The growth in the number and complexity of outsourcing has led both shippers and logistics service providers (LSP) to become increasingly concerned with managing the relationship as a way to maximize gains for both companies.
For the relationship between a logistics service provider (LSP) and a shipper to be successful, a series of precautions are required, both on the part of the shipper and on the part of the LSP itself. These precautions must begin even before hiring and become even more critical in the day-to-day operations.
In this way, it is important to assess the potential of the relationship and the way in which it is or will be conducted. Regardless of when this assessment is being carried out (before or after hiring), attention should be focused on issues such as:
– Relationship interaction level
– Coordination mechanisms necessary for a successful partnership
This article aims to present a methodology for diagnosing a relationship already underway. However, several of the analyzes found throughout this work are also applicable when hiring a third party.
ASSESSING THE DESIRABLE INTERACTION LEVEL
The intensity of the relationship between the shipper and the LSP is the first aspect to be evaluated when thinking about outsourcing an operation. It can vary from a very low level of interaction to a maximum level of interaction that would correspond to vertical integration between companies (see figure 1).
Not all contractor/contractor relationships should be based on a partnership relationship. Managing a partnership requires time and dedication from the people involved in managing outsourced activities. For this reason, this investment must have the prospect of a return that justifies the effort.
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To assist in defining the desirable level of interaction between contractor and contractor, partners should answer the following questions:
– Are there enough motivators for the formation of the partnership?
– Are the environments and management philosophies compatible?
The motivators of the contracting party and the contracted party do not necessarily have to be the same; in general, they are not. However, it is important to identify the degree of motivation of both companies and ensure that they are mutually aware of their drivers.
There are situations in which the motivators justify a high-interaction partnership, but those involved in the relationship have total business incompatibility An example of this is the case in which the contractor does not attach importance to strategic planning or operations and the contractor considers these activities of great importance for efficient operation.
These and other cultural characteristics are difficult to change in the short term and, at the same time, crucial to maximize the benefits of the partnership. In this way, it is important that gaps are identified as early as possible so that initiatives can be taken to reduce these distortions or even verify that a certain level of interaction is not possible with the partner in question.
In addition to business compatibility, other examples of elements that make up the business environment are: similarity of managerial techniques and philosophy, and symmetry (when the importance or size of the companies involved in the relationship are equivalent).
The steps presented below help identify the relationship's potential level of interaction. The same procedure must be followed by the shipper and the PSL that you want to evaluate.
Step 1 – Elaboration of a list with the motivators that stimulated the hiring of the third party.
Step 2 – Definition of the importance of each motivator (see figure 2)
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The shipper's level of motivation for forming the partnership is obtained by defining the importance of each listed driver. This level of importance should range from 1 to 5 , resulting in a maximum score equal to five times the number of motivators.
Depending on the number of points assigned to each motivator, the total points will vary and, consequently, the degree of motivation for forming the partnership, which in the example above is 63%¹. This result will be compared with the analysis of the partner's characteristics to identify the potential of the partnership.
Step 3 (shipper only) – Elaboration of a list with the characteristics considered, by the shipper, important in a relationship.
Step 4 – Definition of the importance that the shipper attributes to each of the characteristics listed and the importance that the PSL attributes to the same characteristics (see figure 3).
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¹ This number is the result of the following analysis: Total Points Obtained / Maximum Possible Points (= 22/ 35)
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As with the level of motivation, the score given to each of the characteristics should range from 1 to 5, resulting in a maximum score equal to 5 times the number of characteristics listed.
In the example above, a joint analysis is made of the importance given by the shipper to each of the listed characteristics (Importance column – Contractor), as well as the importance given by the PSL to the same characteristics (Importance column – PSL). This type of comparison highlights potential points of lack of harmony between business environments.
At the end of the execution of these steps, the percentages of motivation (Figure 2) and synergy of the partners' characteristics (Figure 3: only column that makes reference to the importance attributed by the PSL) must be compared with the table below. The objective is to identify whether the relationship should be a partnership and, if so, what is the level of interaction (see figure 4).
The types of partnership indicate the degree of interaction between contractor and contractor, according to the following guidelines:
– Type I: Short-term partnership, involving only one functional area within the company (eg transport or storage). Partners coordinate operational and planning activities on a limited basis;
– Type II: Long-term partnership, involving several functions within the company. Activities are managed in an integrated way;
– Type III: Partnership without a deadline and with highly integrated activities.
In the example presented in this article, the level of motivation for forming a partnership is 63% and the partner's characteristics are 88% important. This conjunction of motivators and characteristics, according to figure 4, results in a type III partnership, with the potential for a partnership of great synergy between the member companies, where the shipper perceives the PSL as an extension of his own company.
