Managing an outsourced relationship is not an easy assignment. Prior to implementation, contracts, procedures, and personnel all should be in place, as well as all expectations and possible friction points identified; but from time to time, interests and goals will differ. Inevitably, conflicts will arise, and must be dealt with. Even when the differences are minimal, managing the provider will be a full time job.

Everest Group, Inc., an outsourcing consultant, has assisted many clients in developing the causes of dysfunctional outsourcing relationships; and their experience has shown that the most common contributing factors to these are:

Pricing and service levels are established at the start of the contract and usually contain no meaningful mechanism for continuous improvement.

 

Differences in buyer and supplier cultures often cause misunderstanding and distrust. Even if the cultures are compatible, the two parties still have fundamentally different goals and objectives that are frequently difficult to harmonize.

All outsourcing contracts are based on key assumptions regarding technologies, business conditions, personnel, and other relevant issues. As soon as the contract is signed, these assumptions begin to change. However detailed the contract or favorable the terms, most contracts cannot anticipate the changes in an evolving environment. This phenomenon tends to ensure that one, if not both, of the parties will become disenchanted with the relationship. Longer-term contracts that lack flexibility tend to increase the likelihood of dissatisfaction.

Once the contract is in force, there is a great temptation for both parties to sub-optimize the relationship and attempt to better their lot at the expense of the other. The inflexible nature of the contract usually favors the supplier.

Buyers frequently underestimate the time and attention required to manage an outsourcing relationship, or worse, they hand over management responsibility to the supplier. The supplier begins to operate in a priority vacuum, and service levels tend to deteriorate because the supplier’s agenda is not in sync with the buyer’s business objectives.

This lack of management oversight is usually the result of two factors: The team that negotiated the contract often does not stay engaged in contract management. A new team that may or may not understand the contract’s intentions is given responsibility for managing the relationship.

Employees that understood the pre-outsourced environment have been transferred to the supplier’s team. This disruption in continuity can have significant adverse effects on the outsourcing relationship. ¹

In discussing outsourcing relationships, Peter Bendor – Samuel, Editor of Outsourcing Journal, has made an interesting distinction between partnerships and alliances. In suggesting that most contemporary outsourcing arrangements are alliances rather than partnerships, he said,

"A partnership is an association with another entity in a joint endeavor, where both parties have joint interests, joint risks and rewards. In a partnership, the interests are undivided. In an alliance, there is a pact or agreement between the parties to cooperate for a specific purpose and to merge their separate interests and efforts for that common purpose. The two work together for each other’s good. Their pact (or the contract) establishing their alliance and agreement to perform a specified function together provides for flexibility. It also recognizes that their interests will differ at times." ²

Such an arrangement by its very nature will produce cultural differences, and this is particularly true with logistics outsourcing. While the objective of the two parties may be the same, their methods of achieving those goals may be quite different.

For example, the client more often than not will be more bureaucratic, and employ an elaborate approval process before significant (or sometimes insignificant) change can be made. A logistics service provider, on the other hand, tends to be more entrepreneurial and able to make decisions quicker. (It has been suggested, however, that as logistics service providers become larger, they too are becoming more structured and adverse to rapid change.)

In-house logistics managers often may see the provider as a threat to their control or job security, and never totally embrace the relationship. While they may give it lip service and do what has to be done, they are not completely committed to the success of the operation.

As the Everest Group suggested, another common source of difficulty is the leaving of the supplier to its own management devices. Too often, either through lack of interest or lack of expertise on the client’s part, the logistics service provider will be expected to operate on its own, with little or no direction.

While certainly this is desirable, and indeed one of the primary reasons for outsourcing, advice and counsel must be available even though it is not utilized every day.

In Chapter 8, it was suggested that as many potential friction points as possible be identified in advance; and even though this may have been accomplished, they will not resolve themselves when they do arise. The client must have in place an effective management structure and process for the relationship, not only to resolve conflict but to manage the ongoing activity.

Ideally, the logistics manager that has chaired the transition team during the implementation of the outsourcing arrangement will be the relationship manager, but this may not be the right choice. The client must be sensitive to the principle that managing relationships requires quite a different skill set than managing logistics activities. While managers may be good logistics problem solvers, they simply may lack the necessary managerial and leadership capability.

