Are you sure how to well manage your relationship with your third party logistics provider?

Your market research has been spot on: you’re bringing the most appropriate product, at the right time on the market. Your team also found the best 3PL companies in Mexico.

But there’s a common phrase: Don’t count your chickens before they hatch.

The Global Supply Chain Institute at the University of Tennessee explains that 3PLs are evolving rapidly from tactical providers of transportation and warehousing services to collaborative partners providing a wide range of products.”

So, what best practices to consider when relating to a 3PL?

1. Figure out your company needs first

English consultant Martin Murray says that “deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ from business to business. The decision to outsource certain business functions will depend on the company’s plans; future objectives, product lines, expansion, acquisitions, etc.”

But a company needs to understand its own needs before reaching for a quotation. Chuck Franzetta, a prominent logistics consultant in the United States, tells Inbound Logistics:

“You understand your logistics operations better than anyone else, but you may not understand completely what a 3PL relationship can represent to your operation—and to its profitability.”

The consultant was concerned, as he often found that, there was no process, nobody was clear what results were expected or the order that both parties expected results.

2. Negotiate a fair and balanced contract

According to the Global Supply Chain Institute, good contracting practices ensure that the 3PL contract is “fair and balanced for both the shipper and 3PL.” The paper suggests companies ask:

  • Who should negotiate the contract?
  • Should it be a centralized corporate procurement area?

They suggest that both procurement and functional owners negotiate the contract together to polish the language

 Martin Murray suggests that, when selecting a 3PL, the requests for information or quotations be as detailed as possible.

“The company that is selected should be able to fulfill all the logistics requirements and that can only be assured if every requirement is communicated to potential companies.”

The Global Supply Chain Institute adds that contracts must be managed in a collaborative manner, to enable both parties to achieve their respective goals. This includes contract termination causes and payment terms and schedules.

This is especially relevant when your cash flow depends so much on your distribution, exchange rates or bonded goods.

Patience is of particular importance in countries like Mexico.

“People in other countries know impatience is inherit in US culture and use that to their advantage. Clearly it’s important to understand the nuances of cultures in Asia, Latin America, and Europe when negotiating contracts in those regions.”

So, have a checklist on how to evaluate the providers. Remember, these must fit your needs and priorities. 

3. Make sure you have set up excellent performance measurement and management

Hau L. Lee, professor of operations at the Stanford Graduate School of Business and contributor to the Harvard Business Review thinks that if the interests of one party are different from the rest, their work will not allow maximizing the performance of the entire logistics operation.

As our suppliers usually focus at various stages of supply chain logistics, companies tend to ask for different indicators.

According to the Global Supply Chain Institute, setting up a good performance management program “involves looking at both how you will measure performance (which metrics you will use) and performance management (how you will scorecard and measure the effectiveness of supplier’s performance).”

“Identifying the appropriate metrics should be a collaborative process with the 3PL, the first step being a discussion of what success looks like”.

They suggest using common service level agreements (SLAs), which are “typically metrics that are controllable by a supplier and contractually documented in the 3PL.”

4. Provide proper governance to manage your relationship

John Blanchard, leader of a transportation company and supply chain consultant, tells Industry Week: “the logistics landscape is littered with failed relationships between 3PLs and manufacturing companies. In many cases, the seeds for these failed ventures are sown early in the process.”

Companies must find a cultural fit with the supplier. According to Inbound Logistics:

“Every shipper should ask: ‘Does my company and the 3PL we will work with share the same values, such as ethics and responsibility; and can we understand and agree upon what the specific nature of the partnership arrangement will entail?’”

The Global Supply Chain Institute research found that micro-management in 3PL outsourcing “is a problem.” They have seen that most people claim it’s hard to have two managers in the same building, and, on the other hand, “even the 3PLs don’t want a completely hands-off relationship.”

“The key to good governance is to collaborate and reach an agreement on management style that respects the culture and strengths of the client firm and the 3PL.”

5. Both of you must improve along the way

A continuous improvement process is critical for either party, but even more important when it comes to managing a business relationship. Don’t expect for everything to fit at the beginning. Likewise, if the relationship doesn’t start evolving and improving regarding performance and communication, you’re off to a rocky start.

The Global Supply Chain Institute believes that more strategic relationships “should increase the number of interfaces and include top-to-top interaction of executives that drive the overall strategic alignment of the partnership.”

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How have you managed your past relationships with your 3PL providers?