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Those cases in which the pair Motivators X Characteristics does not point to a partnership relationship, does not mean that companies should not have a commercial relationship. Many of them achieve very positive results based on traditional contractor/contractor relationships, without involving partnership efforts.
PARTNERSHIP COORDINATION MECHANISMS
Each type of partnership has more appropriate coordination mechanisms for its functioning.
If the result of the analysis of motivators and characteristics suggests that the relationship should not be one of partnership, the coordination mechanisms should be unsophisticated, aimed at exchanging strictly operational information, communicated irregularly and with a very limited scope.
The evaluation of the tools used by the partners reflects the current stage of interaction between contractor and contractor, which is not always in line with the potential of the partnership. Comparing the level of potential synergy of the relationship with the current level of synergy shows whether there is room to increase interaction between partners through changes in partnership management procedures (figure 5) or whether partnership management efforts are on track. oversized.
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Thus, after evaluating the interaction potential of the relationship, it is necessary to evaluate the stage of development of the management tools. Among the various questions to be analyzed, we highlight the following:
– Management planning
– Operational controls
- Information exchange
– Range of outsourced activities
In addition, it is also important to analyze the gaps found between the characteristics that the PSL considers important and the characteristics that the shipper perceives that the PSL considers important. The discussion of the cause of these differences and the development of initiatives to reduce them will certainly bring enormous gains in the relationship.
Figure 6 presents a way to identify the most critical gaps. The greater the perception gap (importance perceived by the shipper – importance attributed by the PSL) and the greater the importance given by the shipper, the more attention should be given to the characteristic.
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In the example above, the willingness to invest according to the customer's needs is seen as a characteristic of great importance by the shipper (X axis). However, the negative perception gap (Y axis) shows that the PSL, in the shipper's perception, does not seem to give the same importance in practice as that stated by him. In this fictitious case, the PSL said it attaches great importance (5 points) to willingness to invest, but the shipper does not perceive the same willingness in practice (2 points).
Discussing the reasons for these gaps can generate enormous opportunities for improving the relationship and, consequently, operating results.
Below, some of the elements that make up the coordination mechanisms are presented.
1. Management planning
Relationships that presuppose a partnership relationship require, at the very least, the sharing of existing plans in each of the companies. Types of planning can range from purely operational activities to strategic-level decisions. Some examples of each type:
– Operational planning: shipper shares demand planning with PSL, considering actions such as promotion and advertising;
– Tactical planning: the shipper shares short-term projects with PSL in advance, such as, for example, plans to change processes that may affect the contractor's performance.
– Strategic planning: the shipper shares strategic medium and long-term plans with PSL, such as introducing new products, serving new markets, changing the logistics network, etc.
Depending on the type of partnership intended to be implemented, the approach given to management planning should vary (see figure 7).
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In type I partnerships, the main focus is on operational planning and the costing system is focused on each company, with no visibility of the cost of the chain. However, progress has already been made towards greater sharing of the operational plans of both companies.
In type II partnerships, the focus is on short-term planning with process visibility, where decisions are taken by analyzing all the activities involved in it. In partnerships of this type, planning is done jointly by contractor/contractor, always seeking the best cost/benefit for both companies. Costing, however, is still seen independently.
Type III partnerships have as their main characteristic the sharing of information and strategic decisions of both companies. Several management levels participate in decisions that are always taken together. The cost ceases to be exclusive to companies and becomes a chain cost. In this way, all efforts are made to minimize the total cost.
- Operational Controls
Management controls identify the existence of problems in the operation. An example of this is when the managerial indicator “operating costs” indicates that transport costs are high. Operational controls should be responsible for identifying the causes of the problem: Is truck utilization low? Are too many emergency deliveries being made?
Some of the most used operational indicators are:
- Deadline
– stock level
– Time from invoicing to delivery
– Percentage of complaints
– Availability of vehicles
– Number of defective parts
– Moved pallets
– Discrepancy between accounting and physical volumes
It is necessary to ensure that the operational controls are in tune with the relationship's motivators and that both the shipper and the LSP are aware of the indicators used by their partner.
Depending on the type of partnership, the approach around the development of the indicator and the actions to be taken based on them changes (figure 8).
In type I partnerships, the development of indicators is done independently by the companies involved in the partnership and, therefore, the focus of the indicators is on the best performance of individual companies. However, there is a mutual understanding of these indicators and openness to suggesting changes in the operation based on the identification of problems.
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Type II partnerships must allow one partner to change the operation of the other after permission, evidencing a spirit of greater cooperation and trust. Despite the indicators being jointly developed, the focus of performance remains on individual companies.