Robert E. Sabath, a veteran supply chain consultant, put it very succinctly when he said, "Successful managers of [outsourced] relationships need to be problem solvers, innovators, facilitators, and negotiators who have exceptional people skills and the ability to get things done. Most managers who take the traditional logistics career path never have a chance to learn the skills required to be a good relationship manager. Nor do they have an interest in them." ³

The relationship manager then must strike a fine balance between being a logistics problem solver and a leader that can motivate and facilitate superior performance by the provider. He or she must be accessible, willing to listen, a good communicator, and have a high sense of integrity. The manager must be available to the provider when assistance is needed. As our society becomes more technical, it is easy to lose sight of what good communications really consist of. When a provider has a problem that requires client attention, messages in voice mail and e-mail communications simply are not good enough. The manager must be available for a two-way voice dialogue either by telephone or, if necessary, in person. Unfortunately, too many business people have become more enamored with the various message devices than they have with the messages themselves.

Once contact is made, the manager must be willing to listen carefully to the issue and its impact on the task at hand. Since the selected provider is an expert in his field, the defined problem may be one that will require some research and thought. A hasty, uninformed response will do more harm than good, and while proper care must be taken to make sure that resolution is prompt, it must also be appropriate.

Finally, the relationship manager must have a high sense of integrity. Many times, problems with the outsourced operation are the fault of the client; and in too many cases, client representatives are unwilling to accept responsibility for their own actions or lack thereof. The manager must be honest and forthright in dealing with these issues and be willing to place responsibility exactly where it should be.

Frequently, the major relationship challenges will not be with the provider, but within the client organization itself. The manager then must be able to negotiate and influence internally as well as externally. As pointed out earlier, some personnel will be quick to criticize and even undermine; and the outsourcing manager must have the position and standing within the organization to combat these negative forces.

He or she must have the respect and influence necessary to resolve these cross-functional issues quickly and non-politically.

At the risk of digression, the necessity for relationship management expertise will not be limited to outsourcing. In 2003, the Council of Logistics Management published an "official" definition of the term supply chain management. The second part of the definition states, "Importantly it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers."

As suggested earlier, in many cases logistics managers have not been conspicuous by their relationship skills. Many good logisticians simply haven’t mastered the skills required for effective supply chain management – human relations skills, negotiating expertise, and a knack for fostering collaboration and integration among them. If they expect to succeed at the next level, they must find a way to acquire them.

Users of logistics service providers should treat them as extensions of their own business. In a logistics relationship, the provider will be the last contact with the product before it is shipped to the customer, and as such, is one of the most important representatives of the client.

The provider should be considered as much a part of the logistics process as an in-house operation and treated accordingly. While ensuring this is the primary responsibility of the transition team, the relationship manager must assume the responsibility for making sure that the necessary steps have been taken.

Each function that is impacted by, or has any impact on, the outsourced operation must make certain that any process changes are reviewed by the providers prior to implementation. Not only might they receive some good suggestions, but the impact of such changes must be understood and communicated. For example, if a new order entry system is being contemplated, the logistics service provider must be consulted early in the process since their requirements may be quite different from in-house needs. To install such a system without this input could be disastrous.

Outsourced operations should be treated in precisely the same manner as in-house operations. They are an integral part of the company, and it is absolutely critical that this not be forgotten or overlooked.

Poor communication is second only to poor planning as a major cause of outsourcing relationship failure.

Communications on all aspects of the logistics arrangement must be frequent and two-way. This applies not only to the relationship management communications discussed earlier. If the provider is truly integrated into the client organization, it must be kept fully informed of every aspect of the business that will affect it or influence its operations. For example, advance notification of such things as deals, promotions, or possible labor disputes can be critical to the scheduling activity.

Often, the logistics service provider is expected to operate in an information vacuum; and if this becomes the rule rather than the exception, the entire operation will become reactionary. This is the first step toward failure.

