May 2014 Effectively Managing a 3PL Partnership St. Louis CSCMP.

May 2014

Effectively Managing a 3PL Partnership

St. Louis CSCMP

Agenda

• Domestic Third Party Logistics Environment

• Keys to an Effective Partnership

• Questions

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• Questions / Comments

Agenda

3

Domestic Third Party Logistics EnvironmentUS 3PL Revenues

*December 2013 Armstrong & Associates

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5

49% increase

in 10 years

49% increase

in 10 years

Domestic Third Party Logistics EnvironmentUS 3PL Revenues

Rapid gross revenue growth is NOT linear with net! » Growth:

• Big data, near-shoring, technology advances and flexibility

» Margin compression:

• Purchased transportation increasing, fierce competition, procurement-driven (commodity mentality)

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Domestic Third Party Logistics EnvironmentUS 3PL Financial Performance

Domestic Transportation 9.20% 5.40%

International Transportation 0.40% 1.00%

Value Added Warehousing 5.30% 3.80%

3PL SegmentGross Revenue %

Change 2012 vs. 2011Net Revenue %

Change 2012 vs. 2011


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Domestic Third Party Logistics EnvironmentSize of Organizations Engaging

Largest Increase in Utilization

of 3PLs

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Domestic Third Party Logistics Environment3PL Services Measurable Benefits as Reported by Shippers

*2014 18th Annual Third-Party Logistics Study

Logistics Cost Reduction 15%Inventory Cost Reduction 8%Logistics Fixed Asset Reduction 26%Order Fill Rate

Changed From 58%Changed To 65%

Order AccuracyChanged From 67%

Changed 72%

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• 90% of Shippers report their relationships with 3PLs generally have been successful

• 97% of 3PLs say their relationships with Shippers have generally been successful

• 55% of Shippers report use of 3PLs led to year-over-year incremental benefits

• 91% of 3PLs say their customers’ use of 3PL services lead to year-over-year benefits

Domestic Third Party Logistics Environment3PL Services Gaps in Performance as Reported by Shippers and 3PLs

What creates this gap in performance?

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Domestic Third Party Logistics Environment3PL Services Gaps in Performance as Reported by Shippers and 3PLs

Successful Relationships$148B Industry Total Revenue

$10 7% gap in satisfaction$565K Average Revenue per Contract

17,699 # of Contracts

Year-Over-Year Incremental Benefits$14B Billion Industry Total Revenue

$53 Billion 36% gap in satisfaction$565K Average Revenue per Contract

94,000 # of Contracts

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Domestic Third Party Logistics EnvironmentSummarized

GAP in Perception of Performance

GAP in Perception of Performance

http://youtu.be/nKvYBbzqQJw



• Questions / Comments

Agenda

12

Agenda



» Selection Process

» Award and Implementation

» Value Beyond the Technology

» Renewal

• Questions / Comments?

13

2014

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Definition of the success of project

•Internal support and coordination across disciplines

•Cultural alignment with partner

•Formal vision of success conveyed to partner (short-term, long-tern, KPIs…etc.)

Definition of the success of project

•Internal support and coordination across disciplines

•Cultural alignment with partner

•Formal vision of success conveyed to partner (short-term, long-tern, KPIs…etc.)

AugustMay June July September

Pre Selection

• Quantified value of project• Acceptance from finance &

leadership• Internal team established

• Who’s NOT onboard?• Must have / Nice to have list

by stage of relationship

Selection•Identify participants, if bidding•Design RFQ•Execute and evaluate•Award•Contract

Implementation•Go-Live•Stabilization•Project management

Selection Implementation

Pre Selection

Keys to an Effective PartnershipSelection Process

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• Identify Participants

» Immediate organizational driver for outsourcing (visibility, control, cost reduction…Etc.)

» Long-term (5-8 years) organizational requirements of partner

• Manufacturing Support, warehousing, dedicated capacity?

» Culture

• Position in marketplace

• Flexibility

• Transparency

• References

Keys to an Effective PartnershipSelection Process

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• RFQ Process

» Capture RFQ samples form trusted advisors in industry, then customize to meet your needs

» Analysis of respondents: DETAILS

• Technology

• Total value

• Credibility of solution

• Customized solution

» Inquire about internal costs to deliver

• Adherence to bid process

Culture of organization

Agenda


• Keys to Effective Partnership




» Renewal


17

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Keys to an Effective PartnershipAward and Implementation

Don’t skip stepsfor short term gains!

