Year: 2020

Principles of Logistics Information System

Availability Logistics information must be readily and consistently available. Information may be regarding order status, inventory status, etc Rapid availability is very important to respond to decisions. Information availability can reduce customer requirements and improve management uncertainties in operations and planning

Accuracy Logistics information must reflect the current status of all the activities like inventory levels, customer orders etc. E.g.: The actual level of inventories should match with the LIS reported inventory levels. However, if there is a large difference between the actual inventories and those indicated by the information system inventory levels, buffer stock or safety stock would be required to cover up the uncertainty.

Timeliness The logistics information must be timely to provide quick management feedback. Timeliness is measured in terms of delay that takes place between the commencement and occurrence of an activity and when the activity is actually visible in the logistical information system. E.g.: a company may receive a certain order which a customer desires to be executed urgently. However, the database information system of the company is not fed with the details regarding the urgency of the order for whatever reasons. This will cause delay in the actual execution of the order. This delay indicates ineffectiveness in the planning process. Similar delays can occur when the goods are moved from VVIP to finished goods. All this calls for timely management controls so that corrective actions can be taken to minimize loss. Hence timely information is very necessary to reduce uncertainty.

Logistics information system

Converting data to information, portraying it in a manner useful for decision making, and interfacing the information with decision-assisting methods are considered to be at the heart of an information system. Logistics information systems are a subset of the firm’s total information system, and it is directed to the particular problems of logistics decision making.

There are three distinct elements that make up this system:

• The input
• The database and its associated manipulations
• The output

Logistics: The Inputs

The inputs are data items needed for planning and operating logistics system obtained from sources like customers, company records, and published data and company personnel.

Logistics: The Database and Its Associated Manipulations

Management of the database involves selection of the data to be stored and retrieved, choice of the methods of analysis and choice of the basic data-processing procedures.

Logistics: The Outputs

The outputs of a logistics information system include:

• Summary reports of cost or performance statistics
• Status reports of inventories or order progress
• Exception reports that compare desired performance with actual performance
• Reports that initiate action

The element of information and control is needed by all the elements to act as triggers to various operational procedures. We have mentioned the information needed for inventory. Order levels help decide what orders need to be picked and packed in warehouses and enable the planning and organisation of transport. Information and control’s role are to help design information systems that can control operational procedures. They are also key in the forecasting of demand and inventory as already mentioned.

Along with transport infrastructure, an efficient information and communication infrastructure is vital for the development of logistics concepts and for the performance of logistics processes. This infrastructure is to a great extent based on telecommunication infrastructure and can be set up using different networks (landline, mobile telephony, radio network, microwave radio relay), depending on the services offered (GSM, UMTS) and on the data transfer. There is, however, a tendency towards the development of a uniform network infrastructure through which all services can be offered and utilized. This network infrastructure is based on the Internet Protocol (IP) which replaces the circuit-switched networks with a packet-switched network infrastructure.

Telecommunication networks can exhibit different structures (network typology) which utilize various types of hardware and access methods for data connection and transmission. These, in turn, determine the rate of transmission, the data throughput, and data security concepts. Thus, local networks (LANs – Local Area Networks) consist of several computers and external devices (printers, scanner etc.) which are interconnected in one building. Internet access is given via a router. In contrast to LANs, WANs (Wide Area Networks) cover a large geographical area. Commercial WANs are designed for maximum capacity utilization and consist of circuit-switched connections, point-to-point connections, packet-switched connections, and Virtual Private Networks (VPN). In order to support these services and to achieve high transmission speeds, optical transmission media (fiberglass) are used more and more frequently for broadband infrastructure.

All these hardware and software installations are usually hosted in IT rooms, server rooms, or in data centers which display a specific infrastructure. The infrastructure of data centers includes the provision of rooms, energy supply, air conditioning, and object security

The development of IT and computer technologies does not only substantially influence the kind of services rendered in data centers. it also affects the property and room layout. Data centers are a specific type of real estate which are also termed collocation centers, IT centers, IT hotels, server hotels, telehouses, and so forth.