Similarly, the provider must be encouraged to keep the client fully informed about its operations and plans. Unanticipated scheduling or shipping problems, work stoppages, or equipment shortages are just a few of the unpleasant surprises that can send shock waves throughout the system. The client relationship manager must be sure that the relationship is such that two-way, open, honest and prompt communication is encouraged, expected, and accepted. There is no quicker way to sabotage a relationship than to allow unpleasant surprises.

The Dalai Lama has said that

"…to act altruistically, concerned only for the welfare of others, with no selfish or ulterior motives, is to affirm a sense of universal responsibility." ⁴

While this is a goal for which we all should strive, it is not one we are likely to ever reach in totality. However, in dealing with any issues, whether they be client- or provider-provoked, there are some basic rules which, if followed, can make even unpleasant communications somewhat more tolerable.

These are business, not personal, issues.

Approach all problems openly with the responsible party. Do not operate with a hidden agenda.

Treat the other party as you would like to be treated were the roles reversed.

Do not become emotional.

Do your homework. Make sure you have all the facts before confronting.

Do not act impulsively.

Do not exaggerate or embellish. While the addition of a few details can make a problem seem even more entertaining and embarrassing, this only complicates the resolution and certainly does little to cement a relationship.

Give the other party time to respond. To demand an answer "in fifteen minutes" allows no time for research and only adds to the dilemma.

As part of the solution, develop a plan for preventing a recurrence.

Share the problem and its method of resolution with others. This will enhance everyone’s understanding.

The most important rule of all, however, is to maintain open communication at all levels at all times. Do not communicate only when there is a problem.

There is no one best schedule for, or frequency of, communications between client and provider, but an example of a program that was effective for one relationship was that of the Professional Health Care Sector of Kimberly-Clark Corporation and the InterAmerican Group, now a part of USF Logistics, Inc. ⁵

These two companies utilized a number of different types of communication at a number of different levels; i.e.,

Daily telephone conversations between operations personnel.

Monthly conference calls between customer service personnel of the two companies.

Client visits to the InterAmerican facility several times a year.

Annual meeting of all logistics service providers, where client outlined its plans and providers exchanged information and solutions.

Performance evaluations using a monthly report card.

Open, frequent communication between senior managements of both firms.

Provider participation in planning with client customers.

Provider visits to client customers to discuss operational issues.

A number of companies utilize the annual meeting concept quite effectively. Experience has proven that the provider representatives attending feel more involved in the client’s operations, and of course use the sessions as forums to exchange ideas with the other providers.

Customer visits by provider personnel also can be quite effective as long as they are made by qualified, informed representatives.

The appropriate methods of communication will depend on the nature of the specific relationship, but whatever means are utilized, both parties should err on the side of over-communication.

1n 1610, Galileo Galilei said, "We must measure what can be measured, and make measurable what cannot be measured." Over the years, this statement has evolved to the more direct, often-quoted axiom, "You cannot manage what you cannot measure." But today, some 400 years later, logistics managers still struggle with the premise.

Much has been written about measuring the performance of logistics service providers, and different firms have different standards and levels of measurement. For example, a pharmaceutical client would be much more concerned about batch controls and error rates than would an appliance manufacturer. Some firms have developed meaningful performance and productivity standards and metrics, but a surprising number have not. There is no valid reason for not having a well-though-out and meaningful measurement program in any outsourced operations. Although literally hundreds of rules and suggestions for establishing metrics exist, the following four basic axioms will apply across all industries and providers. These are:

The first axiom is the tried and true, "You can’t manage what you can’t measure."

"Make measurable what cannot be measured."

Measure only what is important and actionable.

Performance measurement must be balanced.

The first axiom is particularly applicable to logistics operations. If the client does not know how the provider is performing against agreed-upon standards and benchmarks, it will be impossible to evaluate not only the provider’s efficiency, but the client’s own customer service performance, as well.

Not mentioned nearly as often is the second part of Galileo’s admonition, "Make measurable what cannot be measured." In other words, the task is to identify activities within the warehouse in discrete segments against which you can establish measurable and achievable standards. As the relationship evolved, standards should have been identified and agreed upon; but as the operation comes on line, it is important to initiate and conform to a regular measurement program. Realistic, measurable standards should be set, and performance accurately evaluated against these. A common mistake is to establish standards that are so vague they are absolutely meaningless. This creates unnecessary work for both parties.

