3 PL relationships: more than a contract

Ask most shippers if they’re happy with their third-party providers of warehousing or transportation services and their standard answer is “yes.” Scratch a little deeper and the real perspectives start to emerge—perspectives quite often summed up in gripes about missed deliveries, missed opportunities, and persistent miscommunication.
Those viewpoints are made plain in the latest annual study of third-party logistics (3PL) services led by the Georgia Institute of Technology. Overall, respondents report basic satisfaction. Fully 88 percent of the shippers polled affirmed that their 3PL providers offer them a competitive advantage. Respondents worldwide reported logistics cost reductions averaging 12 percent, with order cycle times trimmed by three days. Shippers expect to outsource even more of their logistics activities; North American companies see 56 percent of their logistics spend going to 3PLs in about three years, up from 48 percent today.
Yet there is constant colic about 3PL providers reacting to situations rather than anticipating and identifying opportunities for improvement. Shippers also complain that 3PLs fail to come through on their basic service commitments (See Figure 2).
It takes two to tango, of course. Third-party logistics providers are right to point out that shippers have an obligation to collaborate with those from whom they expect much. Several industry observers point out that shippers must do much more to share information with their 3PLs. Dr. Robert Lieb, professor of supply chain management at Boston’s Northeastern University and author of an ongoing survey of 3PLs, has some compelling data to show that there are consequences for shippers that consistently fail to uphold their half of the bargain. Third-party logistics providers, he reports, are becoming much choosier about the customers they choose to work with.
So what does a successful shipper/provider relationship really look like? How does it change as the shipper’s business needs change? How do the parties define success?
To get an authentic perspective, Logistics Management interviewed three shippers whose market positioning and history with third-party logistics providers are absolutely typical. We found that there is no great mystery to a productive and profitable relationship: It relies on timeless factors such as clear expectation-setting; empathy; consistent, constant communication on many levels; a keen sense of a shared future; and an openness to change. As our stories reveal, though, it is one thing to list those factors and quite another to live them, day in and day out.

GE Fixes What Wasn’t Broken
Last September, Todd Greener headed off looming logistics problems just in time. Warehouse productivity gains—a key measure of efficiency for his operation—had flattened off. TMSi, his largest 3PL, was edgy about the profitability of its business with the General Electric appliances division whose aftermarket parts business Greener led. But rather than invoking the performance indicators in the contract and reading TMSi’s managers the riot act, Greener began working hand-in-glove with Ron Cain, the 3PL’s president, and Doug Jones, the aftermarket parts facility leader.
GE’s refrigerators, cooking products, dishwashers, and washing machines are among the more familiar appliances built by the company’s Consumer & Industrial business unit. Greener’s job is to manage the appliance division’s entire aftermarket parts operation, managing more than 60,000 SKUs servicing GE’s official parts distributors, the company’s field technicians and independent servicers, consumers, and retailers. TMSi manages the 532,000 square-foot center in Jeffersonville, Ind., that handles all inbound parts and kitting as well as distribution direct to customers and to the regional DCs.
In the prior four years that TMSi had been handling warehousing for the Jeffersonville parts operation, there had been some striking improvements. Greener estimates that on-time shipment defects had been reduced by 75 percent and fill rates improved substantially. The 3PL had consistently gotten significant productivity gains, with yearly reductions of about five percent from GE’s key measure: cost per line shipped.
But in 2006, a lot of those improvements stalled. “A lot of the low-hanging fruit had been plucked,” says Greener. At the same time, the parts operation had grown in size, scope, and complexity, due to significant sales growth, approximately 15 percent growth in SKUs over five years due to increased new product introductions, and more pressure on storage space due to supporting new product enhancements like large refrigerator door panels.
Taking over the parts leadership role from another senior manager whom GE had promoted, Greener immediately reached out to TMSi boss Ron Cain. The two companies already had a quarterly review rhythm to review progress of key programs and to evaluate potential investments in resources. A daily production report allowed Greener and his staff to check key metrics. However, shipment quality for GE’s customers and the list of process improvement projects both left quite a bit to be desired. The two leaders agreed that a new approach was needed if they were to continue to meet GE’s customers’ goals in the future.