We can also see an increase in the number of data center parks in which companies rent cages, several rooms, or entire buildings which are then equipped or (re-) constructed according to the customer’s specifications. These types of solutions offer the advantage of redundant provisioning of building infrastructure as well as the possibility to provide office space with emergency workplaces. These workplaces can be utilized in emergency situations (disaster recovery, business continuity) in order to continue business without interruption, which is also becoming increasingly important in a logistical context.

Satellite Systems and Satellite Navigation

World-wide telecommunication is to a great extent based on satellite systems. This technology makes it possible to set up a comprehensive infrastructure that offers services with high data transmission rates. A logistical example of this is the ERMTS (European Railway Transport Management System), which offers several projects and services in the area of railroad information systems, as for example the international GSM-R-network (Global System for Mobile Communication Railways). This network is a platform for commercial railroad radio systems.

Apart from the support of telecommunication services, satellites also offer satellite navigation as one of their core functions. This method enables the determination of an object’s position. Using suitable technologies and programs, modern satellite navigation makes it possible to determine the coordinates of locations based on their distances to at least three satellites. The construction of the European satellite system Galileo, due to be operational by 2013, is of paramount significance for the commercial use of satellite systems. Galileo will be a system of the European Union which adds to the already existing state-owned US satellite system GPS (Global Positioning System) and to the Russian system Glonass (Globalnaja Nawigazionnaja Sputnikowaja Sistema). The system will comprise 30 satellites. Galileo will make it possible to offer different services which vary in regard to accuracy, number of signals, and reliability of service.

Commercial satellite navigation services are especially suitable for logistics and can be used for the navigation of continental transport, telematics platforms, for locating purposes in aviation and shipping, and as research platforms for transport and logistics systems. The additional availability of these applications in comparison to existing systems is mainly due to the system’s high accuracy and its world-wide availability. Central to these applications is the localization and tracking of goods which are transported in a multi-modal manner. This requires constant location of the respective carriers and of the goods transported, and all parties involved in the supply chain need to be able to continuously obtain information across all transport modes and independent of their location (location information).

Multi-Modal Logistics Parks (MMLPs) are a key policy initiative of the Government of India to improve the country’s logistics sector by lowering overall freight costs, reducing vehicular pollution and congestion, and cutting warehousing costs. The government’s Ministry of Road Transport and Highways (MoRTH) is developing multi-modal logistics parks at selected locations in the country under its Logistics Efficiency Enhancement Program (LEEP). India is burdened with high logistics costs, which account for about 13% of the value of goods sold in the economy compared with 8% in other major economies. The average cost to export/import one container in India is about 72% higher than in China.

LEEP, which is spearheaded by the MoRTH and the National Highways Authority of India (NHAI), aims to enhance freight transport in India by reducing costs and time, and improving the tracking and traceability of consignments through infrastructural, procedural, and information technology interventions.

The government defines an MMLP as a freight-handling facility encompassing a minimum area of 100 acres (40.5 hectares), with various modes of transport access, and comprising mechanized warehouses, specialized storage solutions such as cold storage, facilities for mechanized material handling and inter-modal transfer container terminals, and bulk and break-bulk cargo terminals. Logistics parks will further provide value-added services such as customs clearance with bonded storage yards, quarantine zones, testing facilities, and warehousing management services. Provisions will also be made for late-stage manufacturing activities such as kitting and final assembly, grading, sorting, labelling and packaging activities, re-working, and returns management

Logistic parks are basically Industrial areas or defined areas for activities relating to transport, logistics and the distribution of goods which can be regional, national and/or international transit, and carried out by various operators. Owners or occupants of buildings and facilities (warehouses, break-bulk centers, storage areas, offices, car parks, etc.) are generally the operators. Logistics Park is centered in the areas of logistics operations. Logistics parks have a specific scale as the size determines the facilities, functions, and services that are possible to carry.

