Supply Chain and Logistics Consulting 734.502.2771
Supply Chain and Logistics Consulting 734.502.2771
Bob Koerner, CEO, Total Logistic Control
I recently facilitated a panel discussion at an industry conference. Many of you reading this were probably there. The topic was “How to develop and maintain the right relationship between a 3PL and a customer.” I asked three of our customers-- all household name companies—to answer a series of questions about how they worked with 3PLs, and how they saw our industry changing. Their answers were unsurprising. They reflected what we’ve been experiencing in our own business. From my perspective, the changes are not positive for 3PLs, or for users of our services. Let me explain.
In a 3PL’s business, as in life, there are shortcuts. Very few of these shortcuts result in a happy ending. Most of our customers working in these very large companies know that while they are driving short-term results, they end up spending more money in the long run. Sadly, they’re forced to do it, because that is the directive coming from above. I certainly cannot change that, but what I can do is continue working with our customers, educating them and discovering that subtle balance between short-term and long-term thinking.
As our industry evolves, I believe the biggest driver for these changes is shareholder value. While that is an important objective, in many cases, companies are looking for short-term share prices. I know this short-sighted thinking is disastrous for the end game.
As I listened to the companies discuss how they made decisions on picking 3PLs, there were various comments like “Based on a company’s track record,” or “Based on a company’s culture,” or “Based on the way the company operates a facility.” All of these were the right answers. This managerial mindset will typically get customers the results they want.
Unfortunately, what I see happening today is that many of the decisions are driven off of responses to RFPs and sterile discussions with purchasing people. Purchasing people may be told to find the best company to perform a particular service, but they are clearly being judged on the lowest price to perform that service. I even verified this with a senior purchasing person from another household name company. I talked to him after our panel discussion and he shared with me he felt conflicted in many ways. Senior management tells him to find the best company to work with, but he clearly is being judged on the lowest cost.
The other problem with this approach is that there is rarely a relationship built between the people who would manage the 3PL, and the 3PL themselves. There is no opportunity for a company to demonstrate their points of difference, other than in an RFP response or a presentation. I’ve got to believe that almost all of these presentations look alike, and it’s very difficult to find any real point of difference. Talk is cheap.
In my many years in this industry, I have been on both sides of this fence. We have won projects or taken them away from competitors (who were probably doing a pretty good job) by giving a company an economic value that pushed the project our way. We’ve also had projects taken from us (even though we were doing a very good job) because a competitor came in with a cheaper price—not necessarily a better value, but a cheaper price. I’m certainly not opposed to getting the best price to do a job. If our company or others like us cannot find a way to operate efficiently or be able to price our services at market, then we do not deserve to have that business. What often happens is that companies who don’t understand a particular piece of business will bid it very aggressively and get the business. After the fact, they end up either losing the business because they couldn’t perform at those promised rate, or they raise the customer’s prices back to the point that they were when the previous 3PL was operating the business.
Another comment that came from the panel is they would like their 3PLs to partner with them in innovating cost efficiencies and business improvements. Along with that, they would like to have their 3PLs strategically involved in their business. I agree with both of those comments. People in the 3PL industry should be responsible for coming up with new ideas to take waste out of the supply chain; they should do a good job of interfacing with their major customer’s strategy. Too often I have found when these long-term strategy meetings are set to discuss what we could be doing together in the future, the list of invitees is too large. The promise of a great, productive meeting dwindles to a small group, or the meeting is canceled entirely because no one has time in their busy schedule to think about the big-picture future. So while some customers say they want better ideas and more strategic thinking, many are saying let’s find ways to cheapen the deal…today.
Rather than complain about these trends, do I have a solution? Well, as always, I have an opinion—I’m not sure if it is a solution. In my opinion, there needs to be more of a balance as we think about how we deliver value and how we interact with our customers. I believe this because in some situations, we have just that kind of a relationship with our customers. Yes, we have to go through the dreaded RFP response in many cases, and yes, in many cases we have to deal with purchasing or someone different than the ultimate customer. Because of what we have done for that customer in other areas, they realize the added value we offer.
So, in some cases, we do have strategy discussions and we do set aside time for us to meet. We talk about ways to improve productivity, take waste out and look at opportunities for both companies. This kind of relationship may not provide the lowest management fee in the industry, nor does it give a particular customer the cheapest deal, but I firmly believe that this balance gives them the best overall value.
Poor customer service, poor quality, poor communication, poor response and many other things that come with that cheap solution will cost far more than any additional management fee a good 3PL will charge you. Quality programs, training programs, safety programs and productivity improvement programs do not happen by accident. All of these initiatives take time and money to implement, but they all should deliver results far in excess of any other costs. This year, TLC was very proud to have a Michigan warehouse that has gone 25 years without a safety incident. That kind of record-breaking didn’t happen without an investment in proper training.
In short-term thinking, some would say we can’t afford to do those programs. My belief is we need to do those programs; in fact, we can’t afford not to do them. The cost does not look so appealing on a line item in an RFP, especially for start-ups. Many times our customers have said “You shouldn’t charge us for that—your competitors don’t.” My response is that our competitor may not charge, but that doesn’t mean you won’t be better off down the road for spending that money. In many cases, these one-time expenses will deliver value and lower costs per case for months and years to come. Yes, the RFP response may look more agreeable. The purchasing person might be able to boast that he got the cheaper deal. My lifetime of experience in the 3PL world says otherwise.