Exclusive – 2008 Supply Chain Business Forum

Not all business is good business in the outsourcing relationship, the 2008 Supply Chain Business Forum finds.

It’s much more commercially rewarding to get rid of those organisations without a cultural fit to your own.

Leading supply chain solutions provider Linfox Logistics has reduced its customers from 300 to 104 since 2002, while increasing profits by 200 per cent.

CEO Michael Byrne told the 2008 Supply Chain Business Forum panel on the critical role of 3PLs that his company’s strategy has been viewed as high risk and therefore controversial.

“Linfox Logistics is asset heavy, while others are stripping assets,” he explains.

“More importantly, we spend a lot of time thinking about customers. We see customers as unique – as business partners.”

“We have no standard offering. Customers want to be valued, they want attention and they’re smarter and better informed than in the past.”

“We need to keep up with them and be robust with them,” he says.

Byrne, whose company sponsored the invitation only forum, an initiative of internationally renowned supply chain expert John Gattorna, says he doesn’t think 3PLs look after their customers very well.

“For a strategic partnership to succeed, execution needs to be near perfect,” Byrne says.

“Since such strategic relationships require enormous effort and time, it makes commercial sense to have fewer customers.”

According to panel chair professor Martin Christopher of the UK’s Cranfield School of Management, the rapid change from a supplier driven market to one of mass production and customisation has increased the need to harness the skills and capabilities of others.

“Because skills are of strategic importance to business the trend is irrevocably moving towards virtual arrangements and the sharing rather than ownership of data,” he says.

“A certain level of discomfort with this change is also inevitable because most businesses are still primarily transactional rather than strategic in their relationships with providers.”

“They’re not prepared to pass over control, and not yet ready to change the structure of their business,”Christopher says.

“A certain level of discomfort with this change is also inevitable because most businesses are still primarily transactional rather than strategic in their relationships with providers.”

“They’re not prepared to pass over control, and not yet ready to change the structure of their business.”

With 15 years experience in the area of outsourcing contract law, panelist Jeremy Clarke, Principal Lawyer with the UK firm LLC Law points out that in an environment where many brand organisations outsource close to 100 per cent of their activities, the concern over control is ‘old hat’.

“In such a partnership, information has to be disclosed in order for the provider to understand the user’s business,” Clarke says.

“We need to actually embrace a policy of opening ourselves up to appropriate organisations who offer the opportunity to improve our business overall, and that is a matter of trust.”

“It’s also a matter of careful selection, employing the right kind of protections, controls, due diligence and appropriate contract provisions to make sure that issue never arises.”

“If a provider can’t demonstrate the right approach to safeguarding confidential business information the user shouldn’t even be talking to that provider,” he says.

According to panelist Connor O’Malley, Group Executive Logistics & Planning for National Foods Australia, strategic conversations can’t take place unless a 3PL exhibits near perfect operational execution.

That true partnerships remain problematic and 25 per cent of organisations are still unhappy with their logistics provider seems to add weight to this view.

Jeremy Clarke argues that 3PLs are often expected to garner all the core information about a user organisation and somehow pull out a ‘white rabbit’ solution under impossible circumstances.

“Contracts are often rudimentary and not particularly well thought out,” he explains.

“They tend to be over lengthy in the areas that are less important and pretty thin on the areas that are very important like SLAs and KPIs.”

“If you haven’t got a very clear understanding of your own business, the provider organisation in turn will have a very misaligned understanding.”

“This will produce a standard kind of contract although the non standard issues might be the most critical, even at the heart of why a company might be outsourcing in the first place. That’s simply a recipe for an inappropriate contract.”

“Each of the parties must make sure that it has a framework, a structure, a contract that’s in place governing that relationship which is straightforward, does the job, provides the relevant protection, gives a fair balance of risk and reward and is hopefully long term,” Clarke says.

“Otherwise you’re reinventing that wheel over very short periods of time. Early termination is a major problem and a headache.”

“In essence we’ve got two organisations,” Clarke says.

“One of them is buying and one of them is selling. Each party needs to fully understand the other’s business, the way it operates, its culture and objectives.”

“That takes some work. It doesn’t fly off the page, you’ve got to drill in, invest a minimum of three months. And then at the end of three months you may actually decide if this is the right fit. Undertaking this process is the key to successful outsourcing, but it is a complex task.”

Panelists agree large contracts should be a facilitator for leveraging the business rather than an excuse to hide behind a problem.

Users must understand their outsourced activity and actively manage their service or manufacturing partners to ensure they continue to do their best job.

Otherwise they may risk losing their competitive position in the market.

On the other hand, Jeremy Clarke questions whether 3PLs should wait to achieve operational excellence before embracing strategic relationships.

“Engaging in a collaborative framework and improving your buy and sell contracts will help organisations better understand their business,” he says.

“It’s almost like a self fulfilling prophecy. Wisely chosen organisations with whom you’ve engaged will make an immediate contribution to improving efficiency.”

Jeremy Clarke says 3PL relationships of the future will be underpinned by contracts refined to include more KPIs, service levels and provisions to review and refresh these periodically.

“Such contracts are the basis for providing services on the ground, whether they’re warehousing or transport or other value adding services,” he says.

“Rather than shoehorning strategic visions for improving the business into these arrangements, some companies are developing new structures where the buy-sell agreement is overlaid with a collaborative framework.”

“This needn’t be a complicated legal document, but one that can transition from the initial two or three years to a long term period, such as five or ten years.”

“Inviting your service provider to take a more proactive role in terms of the future development of your business takes place at a different level and requires multi party involvement.”

“Modern day business moves very quickly, and the driver is fast change,” Clarke warns.

“If businesses put contracts in the bottom drawer, fail to measure their business in a meaningful way, they’ll be unable to function effectively in the long run.”

“That’s why I say look at contracts, keep those KPIs live, fresh and relevant.”

Connor O’Malley believes it’s up to the customer to determine the extent of a relationship with a prov

“Common myths include the notion that 3PLs don’t add value, that they don’t understand their customer and that they’re more focused on increasing their own margins than reducing a customer’s costs,” he points out.

“Whatever the level of the relationship, values must align,” O’Malley says.

“The customer’s value proposition must be clearly defined for both parties.”

“Inevitably there will be a wall between providers and their customers. In the worst scenario it’s a brick wall, in the best, it’s a glass wall. It’s up to the customer to let their 3PLs in.”

Held at the Sofitel Hotel in Werribee, Victoria, the 2008 Supply Chain Business Forum was hosted jointly by the Institute for Logistics and Supply Chain Management at Victoria University, Melbourne, and Macquarie Graduate School of Management, Sydney.

The next Forum is scheduled for February, 2010.

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