The contemporary logistics park has two chief functions:-

• The logistics organization
• The logistics management functions

Function of logistic parks

• Now with Logistics Parks, the shippers are able to plan out their inventories without any hindrance.
• The requirements of demand and supply are being met on time.
• Logistics Parks can prove to be a huge success if they are located in the industrial belts, and near airports, ports, and ICDs.
• They pave the route for other industries like equipment suppliers, construction companies, consultants, and trucking companies
• The logistics parks offer a larger amount of space for storing goods and products. They are larger and better managed than common warehouses.
• The logistics parks are also suitably connected through all the essential means of transportation. These parks are more concentrated in urban places and thus further connected with shipping and transferring of goods.
• With mediators being eliminated or marginalized due to streamlining the supply chain in India, goods movement has become more cost-efficient.
• They improve environmental quality by reducing the number of trucks on roads.
• Logistics Park offers a strategic location with good road, rail, and air connectivity. Logistics Parks have wide roads which are sufficient for the free flow of two way traffic during the day and night.
• They promote economic development by attracting businesses and generating employment
• The area is available for multiple customers and commerce for future expansion.
• Ample truck and office parking space.
• The highly secured area with required security arrangements.
• Mingled park management for general maintenance, landscaping, security & waste control.
• State-of-the-art warehousing & cold storage facilities.
• They promote growth expectations in freight
• For amenities like banking, insurance, office space, accommodation, catering, and other services facilities.
• Connectivity with ports & Inland Container Depot (ICD).

In commerce, global supply-chain management (GSCM) is defined as the distribution of goods and services throughout a trans-national companies’ global network to maximize profit and minimize waste. Essentially, global supply chain-management is the same as supply-chain management, but it focuses on companies and organizations that are trans-national.

Global supply-chain management has six main areas of concentration: logistics management, competitor orientation, customer orientation, supply-chain coordination, supply management, and operations management. These six areas of concentration can be divided into four main areas: marketing, logistics, supply management, and operations management. Successful management of a global supply chain also requires complying with various international regulations set by a variety of non-governmental organizations (e.g. The United Nations).

Global supply-chain management can be impacted by several factors who impose policies that regulate certain aspects of supply chains. Governmental and non-governmental organizations play a key role in the field as they create and enforce laws or regulations which companies must abide by. These regulatory policies often regulate social issues that pertain to the implementation and operation of a global supply chain (e.g. labour, environmental, etc.). These regulatory policies force companies to obey the regulations set in place which often impact a company’s profit.

Operating and managing a global supply chain comes with several risks. These risks can be divided into two main categories: supply-side risk and demand side risk.[4] Supply-side risk is a category that includes risks accompanied by the availability of raw materials which effects the ability of the company to satisfy customer demands. Demand-side risk is a category that includes risks that pertain to the availability of the finished product. Depending on the supply chain, a manager may choose to minimize or take on these risks.

Successful global supply-chain management occurs after implementing the appropriate framework of concentration, complying with international regulations set by governments and non-governmental organizations, and recognizing and appropriately handling the risks involved while maximizing profit and minimizing waste.

Management theories

The 21st-century logistics framework

The 21st-century logistics framework is a global supply-chain management theory that was developed at Michigan State University and was introduced to the business world in 1999. The framework identifies six business competencies that are necessary to operate a global supply chain.

There are multiple underlying capabilities for each competency which influence management decisions. The six competencies are: customer integration, internal integration, material/service supplier integration, technology and planning integration, measurement integration, and relationship integration.

The capabilities that are attached the competency of customer integration are: segmental focus, relevancy, responsiveness, and flexibility. Segmental focus refers to the ability to develop customer aimed programs that are specifically designed to achieve maximum customer success. Relevancy refers to the ability to maintain and modify customer focuses to reflect the constant changing expectations. Responsiveness refers to the ability to accommodate unique and unforeseen customer requests/requirements. Flexibility refers to the ability to appropriately adapt to any unexpected circumstance.

Cross-functional unification, standardization, simplification, and compliance are the underlying capabilities that are associated with the internal integration competency. Cross-functional unification refers to the ability to put potential co-operative activities into manageable operational processes. Standardization refers to the ability to implement policies/procedures that address any concurrent operations. Simplification refers to the ability to identify, adopt, implement, and improve the best possible business practices. Compliance refers to the ability to follow any established policies.