This type of restriction disappears in type III partnerships, where the focus becomes the partnership's performance (chain view) and there is even greater freedom to change the partner's operation.
- Information exchange
The exchange of information should become more sophisticated as the partnership moves towards a more integrated relationship, where outsourced activities have greater added value and a broader scope.
Sophistication is understood as the use of information systems that allow a continuous exchange of information, which are rich in data and indicators and, many times, customized for the relationship.
The greater the participation of the PSL in planning activities and the greater the number of outsourced activities with a single operator, the greater the need to have integrated and transparent systems, involving not only information related to the shipper, but also the information in possession of its suppliers and customers. The objective is to anticipate demands and problems. The supply chain idea becomes more concrete and visible in more integrated partnerships.
In addition to allowing PSL and shipper to have knowledge and better management of the progress of their outsourced operation, the broader exchange of information can also allow PSL to know about operations that are not yet under its responsibility.
This type of initiative makes it possible for the PSL, which in general also has experience in other logistics operations, to assess possibilities for improvement in activities that are not yet under its management.
The frequency of communication, the systems and the type of information shared between contractor and contractor should vary depending on the type of partnership implemented (see figure 9).
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Type I partnerships are characterized by the exchange of informal information (only when there is an unusual event), with no need for systems dedicated to the availability of information between partner companies, which communicate via telephone, fax or email.
Type II partnerships, on the other hand, must be supported by systems that provide some information necessary for the partner companies to make a decision. An example of this are EDI systems that share some information generated by the ERPs of the respective companies.
In type III partnerships, the exchange of information between contractor and contractor must be broad enough to allow, for example, the PSL system to monitor transport in real time, be able to define routes and schedules, plan the gathering supplies, scheduling shipments on demand, optimizing resources, and viewing abnormalities in order compliance.
Some examples of information that, depending on the operation, must be exchanged between PSL and the shipper are:
– Operational information
- orders placed
- sales forecast
- production schedule
- shipping schedule
- vehicle tracking
- Management information
- Cost structure
- Profit margins
- Range of outsourced activities
What is the PSL's growth strategy? Is it in line with what the shipper imagines for this relationship in the future?
Analyzing the answers to these questions makes it possible to align the shipper's expectations with the PSL's strategy regarding the services it intends to offer, geographical coverage, among other issues related to the future of the relationship.
In this way, the shipper will know exactly at which points he can rely on the PSL; and the PSL, in turn, will be able to prepare in advance for future demands.
These expectations can be aligned through the elaboration, by the shipper, of a list of activities that it intends to outsource in the short (up to 1 year) and in the medium/long term. Then, another list must be drawn up, this time by the PSL, containing the activities it intends to offer in the short and medium/long term. Figure 10 presents a structured way of assessing differences in perspectives.
The analysis of this figure by the PSL should be directed to the following questions:
– What services does the shipper want to hire that my company was not planning to offer (in the short or long term)? Do these services represent opportunities for scope expansion without loss of profitability?
– What services does my company intend to offer and the shipper does not intend to hire? Can these services effectively result in benefits for the shipper?
Analyzes such as these must be carried out in partnership, on a continuous and scheduled basis. The result of this effort should be the planning of a set of actions to be developed by both sides in order to eliminate those gaps that the partners agree that generate mutual benefits in their implementation.
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CONCLUSION
There is no ideal type of partnership, and not every agreement between contractor and contractor should become such a relationship. The best relationship is the one that is adjusted to the benefits that outsourcing will bring to the shipper, combined with the synergy between the cultural environments and characteristics of both partners.
The coordination mechanisms presented, when appropriate to the type of partnership, help in directing the relationship in order to leverage opportunities for both partners.
It is very common to find shippers complaining about the LSPs' lack of initiative in suggesting operational improvements. However, there is also a great restriction on the part of shippers in sharing information with their logistics service providers.
It is true that, in distant relationships, the PSL must have very limited access to the shipper's information. But as we move towards a partnership relationship, where greater cooperation from the PSL is expected, greater sharing of information is essential in order to make joint planning of activities, and even strategic planning, feasible.
The schedule of frequent meetings with senior management levels from both companies demonstrates the mutual commitment to the success of the partnership, which should be encouraged by the corporations through the granting of prizes and incentives.
Investments in a close relationship between contractor and contractor are high, but they become increasingly necessary to face extremely competitive environments like today.
BIBLIOGRAPHY
LAMBERT, D., EMMELHAINZ, MA, GARDNER, J., 1996, “Developing and Implementing Supply Chain Partnerships”, International Journal of Logistics Management, v. 7, no. 2, pp. 1-17.
LINCH, CF, “Logistics Outsourcing – Management Guide”, CLM, 2000.
