally be structured so that the LSP’s profit element can be increased or decreased, rather than attacking the LSP’s total income. In this way the right performance is encouraged, without openly putting the LSP’s business at risk. An escalation clause would also be used, so that repeated performance below agreed targets, would at some stage then start to erode base fees, not merely profit margins. But appropriate review and mediation clauses should avoid this point being reached.

Summary

In summary, this article has attempted to highlight, albeit at a high level, the range of common warehousing contract pricing mechanisms that can be utilised, and some of the advantages and disadvantages of each. Which ever pricing mechanism is used, an effective pricing mechanism must be based on detailed factual information, particularly regarding customer product volumes and order profiles, as well as a willingness for joint resource planning and contract costing. (This would normally take place after an LSP has been short listed for a contract).

Considerable outsourcing experience has shown that the failure of pricing mechanisms and often the inevitable contract failure can usually be traced to poor planning, communication, resourcing and costing, right at the start. Bearing in mind that 80% of Supply Chain costs can be ‘locked in’ at the design stage (see Introduction above), this phase of outsourcing can prove to be the most critical.

On a final note, whilst this article has been focused on the establishment of new warehousing contracts, it is not impossible to also review and revise existing contracts and pricing mechanisms.