The capabilities that are related to material/service supplier integration are: strategic alignment, operational fusion, financial linkage, and supplier management. The ability to develop a corporate culture or common vision that create a shared responsibility is defined as strategic alignment. The ability to fuse systems together to reduce redundancy is defined as operational fusion. Financial linkage refers to ability to join financial ventures with suppliers to achieve common goals. Supplier management refers to the ability to extend management to include the hierarchical structure of suppliers.

Information management, internal communication, connectivity, and collaborative forecasting and planning are the capabilities that encompassed by technology and planning integration. The ability to use seamless transactions across the entire chain to allocate resources throughout the chain is called information management. Internal communication refers to the ability to communicate within the business in appropriate manner. The ability to communicate and exchange information between the business and the external supply chain partner is called connectivity. Collaborative forecasting and planning refers to the ability to collaborate with customers to identify and develop shared visions.

The capabilities that underlie measurement integration are: functional assessment, comprehensive metrics, and financial impact. Functional assessment refers to the ability to develop and implement an appropriate performance measurement tool. Comprehensive metrics refers to the ability to implement cross-business performance standards. Financial impact refers to the direct link between overall supply chain performance and the results of the financial measurement.

The capabilities that underlie relationship integration are: role specificity, guidelines, information sharing, and gain/risk sharing. Role specificity refers to the ability to clearly define leadership and establish a set of shared and individual responsibilities. Guidelines refers to the ability to create and implement policies/rules that govern everyday interactions. Information sharing refers to the willingness to share important information (often including financial, technical, or strategic information) throughout the supply chain. Gain/risk sharing refers to the appropriately divide and allocate rewards/penalties.

The 21st-century logistics framework allows managers to identify and implement the most important underlying capabilities that are encompassed in the six business competencies. The framework gives managers the freedom to decide what they believe to be the most important capabilities that need to be implemented to run a successful global supply chain.

Human collaboration theory

The human collaboration theory suggests that there is strong evidence to prove that investment in supply-chain management have the largest impacts when they focus on enabling supply chain collaboration. This management theory focuses on the managers ability to invest in and promote human collaboration between employees throughout the global supply chain.

Human collaboration is defined as the use of skills through harmonization of individuals, teams and organizations to achieve greater things not achievable by an individual person. The human collaboration theory/framework lays out four key components. The first component deals with the forces that drive change, the second focuses on people-technology-process assets that create network collaboration, the third deals with resisting forces which encourage people to resist collaboration, and the fourth component looks at the desired collaboration performance. The theory states that to implement and operate a successful global supply chain, a manager must understand and use these components.

The theory states that to implement and operate the best collaboration system, a manager must; build trust between the different players of the chain (supplier and manufacturer), establish a culture which supports decision making and work, implement a proper reward system, and use synergistic activities.

According to the theories creators, a manager must follow four steps to transform their network into a more collaborative network. The first step is to recognize that to be competitive the company will require innovations which can be proposed by people outside the corporate boundary and therefore to access these people they need to be more collaborative with external partners. They then must alter their views of achieving collaboration by acknowledging the different types of collaboration (transactional, co-operative, coordinated, synchronized). Next, a manager must develop a collaborative plan that achieve the goals he/she sets out to achieve. Finally a manager must develop the right controls to ensure the goals/mission can be met. If a manager follows the recommendations made by this theory, then they will have implemented a proper global supply chain that focuses on human collaboration which in turn will yield better results.

The rapid increase in world trade in the past decade has restructured the global maritime industry and has brought about new developments, deregulation, liberalization and increased competition.

There have been dramatic changes in the mode of world trade and cargo transportation, characterized by the prevalence of business-to-business and integrated supply chains. These changes have been embodied in the increasing demand for value-added logistics services and the integration of various transportation modes.

As a consequence, high-quality logistics services and the effective and efficient integration of transport and logistics systems offered by a maritime operator (i.e. a shipping company or port/terminal operator) has become an important issue.

Maritime logistics has been traditionally regarded as the primary means of transporting parts and finished goods on a global scale and has recently attracted considerable attention from academics and practitioners alike.