Examples of sound, measurable criteria are:

- Productivity

- Order Fill Rate

- On-Time Performance

- Inventory Variations

- Order Cycle Time

- Line Item Accuracy

- Number of Orders Handled

- Space Utilization

Measure only what is important. This is another area that often leads to "report abuse." Some managers will become so fascinated by the reports themselves that they will insist on measuring meaningless trivia. If it does not have an impact on the operation, its cost, or customer service, forget it.

As indicated in the fourth axiom, the measurement must be balanced. Too many measurements can bury the operation in details and lead to friction between the parties. Too few or too general evaluations make the performance difficult to manage. Timing should be balanced as well. Don’t measure everything every day.

As indicated earlier, there are several areas that lend themselves to accurate and meaningful measurement; but every firm will rank the importance of these differently. The most common areas of measurement are warehouse operations, sanitation, productivity, order cycle time, on-time performance (shipping and/or delivery), order fill, and inventory variations.

Warehouse operations usually are evaluated by personal visits, and evaluation can be quite detailed. Ordinarily, there will be a monthly inspection with a more thorough audit conducted annually.

Sanitation will be very important to clients in the food and related industries, and detailed monthly evaluations of each facility should be made.

Productivity can be measured in different ways, but most firms will want to measure some form of productivity per person-hour. This can be orders, line items, cases, unit loads, or any other unit of measurement that is important to the user firm.

Order cycle time is simply the time elapsed between the time an order is received and the time it leaves the dock. In a highly sophisticated order fulfillment operation, this time will be measured in hours; in other more relaxed environments, in days.

On-time performance will be a measurement of either on-time shipping or delivery, or both.

Order fill, or orders shipped complete, determines the number of orders that were shipped complete as ordered, without any backorder.

Inventory variations can be determined by calculating the differences between physical and book counts. In many situations, physical count is required to match both client and provider book inventories.

As indicated at the outset of this discussion, there are literally hundreds of measurement techniques. For example, DC Velocity in its metrics research divided the measurements into four basic segments; i.e.,

Cost such as various costs as a percentage of sales, costs per unit, and operating ratios.

Quality metrics such as order fill, line fill, damage percentage, and backorders.

Time of order cycle, pieces per man-hour, overtime hours, etc.

Other measurements such as miles per gallon, workforce turnover, and equipment utilization.

Whatever metrics are installed, Kate Vitasek and Steve Geary suggest that there are "Twelve Commandments of Successful Performance Management" that separate a great company’s efforts from those of a good company. ⁶

Lead: Practice what you preach.

Focus: Know your goals.

Balance: Use a balanced approach.

Beware: Know the point of your metrics.

Involve: Get employees engaged.

Apply: Be metrics users and not just "collectors" or "posters."

Anticipate: Use metrics as your headlights.

Integrate: Layer your metrics like an onion.

Listen: The voice of the customers.

Benchmark!

Be Flexible: There is no holy grail of metrics.

Patience: Crawl before you walk.

Warehouse operations and sanitation usually are evaluated on a monthly basis with more comprehensive inspections performed annually. For a food manufacturer, the sanitation performance will be the most serious evaluation of the two, and harsher penalties should be enforced for non-compliance.

For years, the Nabisco Foods Groups conducted a "1000 Point Audit" at each of its outsourced warehouse operations. The audit is tactical in nature and focuses on compliance with operating and sanitation policies.

In the operations area, the evaluation is concentrated on:

General Appearance

Receiving Dock

Stock Locator System

Shipping/Order Selecting

Sanitation

Stock Rotation

Security

Reconditioning Area

Temperature/Humidity Control

Administratively, compliance with procedure is measured in the following categories:

Customer Returns

Held Product

Case Control

Receiving Recodes

Shipping Records

Reporting

Each item evaluated is given a point value ranging from five to fifteen, for a total of one thousand; and at the conclusion of the evaluation, each operation is given a numerical score. Scores of fewer than nine hundred points are considered to be unsatisfactory.

One of the most comprehensive in the industry, this audit was a valuable tool for measuring and managing Nabisco logistics service providers.