It was Cain who suggested getting his and Greener’s team in the same room to thrash out issues that just didn’t surface during everyday interaction or in the quarterly reviews. “We both sensed that we had to have tighter relationships between the teams to take our performance to the next level,” recalls Greener. The meeting—held last October between 10 TMSi professionals and about eight GE staff—used an outside facilitator to unearth the top five issues that each side wanted to improve.
Greener describes the session as “respectful but very tense.” TMSi staff sat together, as did GE participants. Initial dialog focused on what worked well and what didn’t. However, staff on both sides were surprised by some of the responses. Greener’s team learned that they needed to invest more time and effort in the TMSi warehouse operations; TMSi personnel complained that they sometimes felt like “the hired help” vs. strategic business partners. For their part, Ron Cain’s representatives found that they had to focus more on GE’s customers’ metrics. Both Cain and Greener agreed that their teams just didn’t talk enough.
“That session was the big catalyst to improve our relationship,” says Greener. The emphasis was placed on process improvement, and both teams began attending weekly operations reviews, tracking metrics that GE had always measured and adding several areas of focus. “That was the opportunity to get those things out on the table real-time instead of just talking about them quarterly,” says the GE parts chief.
Long story short: The two teams now meet regularly, and each deploys managers to sit in on the other’s regular meetings. “My program manager participates in TMSi’s daily production meeting and he walks away with several tasks for the GE team,” says Greener. “I personally spend about five hours a week in the Jeffersonville facility with Doug and his team. That touch time is important—unless you’re there, you don’t really understand the operation and how many ways you and your team can influence it.” More important still: GE has substantially increased the level of direct interaction between its customers and TMSi, with several warehouse site visits a year.
Less than a year later, fill rates and on-time shipments are at all-time highs as process velocities have soared—everything from faster order processing to more time spent kitting ahead rather than catching up on back orders. Productivity growth is back on track, gaining six percent over last year. While cost per product line shipped is down to very healthy levels, action plans are in place for cutting it by another 20 percent plus.
Further, GE and TMSi are holding formal strategic planning sessions looking out three years, with a particular focus on planning for facilities and equipment. And to top it off, GE has won the Sears Partners in Progress award—awarded to the top one percent of the retailer’s 40,000-plus suppliers.
Greener describes a host of other initiatives now on his plate, from bringing GE’s Lean Six Sigma prowess to the Jeffersonville warehouse through to expanding outreach programs to suppliers as well as to customers. For now, he is pleased with progress. He cites the high levels of energy in today’s GE-TMSi shared meetings, and applauds the boost in the satisfaction of the GE-TMSi relationship.
“If you’d polled team members in the past, it might have been at a five or six out of 10. Now it would be a nine plus,” Greener says. One other gauge that the relationship is on track: Greener indicates the teams’ “top priorities” lists, once quite different, would now look very similar. “That tells me, Ron, and Doug that we’re operating as one team,” he says.
Multiquip: The Deliberate Path To Success
Multiquip had gotten a bellyful of running its own warehousing operations; absenteeism was just one of its problems. So when the industrial-equipment distributor had the opportunity to revisit its distribution approach, it took a deliberate path to evaluating and selecting 3PLs.
Multiquip distributes products such as water pumps and concrete processing machinery to general building contractors. “It’s a tough business to forecast since not many contractors plan far ahead for their needs,” says operations vice president Mike Howlett. “They’re looking for immediate gratification and they tend to look at us as a warehouse of all the things they need—they’re looking for 24-to-48-hour provisioning.”
As the division grew rapidly, it became evident that Multiquip could not meet escalating demand if it did not outsource at least part of its warehousing operations. About five years ago, Howlett and his team determined that they needed to take a very logical approach to outsourcing their warehousing operations. “We conducted a study with a Texas A&M grad student in logistics and looked at two things: where should we be located so we could meet what customers would be expecting of us; and should we operate the facilities or outsource them?”
The initial research determined that Charlotte, N.C., would be an optimal base for most of the customers that Multiquip needed to reach. And it became clear that outsourcing was the optimal choice. Then began a systematic search for 3PLs in the area that focused on size of warehouse facilities, how many units, what equipment, how flexible, and how many customers. The long list became a short list and Howlett and his managers went on tour, conducting interviews with the management team at each candidate.