However, the term ‘maritime logistics,’ is not easy to define and its precise definition, scope and role within global supply chains are yet to be established.

On the one hand, maritime transport (i.e. shipping and ports) is clearly concerned with the transportation of goods and/or passengers between two or more seaports by sea; on the other hand, logistics is the function responsible for the flow of materials from suppliers into an organization, through operations within the organization and then out to customers.

A supply chain is composed of a series of activities and organizations that materials (i.e. raw materials and information) move through on their journey from initial suppliers to final customers.

Supply chain management involves the integration of all key business operations across the supply chain.

In general, logistics and supply chain management relate to the coordinated management of the various functions in charge of the flow of materials from suppliers to an organization through a number of operations across and within the organization, and then reaching out to its consumers.

Based on this clean-cut understanding, in 2006 Photis Panayides, one of the authors of Maritime Logistics, further elaborated on the issue of convergence of maritime transport and logistics.

These two terms are largely attributed to the physical integration of modes of transport facilitated by containerization and the evolving demands of end-users that require the application of logistics concepts and the achievement of logistics goals.  At the centre of maritime logistics is, therefore, the concept of integration, be it physical (intermodal or multimodal), economic/strategic (vertical integration, governance structure) or organizational (relational, people and process integration across organizations) as an ongoing attempt to create greater value for shareholders.

At the cutting edge in its assessment of the industry, Maritime Logistics covers the whole scope of maritime logistics and examines latest logistical developments within the port and shipping industry.

Benefits.

Economical

Hands down, the ocean shipping industry offers the most competitive freight costs to shippers, especially over long distances. By comparison, some estimates show that ocean freight shipping costs are generally four to six times less expensive than air. With statistics like this one, it is easy to argue that ocean transportation is the cheapest international shipping option.  

Efficiency

No matter the size of your shipments, sea freight companies can usually accommodate your needs. Smaller shipments can be grouped together with other cargo to fill a container, allowing for cost-sharing of the transportation services. Larger cargo can fill one or more containers, offering shippers unmatched bulk options. In fact, vessels are the ideal way to move high volumes of cargo as they are designed to carry large amounts of goods or raw materials.

Oversized, heavy and bulky cargo capability

A major advantage of sea freight shipping is shipping companies’ ability to handle oversized, heavy or bulky cargo often referred to as breakbulk or Not in Trailer (NIT) loads. Such cargo could include large vehicles, equipment, construction materials and more. Oftentimes too heavy or large for air freight or even over-the-road transportation, very large cargo is not a problem on many shipping vessels.

Safety

Ships are designed to carry hazardous materials and dangerous cargo safely. The industry is well-versed in the handling of such goods and has regulations in place to ensure the safety of the vessel, crew, cargo and environment. Cargo loss caused by incidents during transportation is continually dropping as maritime safety increases, and has dropped significantly in the past decade. Containers are designed to be sealed and locked during transportation for extra security.

Environmental friendliness

When compared to sea shipping, air and many other forms of transportation have much higher carbon footprints a definite disadvantage for the environment. Ships, on the other hand, provide the most carbon-efficient mode of transportation and produce fewer grams of exhaust gas emissions for each ton of cargo transported than any other shipment method. These already-low emissions continue to trend downward as technology advances, new ships come online and as liquefied natural gas (LNG)-powered options are utilized.

The rise of on-demand delivery has forced modern-day businesses to rethink their traditional logistic operation models. Outsourcing the entire function to a trustworthy 3PL partner has become a viable option since it reduces the complexity of achieving deliveries until the last mile.

Logistic outsourcing is a brilliant way to free up resources and also achieve cost efficiency. The benefits have lured even enterprise behemoths like HP, Procter & Gamble, Apple and others into entrusting their logistic operations to 3PL experts.

The benefits of logistics outsourcing come in several forms savings in operating costs, savings in human capital, streamlined operations, no lock-in of working capital and well-connected global delivery endpoints to name a few. Let’s take a closer look at some of the additional advantages:

1. Reduces burden of back-office management

On the surface, the logistic function appears to be simple: sending physical packages from point A to point B. However, before each consignment is sent out on transit, there is paperwork, auditing and verification to be conducted and documented.