Appendix 13-1 is an example of another warehouse operations audit, suitable for use during an annual inspection. It can be scaled back for less thorough monthly or quarterly reviews, and a variation of such a form also can be used for the initial evaluation of potential providers.

Sanitation audits can be conducted by client quality assurance personnel or by outside agencies. There are several good firms that specialize in sanitation audits, and often a user firm will utilize a combination of retained and in-house inspectors to manage the sanitation program.

It is very important in the sanitation area that the provider know exactly what is required; i.e., storage practices, baits or traps required, inspection procedures, etc. Once the provider understands the requirements, compliance must be consistently acceptable. Little room for error should be allowed.

Appendix 13-2 illustrates a typical inspection form for evaluating sanitation practices in a food warehouse.

Ratings should depend on the severity and number of deficiencies observed, and deficiencies usually are divided into three categories; i.e.,

Critical – A condition that would result in a regulatory criticism if observed, such as actual infestation or contamination.

Major – A condition that could result in such criticism, such as imminent potential for contamination.

Minor – A deficiency, but one that is unlikely to cause product adulteration.

Whatever productivity items are measure, they should be evaluated against realistic and mutually agreed-upon standards. These can be derived from either historical data developed from experience or through pre-engineered handling standards. (For a good discussion of this subject, see Warehousing Profitably – An Update, by Kenneth B. Ackerman.) ⁷

Some of the most common measurements are cases or unit loads per person-hour, orders per person-hour, or order lines per person-hour. The calculations are all similar. For example, simply take the total cases shipped during a month and divide it by the total person-hours worked; i.e.,

Assume shipments of 760,000 cases per month.

Assume 20 employees working 173.2 hours per month each, or a total of 3,464 person-hours.

760,000 ÷ 3,464 = 219 cases per person-hour.

If this represented 6,000 orders, the calculation would be 6,000 ÷ 3,464 = 1.73 orders per person-hour, and so on.

This sample calculation was based on an average 4.33-week month and 40 hours per week per employee. In actual practice, one would simple use the exact hours worked during the period being measured.

Calculations for the other performance criteria also are fairly straightforward. For example:

Order Cycle Time = Date Shipped – Date Received.

(If measured in hours, simple measure the number of hours between order receipt and shipment.)

On-Time Shipment = Orders Shipped On Time/Total Orders; i.e., 98 orders shipped on time/100 total orders = 98% on-time performance.

On-Time Delivery = Orders Delivered On Time/Total Orders.

Order Fill = Orders Shipped Complete/Total Orders.

Overall product availability can be measured by simply dividing the total number of cases shipped by the total cases ordered.

Costs can be calculated as well, by multiplying the number of hours worked by the fully allocated cost per hour of the operation.

Most outsourcing firms will give providers a monthly rating or "report card." Figure 13-a illustrates how such a summary might be constructed.

Figure 13-b is an actual example of a "report card" used by Kimberly-Clark Corporation.

Inventory performance usually is determined by balancing the physical inventory, whether it be cycle or total, against the book inventory of the provider, as well as that of the client. The contract contains provisions outlining how the discrepancies will be dealt with, but consistent unfavorable variations can be an indicator of other problems, such as orders shipped incorrectly or receipts not counted accurately. Often these errors will manifest themselves in other measurement calculations; but whether they do or not, the underlying causes should be investigated thoroughly.

In addition to measuring compliance with standards, the performance of each logistics service provider can be compared with that of others, thus facilitating ongoing measurement and benchmarking within the entire system.

Having said all this, neither the outsourcing firm nor the provider should lose sight of the fact that improved performance is most impacted by the installation of improved processes. In the words of Kate Vitasek, Michael Ledyard, et.al., "While it is true that performance metrics are a necessary and irreplaceable element in performance management, it is essential to combine your business measurement efforts with qualitative process analysis and viable improvement efforts on core businesses." ⁸

One of the most important aspects of managing the outsourcing relationship is that of motivation and reward. Too often, good performance is simply taken for granted; and many tend to forget that approval and recognition are basic human needs. Ralph Waldo Emerson said, "The reward for a thing well done is to have done it;" but even when we take pride in our own performance, we take even more pride when it is acknowledged by others.

