Valerie Bonebrake from Tompkins Associates; Outsourcing Logistics Success: A Relationship Saga

Achieving Success in Logistics
Outsourcing

How’s Your Chemistry With Your
Outsourcing Provider?
June 21, 2010

Discussion Outline

 Session Objectives
 The Environment Today
 A Look at Outsourcing
 Managing Performance Expectations
 Governance Best Practices
 Strategies for Success

Copyright © 2010 Tompkins Associates. All rights reserved.

2

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!


3

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


4

Why Do Companies Outsource?
Reason for Outsourcing Importance to Them % of Respondents That
(1-5 scale) Favor Outsourcing for That
Reason
Flexibility to Grow Capacity 3.9 83%
Improved Service 3.8 78%
Peak Season / Overflow 3.8 79%
Capacity
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 2.6 52%
Internally

Access to Technology Not 2.2 64%
Available Internally

Local Regulatory 1.7 57%
Requirements
Source: Tompkins Supply Chain Consortium Copyright © 2010 Tompkins Associates. All rights reserved.

5

They Need New Technology

Source: Supply Chain Digest
6

Understanding When to Outsource

Steps In Evaluating Outsourcing Decisions and
Outsourcing Partners
Core Competency Matrix
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


7

Understanding When to Outsource

 Some Key Benefits to Outsourcing?
Common Drivers for
– Focus on Core Competency
Outsourcing?
– Reduction in the Cost of Logistics Operations
• Desire to focus on your core
– Reduction in Head Count
strengths
– Improved Accuracy • Inefficient and costly operations
– Flexibility and Wider Range of Services • Failing to meet service requirements
• Evolving market dynamic (i.e. shift
– Access to Global Networks and Superior
from manufacturer to importer)
Technology
• Outdated technology requiring
– Improved Service upgrades
– Improved Quality • Require flexibility in capabilities and
space
– Reduced Capital Investment and Increased Cash
Inflow • Entry into an emerging market
• Lack of internal expertise in
– Ability to Rapidly Expand and Handle Peaks markets/regions
– Ability to Tap into Transportation Synergies • Capital constraints
• Need for rapid expansion


8

Create Your Outsourcing Plan

Define Customer
Service
Requirements

Perform A Market Map Current
Evaluation of Key Functions
Service Providers or Processes
Identify Total
Cost of Develop a Prepare
Operations Baseline Model RFI/RFQ

Identify an Service Level
Executive Set Objectives Quality and Delivery
Sponsor Requirements Requirements


9

Lack of Adequate Scope Definition

10

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


11

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?
LSP Provider X - Final Evaluation
Category Category Maximum
Category Rating Weight Score 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

12

Managing
Performance Expectations

13

Gaps Still Exist between LSPs and Shippers

Percentages Reported By:
TOP SEVEN Continuing Problems
Shippers 3PLs
Lack of continuous, ongoing improvements and
46% 19%
achievements in offerings

Service level commitments not realized 46% 31%
Information technology capabilities not sufficient 43% 31%
Cost reductions not realized 36% 34%
Lack of project management skills 35% 17%
Unsatisfactory transition during implementation stage
31% 25%

Lack of global capabilities 30% 21%
Source: 2009 14th Annual Global Third Party Logistics Study


14

Incentives and Gain-Sharing

Penalties Incentives
 Assessment on overall  Bonus for exceeding
performance overall performance
 Lost and damaged product – Service levels
– Quality, responsiveness
 Contract specific metrics
– Delivery
 Reduction in volume
stored, handled and  Formal recognition
produced programs
 Gain-sharing plans

Source: Tompkins Supply Chain Consortium Copyright © 2010 Tompkins Associates. All rights reserved.

15

Over Promising and Under-Delivering

16

Governance Best Practices

17

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

18

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?


19

Unrealistic Expectations

20

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

21

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


22

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


23

Post Contract Relationship
Establishing the Relationship and Handing Over the Operation
 Set initial expectations
 Jointly identify resources up front
 Establish operational baseline (current)
Fee Structures
 Establish future goals and destination
• Fixed Cost
 Plan for resistance
• Transaction Fee
Determining the Relationship Structure
Cost Plus
 Metrics and reporting
• Activity Based
 Communication plan • Management Fee
 Problem resolution • Combined Structures
 Change orders
 Steering committee
 Invoicing format

24

Strategies for Success

25

Keys to Success

 Partnering
Perfect Relationship
– Joint goals Recipe
– Continuous improvement Shared Vision
Shared Values
 Managing Shared Expectations
– Performance metrics Shared Commitment
Shared Confidence
– Two-way communication Shared Responsibility
A dash of Cooperation
 Nurturing A pinch of Collaboration
– Ongoing involvement
– Celebrating mutual success


26

EQ Matters!


27

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”


28

Begin with the End in Mind

HIGH VALUE HIGH VALUE
LOW DIFFICULTY LOW DIFFICULTY

LOW DIFFICULTY HIGH DIFFICULTY
LOW VALUE LOW VALUE


29

Don’t Get Out of Balance

COST

CHANGE ONE PARAMETER
AND THE OTHER TWO ARE
LIKELY TO CHANGE AS WELL

TIME SCOPE


30

Don’t Be Like This Guy!
Stay Engaged

31

Contact Information

Valerie Bonebrake

SUPPLY CHAIN EXCELLENCE
Senior Vice President

6870 Perry Creek Road
Raleigh, NC 27616

(913) 393-1051 Office
(913) 219-6768 Mobile

vbonebrake@tompkinsinc.com
www.tompkinsinc.com


32

Valerie Bonebrake from Tompkins Associates; Outsourcing Logistics Success: A Relationship Saga

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