3PL outsourcing service providers will have the necessary backend personnel and systems in place to take care of these procedures. From assigning a dispatch note and carrying out physical verification, to ensuring that all shipping papers are in order, logistics outsourcing can take care of the routine activities, sparing time for the business to focus on other priorities.

2. Economies of scale

3PL players usually have a globally distributed network of carriers and fleets which allow them to reach any destination with ease. Since the function is outsourced, it is easy to scale up or scale down the logistic reach of the business without having to set up owned infrastructure and personnel.

3. Real-time visibility of inventory

Professional logistic outsourcing service providers use ERP systems or cloud-based Warehouse Management Systems to help track inventory on a real-time basis. This data can also be received from the service provider on a regular basis for supply chain management planning.

4. Expert documentation handling

Logistics, especially cross-border logistics, requires adherence to sophisticated paperwork. For a business that has logistics only as a small function or department, this can be a tedious job to do on a routine basis. Logistics outsourcing service providers have the domain expertise and knowledge to take care of all kinds of paperwork involved like inter-connected carrier contracts, insurance certificates, bill of lading, certificate of origin, etc.

Disadvantages of Logistic Outsourcing

While logistic outsourcing delivers high on economic benefits, it also riddled with pitfalls that businesses must safeguard against.

1. Outsourcing without proper appraisal process

A good logistics partner is hard to find. The appraisal process itself will include gathering quotes and doing quality reports to check if the provider meets benchmark standards and so on. Rushing through the tender process without adhering to a well-thought process will lead to hassles in the future.

2. Choosing a low-pricing vendor for cost-benefit

An after effect of rushing through the logistic outsourcing vendor process is that you end up signing the deal with someone who offers the lowest rates. As Sun Tzu, the legendary military leader once said, “The line between disorder and order lies in logistics.”

Outsourcing the function to a low-priced vendor who cuts corners might actually create chaos rather than an orderly logistics function. There is a reason why top-notch 3PL players charge a premium rate. It costs a lot to have personnel and processes in place to ensure perfect paperwork, timely coordination of carriers, warehouse management and much more.

3. Not specifying roles and responsibilities in writing

Logistics is a subset of supply chain management which by itself is a combination of several micro-steps. This increases the complexity in logistics planning and implementation.

Unless the roles, responsibilities and tasks of each party take the form of an explicitly written a Service Level Agreement (SLA), there could be serious complications when the process kicks into action.

4. Not viewing logistics outsourcing as a strategy

Logistics plays a key role in the overall strategy of an organization. Moreover, the business environment and customer demands are not what they used to be a few years ago. E-commerce, mobility, on-demand services and other advancements, have reformed the commerce landscape.

If you are outsourcing logistics merely as a function to be done with, and not as a strategic element, then the business is not going to gain much despite the economy of scale.

5. Disconnect between clients & outsourcing agents

Does your logistic outsourcing agent really know what you are trying to do? Is it last mile delivery that your focus is on or faster delivery than the competition? A lack of consensus between the parties can lead to a waste of resources and also lead to cost overruns and delayed deliveries.

There has been much written about outsourcing over the years. The topic originally gained much notice in articles discussing how Japanese freight forwarders placed people in their customers’ offices to do the export shipping. In reality, if you have an outside firm do things for your company, it could be considered outsourced.

Even before the stories about Japanese forwarders, firms outsourced logistics services. If you hire a trucking company to make deliveries instead of using your own fleet and own drivers; if you use an outside warehouse to store and ship orders; if you use a bank or other service to audit and pay bills, you could be considered as outsourcing these activities. However these were not defined as outsourcing. The advent of the 3PL gave it a different panache.

Given that experience, how well has outsourcing of logistics services to 3PL worked? How well has it delivered expected improvements and benefits? What has worked and what has not worked? There are no real empirical studies of the extensive scope needed. Many surveys are with the buyers only; there are no corollary reviews with the sellers, the providers of the outsourcing service to get a balanced overview of how well the outsourcing did or did not work and why. In addition, press releases are issued when a provider is selected to provide a service for a customer; no press release is issued when the relationship does not work, is terminated or not renewed.