A number of firms have come to recognize that compliments and acknowledgement of effort are proven motivators, and have established formal programs for doing so. Kimberly-Clark, for example, uses its Third Party Report Card as a basis for identifying a "Warehouse of the Years." All employees of the selected operation are taken out to lunch.

Becton Dickenson has a similar procedure for its warehouse of the year selection, and Nabisco Foods used its 1000-Point Audit as the basis for its annual presentation.

Sam’s Club selects a "Distribution Center of the Year" based on certain administrative and operating criteria, and this award is coveted highly by both management and hourly personnel of the logistics service providers in the Sam’s network.

The Pillsbury Company has a comprehensive award program for both carriers and distribution centers, measuring performance in such areas as on-time shipping, damage-free shipments, sanitation inspection scores, warehouse damage and case fill.

Almost thirty years ago, a major food manufacturer developed a program that has served it well over time. Each year the company holds a two-day meeting of its logistics service providers. The sessions consist of presentations by both the company and its providers, and offer guidance on topics of mutual interest and importance. Any upcoming changes in policies and procedures are discussed in this forum, and input is sought from the providers.

Each provider is represented by its senior manager, as well as the manager responsible for the account.

The meeting, which includes a good balance of social and business activities, is in itself an excellent motivator; but the high point of the two days is always the presentation of the "Award for Logistics Excellence." Based on criteria very similar to those of the Nabisco 1000-Point Audit, one provider is chosen each year to hold and exhibit this crystal trophy.

Within thirty days of this meeting, the client relationship manager and other key personnel visit the provider’s location sand "re-present" the trophy at a dinner for all employees associated with the account. Each person attending is given a gift commemorating the event.

Still another firm has a different, but practical approach to rewarding it providers. Again, based on criteria such as customer satisfaction, order fulfillment, and other operational performance, it simply pays out cash bonuses to its providers. These bonuses are paid twice annually, and the management of the company receiving such a cash incentive is strongly urged to share it with the personnel involved with the account.

Whatever method for motivating and rewarding is selected, it is important to remember that recognition must be ongoing and frequent. Do not make the mistake of establishing a wonderful once-a-year program, then ignore good performance for the remainder of the year.

Finally, make certain that the recognition is properly directed. Do not recognize a manager for an outstanding effort of one of the hourly employees. A well-placed, complimentary letter sometimes can be a better motivator than an increase in salary.

Everyone needs recognition for his accomplishments, but few people make the need known quite as clearly as the little boy who said to his father, "Let’s play darts. I’ll throw, and you will say, ‘Wonderful!’"

(from The Best of Bits & Pieces)

The basic premise of outsourcing is that a firm is selecting a service provider that is well qualified to perform the logistics functions, and one that will do so in a satisfactory manner acting on its own initiative. While at the outset, this may seem inconsistent with the discussions in this chapter, it is not.

It should not be necessary to manage the operations of the provider, but the relationship must be managed by knowledgeable, thoughtful client representatives. The provider must be communicated with, monitored, evaluated, motivated, and rewarded. This will be the measure of success in the outsourcing relationship.

In the words of Fost, "Profit is the product of labor plus capital multiplied by management. You can hire the first two. The last must be inspired."

End Notes

Marc Liebman, "Outsourcing Relationships: Why Are They Difficult to Manage?," Everest Group, Inc., 1999.

Peter Bendor-Samuel, "A Pact for Differences," Outsourcing Journal, November 1999, p. 1.

Leslie Hansen Harps, "Selecting 3PL Partners," Inbound Logistics, July 1999, p. 50.

Matthew E. Brunson, The Wisdom and Teachings of the Dalai Lama (New York, NY: Penguin Group, 1997), p. 175.

Leslie Hansen Harps, "Manufacturer’s Report Card Sparks Peak Performance From Third Party Providers," Outsourced Logistics Report, Preview Issue, 1994.

Kate Vitasek and Steve Geary, "Metrics and Management," Traffic World, February 24, 2003, p. 33.

Ackerman, op. cit.

Kate Vitasek, Michael Ledyard, et.al., Logistics and Supply Chain Management Process Standards, Council of Logistics Management, 2004.