As supply chains have gotten more complex, and logistics service providers (LSP) have become more sophisticated and experienced, an increasing number of firms has turned to outsourcing some or all of their logistics functions. This is a major step, and for those new to outsourcing, it is important to understand that the decision will be an important one, requiring careful and thorough research.
The first and most critical challenge will be choosing your logistics partner. What should you look for in an LSP? While each firm will have its own unique needs, there are some basic criteria that every outsourcing firm should consider. While many firms will concentrate almost exclusively on cost, in my opinion, there are at least 13 other factors that should be considered first. A brief summary of these follows.
Financial Stability. Though it may feel awkward to question a prospective candidate about its financial stability, this is an essential part of due diligence. For one thing, you want assurances that the provider will be around for the long term. For another, if you are signing a sizable contract, as is common today, you will need to ensure that the LSP has adequate financial resources to provide the support you need.
Business Experience. How much experience does the candidate have in providing logistics services in general? How about in your particular industry? Finding a partner that has experience in your industry will shorten the learning curve and help to ensure the performance you need.
Management Depth and Strength. When you enter into an outsourcing arrangement, you are not just purchasing services, you should be purchasing expertise, as well. Check out the people at the top. Are they capable of the innovation and creativity that will enhance your operations?
Reputation. Seek out some of the LSP’s other clients and ask them about their experience with the company. Also get the names of a few clients that have left and find out why.
Strategic Direction. Just as your company has a business strategy, so should the LSP. Surprisingly, many do not – and a large percentage of those that do seem to have a planning horizon of one afternoon. You might argue that the provider’s strategy should be the same as yours, and that is true up to a point. But a well-managed LSP should have its own goals and objectives, as well. It must have its own commitment and direction.
Operations. There is no substitute for a careful, in depth evaluation of the LSP’s current operations. Assign a qualified person or team to assess the quality and efficiency of their operating performance.
Global Capability. If you have global needs, can the provider meet them? Be careful on this one. It’s not enough to be able to locate China on a map.
Information Technology. Don’t accept any excuses here. In any logistics operation, state of the arts systems are critical. Be sure they are compatible with any ERP system you may use.
Commitment to Continuous Improvement. Is the provider committed to ongoing performance enhancement? Does it have a formal procedure for continuous improvement?
Growth potential. If, like most companies, you anticipate growth in sales volumes, product lines or markets, you need a partner that will be able to keep up. Make sure it is in a position to support your growth.
Security. Unfortunately, terrorism has become more than a theoretical threat in the United States and elsewhere. Today, it is essential to secure your supply chain against not only theft and pilferage, but also against infiltration by terrorists. Sadly, we are not always protected from our own employees. Make sure the candidate has all the necessary security precautions in place.
Ethics. If we have learned one thing over the past decade, it is this: You have to be extremely careful with whom you deal. Ask providers about their codes of ethics. Though only the larger LSPs are likely to have formal ethics policies, even the smaller ones should at least have some kind of code for their employees. But keep in mind a written policy is no guarantee of ethical conduct. In the words of Mason Cooley, “Reading about ethics is about as likely to improve one’s behavior as reading about sports is to make one an athlete.”
Chemistry and Compatibility. Chemistry isn’t just a factor in picking a spouse. It is also something to consider when picking a logistics partner. Follow your instincts and heed your intuition. If you have concerns about personal chemistry and compatibility at the outset, think twice about going ahead with the deal. The situation is unlikely to improve over time.
Cost. Certainly, cost is not the least important consideration, but neither should it be the overriding determinant. The manager who selects a provider based solely on cost has committed to an outsourcing strategy that has little chance of success. Cost should be a factor only in deciding among candidates that meet all the other criteria.