Also with many outsourcing surveys, it depends on the size of the company being questioned, its position in its market and industry, its experience at outsourcing, role in the outsourcing and other issues. And the answer also depends on how high or low, you set the bar. Plus, there are no absolute performance measures.

Outsourcing is really creating a relationship. And like all relationships, some work well; some hang on for reasons only known by the two parties and some fail badly. Each outsourcing action is unique. Since outsourcing should be a designed response by a service provider to a defined requirement by the buyer, outsourcing should not be a commodity service, like forwarding, trucking and other logistics services are viewed, where price is the key delineator to measure a firm.

In addition, there are different levels of outsourcing. Outsourcing is not a one-dimensional, homogeneous effort. That lack of progress reflects several issues, ranging from the limited outsourcing scope and requirements sought by buyers of supply chain outsourcing services, skill sets of outsource supply chain management service providers and those supply chain organizations that are not defined as “core” by their companies.

What is outsourced, why it is outsourced, what is expected and how it is achieved can be significant. These differences create the various levels of outsourcing and the need for a value proposition.

Levels of Outsourcing

Basic Transactions -> Increasing Level -> Zenith Strategic

In some regards, these are like a variation of Dante’s Nine Circles of Hell. With each increase, buyers of outsourcing move up into more complex and more important areas. Much outsourcing however is done at the lower levels and the resulting lesser impact of importance to the buyer’s firm.

The level of supply chain outsourcing needs be escalated. To put the value proposition in perspective, a step back is needed to lay the foundation for the outsourcing effort. The focus on the value proposition moves into outsourcing into an advanced stage, beyond traditional discussions of RFPs, Service Level Agreements (SLAs), contracts, work plans, governance, etc.

Real supply chain management outsourcing is dramatic and creative. It is used to-

• Drive change-as an agent of change, create new or when an organization is very resistant to change
• Gain significant short-term benefits
• Utilize and blend different service providers into a new capability to manage complex supply chains, with both international and domestic requirements
• Transform a strategic shift or paradigm

With the significant reasons shown above, contacting the “usual suspects” of service providers may not be the avenue needed. New solutions may demand new providers.

When firms going into arenas of outsourcing, the standard approaches will only drive the standard responses. Flexibility is demanded in developing the agreement and the evolving key performance indicators (KPIs) because the parameters, scope and measures will evolve as the outsourcing relationship grows and expands. Relationship is an important term and concept; contracts do not create relationships. Contracts are static and establish walls and barriers. Relationships are dynamic and have no such boundaries.

Companies can be afraid to move into these needed relationships to design and develop the changes they should have in their business model. Losing control is a concern and can be masked by Sarbanes-Oxley or similar issues.

Lowest cost is not the factor here; value is. Collaboration is the vehicle used. Clear objectives of where the outsourcing is to go and the expected result is important and go beyond standard SLAs in advanced outsourcing. Broad outcomes are established early. All parties stay focused on the objective. Rigid structure to the governance is not used; active governance is used.

Shared risks and leveraged gain-sharing of the new activity or enterprise can relieve such concerns because both parties have a vested interest in the results and in the success. In these relationships, leadership on both sides is important, as is trust, open communications, shared objectives, flexibility and mutual accountability.

Value proposition

The concept of a value proposition is not unique to outsourcing. It is something that all logistics service providers should have to distinguish them and to draw the attention of potential customers. This applies to 3PLs, logistics centers, trucking companies, freight forwarders, warehouses, and others.

Note, the topic is value proposition, not value-added. Value added is essentially giving something away for nothing, often some kind of technology application. Nor does it involve a creep effect where some buyers attempt to get something.

What is often missing in discussions of outsourcing is the value proposition that the provider is offering. The value proposition is what sets his service apart from others. “Reducing freight costs by 10%” is not a value proposition, or, at best, a weak one. Reducing a commodity service cost is not unique from the competition and puts the service provider back into the realm of being a commodity service provider, back into being what the provider is trying to escape from with the logistics company he is part of.