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Fixed monthly

fee

Fixed monthly

fee

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• Delivery mechanism for fees must match with your needs – but, understand the commercial dynamics

Cost per unit of activity (load,

shipment, by mode?)

Cost per unit of activity (load,

shipment, by mode?)

Fixed monthly

fee containing only non-

fluctuating costs + cost per unit of

activity

Fixed monthly

fee containing only non-

fluctuating costs + cost per unit of

activity

All costs included in

rate at which

capacity is sold

All costs included in

rate at which

capacity is sold

• Adding uncontrollable variables (# of shipments, freight market) increases risk to 3PL which translates to margin in pricing to buffer unkowns

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Fixed Hybrid Transactional Buy/Sell

Risk/Margin to 3PL

Risk/Margin

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3PL Payout, or Not??

3PL Payout, or Not??


• Legal process de-coupled from commercial and operational agreements

» Project Scope Document: Details of solution agreed upon by Operators (those who will do the work)

» Logistics Service Agreement: Legal and fees negotiated by executive sponsors of partnership or sales and procurement

• Define Key Performance Indicators

» 3-5 KPIs for Supply Chain

• Escalation process defined

» Who specifically (name and title) is notified if either party is not satisfied

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Agenda






» Renewal


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Congratulations, your supply chain has stabilized, the TMS is working, costs are down 11% and sales and customer service are not sending you lengthy emails attacking the college where you earned my supply

chain degree and ……. your budget is reset with year one savings incorporated!

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Keys to an Effective PartnershipValue Beyond Technology

• This is where you harvest the fruits of your labor in selecting your partner and setting expectations

• Well-defined, transparent Project Management process

» Quantify projects by phase

• Idea

• Evaluation

• Implementation

• Open

• Closed

• Tabled

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Project Management bottlenecks are a positive by-product of a properly functioning account

Goal: - Visibility to bottlenecks leading to healthy discussion s about how to remove constraints.

Formality: - Remove perception of complacency - Drives non-transportation discussion “up stream” and challenges status quo - Leads to achievement of budgets

Keys to an Effective PartnershipValue Beyond Technology: Account Management Function

Agenda






» Renewal


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• Cultural fit with your organization?

» Were initial goals accomplished?

» Has relationship matured beyond supply chain and transactional

• Can provider still support 5-8 year strategy?

» If not but you are satisfied, can their role be re-established? 4PL vs. 3PL.

• Extract from relationship?

• Extend relationship without bid

» - Removes cost and “energy” associated with bid distracting from current initiatives

» - Requires trust and transparency with partner

» Recalibration point

Extend relationship with competitive bid

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Keys to an Effective PartnershipRenewal

• As the relationship matures between a 3PL and Shipper

» Costs to support decrease due to efficiencies (carrier rationalization, EDI utilization and standardization or automation in processes)

» Early phases cause an increase in resources to implement and stabilize

» Recommendations for scope adjustments based on project requirements

» Early investment is captured near the end of the term as profit margins increase

» “Recalibration points” align services, costs and fees assuming flat FTE costs

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Relationship between Cost to Support/Fees and Length of Relationship

COST TO SUPPORT

LENGTH OF RELATIONSHIP

FeesCost to Support3PL Investment

3PL Profit

Contract "recalibrate points"

May 2017

Dec 2020

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Relationship between Cost to Support/Fees and Length of Relationship

COST TO SUPPORT

LENGTH OF RELATIONSHIP

FeesCost to Support3PL Investment

3PL Profit

Contract "recalibrate points"

May 2017

Dec 2020

FTE Rate - Increases - Benefits

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Keys to an Effective PartnershipConclusion: By-products of Unhealthy 3PL Relationships

Complacency

Competitive Bidto extend

Service Failures

Flat budget performance

TransportationONLY focus Lack of tru

st

Varying opinions on performance

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Keys to an Effective PartnershipConclusion: Effectively Managed Partnership

KPIs are “Green”

Transparent and adequate

project activity

Opportunities “up stream”

Recalibration based

on scope and efficiencies

Deliver budgetary commitments

Have discussions about organizational strategy vs. tactical execution

“We want to get to the point where we can not only predict demand, but begin to shape or

change demand.”

- Christopher W. Craighead, Ph.D., Director of Research for Penn State’s Supply Chain Research

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Goal: Trusted Advisor Partnership

Questions

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May 2014 Effectively Managing a 3PL Partnership St. Louis CSCMP.

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