“Then it became a matter of knowing more about the personalities of the people we’d be dealing with,” says Howlett. “Are they sincerely interested in our business? Do they know much about our business? Are they sophisticated enough for us?” The list narrowed down to three, and each candidate then sent a team to Multiquip’s offices in Carson, Calif., to be interviewed by Multiquip’s CEO and by several key sales staff. Saddle Creek won out, says Howlett, not only based on the professionalism of its presentation but because its advanced warehouse management system (WMS) offered a benefit specific to the company’s needs. “One of our requirements was for them to operate our SAP system in their location,” recalls Howlett.
His team’s due diligence has paid off. Saddle Creek—now managing a 65,000 square-foot space in Charlotte along with 35,000 square-foot premises in Orlando and another 70,000 square feet in Fort Worth—has proved reliable, particularly when Multiquip’s salespeople have last-minute customer requests to meet.
Howlett contrasts the 3PL’s responsiveness with the days when Multiquip ran its own facilities: “God forbid that the warehouse staff would do anything if a sales guy showed up during their break,” he says. As a consequence, Multiquip is likely to extend the current three-year contract with Saddle Creek for five years. And after listening to input from his salesforce, Howlett wants the 3PL to take over a small warehouse in Iowa that runs under an agreement formed long ago, but only on a handshake.
Method Products Keeps An Open Mind
When Ozburn-Hessey Logistics (OHL) suggested that Method Products adopt radio frequency identification (RFID) technology to better contain warehouse costs, the fast-growing producer of environmentally friendly household cleaning products was quick to act on its 3PL’s advice.
Method, just seven years old, had been selling in volume to Target stores. But in 2006, its sales to other retailers expanded significantly, and it became apparent to the OHL staff managing Method’s warehouse that Method’s use of historical data to drive warehouse activities was becoming less and less workable. “Their numbers on the percentage of case picks compared to full pallet picks were not accurate. Case picks were thought to be at 75 percent but in fact they were closer to 90 percent,” says Paul Cooper, OHL’s business development manager. “It was affecting our daily productivity—and our cost structure.” Method’s consequent RFID implementation helped improve accuracy and trimmed OHL’s costs.
Method was a small account for OHL—shipping about 1.5 million cases a year. It had little in the way of the dedicated WMS and enterprise resource planning (ERP) software tools typical of most of OHL’s other customers. But the cleaning-products maker brought another attribute that has laid much firmer foundations for its relationship with OHL: a participatory culture and a deep commitment to communication.
Paul Tasner, Method’s senior director for logistics, procurement and customer service, puts it this way: “I’m really less interested in seeing a 3PL’s warehouse and their equipment. I really want to find out how they communicate and who their people are. I really want to meet their IT director, or their customer service director. The warehouses are the same and the forklifts are the same. What’s changed over the years has been the sophistication of the relationships.”
That sensitivity to communication allowed OHL to work smoothly with Method to integrate software tools that help Method improve supply chain visibility: A module that ties into OHL’s WMS now gives Method’s logistics team near-real-time views of flow. Similarly, Method’s openness facilitated implementation by OHL of the automated advanced shipment notices (ASNs) that Target required. “We actually have several retail customers now who insist on ASN EDI 856. We’re measured on it weekly,” says Tasner.
In turn, Tasner makes it his job to share with OHL the key performance indicators that his customers impose on Method. And from Cooper’s perspective, the more customer-side information, the better he can serve customers such as Method. “It’s my job to point out solutions before the customer asks for them—otherwise they won’t be our customers for long,” he says.
In none of these three relationships is there anything unusual: Great communication forms the foundation. “When entering a 3PL relationship, you have to really scrutinize how communication happens on a personal level and on an electronic level,” recommends Tasner.
None of the other elements are proprietary either. What a great 3PL relationship comes down to, then, is great execution. Senior executives on both sides refuse to take the relationship for granted. They set expectations clearly (See Figure 3). They continually look to the future. They believe in continuous improvement. And they know very well that if their partner doesn’t win, chances are they won’t either.
By John Kerr, Logistics Management.