“Improving inventory turns by 30%” or “increasing market share by 2 points” are value propositions. The scope and complexity goes beyond a function and crosses the organization just like the process that supply chain management should be. Value propositions create the opportunity to move up the levels of outsourcing toward strategic.

Selecting the right logistics service provider can be a tough experience for companies. Don’t shortcut the process though, because the reputation and success of your company may soon depend on your logistics provider’s reliability.

Avoid a potential logistics nightmare by using these 5 elements in selecting your perfect logistics provider (such as a third-party logistics company, or “3PL”).

1. Capabilities

A prospective logistics provider must be competent in the specific service areas that meet your company’s needs. Just because a provider is a rock star in one area, it’s not a forgone conclusion that they can service your firm properly.

Also, they should have a set of abilities that can satisfy your both your short-term and future requirements. For instance, EDI-capability may not be a requirement for you today, but what if it does become required for you in 12-24 months? Do you really want to unwind all the onboarding and integration work invested in a new relationship? Dig a little deeper and ask:

• Are truckload lanes repetitive, originating from a limited number of shipping points and terminating to a relatively limited number of consignees?
• Are shipments time-sensitive and/or do they require drop trailers? A mid-sized, asset-based carrier would meet these needs without getting sidetracked by their exceedingly large list of clients.
• Are truckload lanes sporadic? Is there live loading/unloading or do shipments come from a high number of origins that terminate to a high number of receivers? If so, a 3PL provider or broker might be a better fit.
• Do you require access to dedicated trucking assets and 3PL? A logistics provider that possesses both assets and a 3PL division may be able to offer optimal solutions.

If a provider claims to possess all the capabilities “under the sun” but your organization requires only a few core services… be wary of a company that is a “jack of all trades” and master of none.

2. Customer Service

Does the logistics provider prioritize customer service, responsiveness, fluid lines of communication and effective problem solving? These elements can be difficult to ascertain early on but do your homework.

Virtually all companies claim to have excellent customer service, but how do you know? You ask their customers. Ask for references, preferably from companies in similar industries and needs. Good customer service is no accident. If the customer service is consistently excellent, it’s likely a result of a well-documented and repeated process that will continue over the years.

Another yield of good process execution is safety. It is uncommon for a logistics provider to achieve excellent results in customer service and poor results in safety or vice versa. It can be deduced that a safe logistics provider, probably provides good customer service.

3. Safety Record

Due to the ever-changing landscape of safety regulations, it is imperative that you select a carrier with a strong safety record. A review of safety ratings and statistics is available to the public here. Also, see how we value safety.

4. Company Stability

Whether your supply chain is simple or complex, select a logistics provider with overall company stability. Top suppliers are consistent suppliers. Quality can be jeopardized as companies experience rapid change. How long has the company been around?

Furthermore, if one high-liability event occurs and your provider cannot withstand the fallout, the liability often shifts, in effect, to you the shipper. This concern can be eased if the provider’s “word”, name and reputation has remained intact through decades of market turbulence and economic uncertainty.

5. Company Reputation

In a new business arrangement, you can rest assured that at some point the relationship will be tested. Often it as at this juncture, that the character of the service provider’s leadership will be revealed.

Before it is too late, investigate whether the provider is likely to respond with integrity and honor. Time will reveal whether the firm has a good, bad or ugly reputation with customers, suppliers, and employees.

• How do they treat their suppliers and employees?
• Are they an active and positive force within their community?
• What type of reviews do they have online?
• What are the consistent themes that appear again and again in their marketing material?
• How long have they been in business?

The answers will go a long way to determining how the provider will be as a supplier and partner.

Bonus: Double-check all elements if a supplier’s price is significantly lower than the market.

• What good is a cheap price if a provider doesn’t deliver consistently or provide an adequate response in the event of mishap?
• What good is a cheap price if service failures cause you to lose revenue?
• What good is a cheap price if your team spends countless hours resolving claims and problems?

Think about the total cost associated with selecting a long-term solution provider. The provider that offers you the overall lowest cost of working together is the partner you want around for years to come.