Procuring Logistics Services is Not the Same as Buying Paper Clips

In a Forbes blog post last week, Kate Vitasek highlighted an issue that continues to negatively affect 3PL-customer relationships: Procurement organizations looking to shift more and more risk on third-party logistics providers — while, of course, also demanding lower costs.

Phil Coughlin, President of Global Geographies and Operations at Expeditors, sums up the situation nicely in this quote from the post:

“Over the last several years in the logistics space, terms and conditions have become more and more aggressive. Customers and shippers have moved away from industry standard liability regimes like the Warsaw Convention and Montreal Protocol. Customers, shippers and consignees are writing their own rules, developing contract terms and conditions and are shifting significant and unreasonable risk to their service providers and carriers…Companies have gotten so aggressive with shifting risk, there is a real risk of driving away good Third Party Logistics service providers (3PLs).”

I spoke with Phil a few weeks ago where we discussed this troubling trend, and I shared with him an example that I had come across a few years ago: a company that had actually performed a reverse auction to select a 3PL to manage its nine-figure transportation spend and daily operations. In other words, this company was turning over several hundred million dollars of transportation management responsibility to the lowest bidder.

Phil shared an example of his own, which Kate also cites in her post: a customer who was demanding liability terms that equated to 500 years’ worth of Expeditors’ revenue for a lost shipment. These types of terms and conditions put 3PLs in a very difficult position. “As President of Expeditors, do I sign the contract and hope like hell a risk does not come to fruition? Or do I walk away from a $20 million account?”

You can find the answer in the failed business relationship between Apple and GT Advanced Technologies. Although this was not an outsourced logistics example, it shows, nonetheless, the costly consequences of taking a “What’s In It for Me?” approach to negotiations.

The net results of this approach are also evident in the findings of a recent eft survey. As reported in the Journal of Commerce:

There is a growing disconnect between third-party logistics providers and manufacturers and retailers who say they are dissatisfied with the level of service they are being provided…Between 2012 and 2014, the survey found a 4 percent jump in “less than satisfied” responses from manufacturers and retailers. Positive reviews declined 3.5 percent over the course of the past two years. And service, the study reports, was the primary driver.

From my conversations with shippers, their number one complaint of 3PLs — and by 3PL, I mean service providers that manage transportation, warehousing, and/or other processes on behalf of a client — is that they are not proactive enough in developing new ideas and solutions. They want 3PLs to tell them something they don’t already know. This was true 15 years ago when I first did a survey and workshops on this topic, and again a few years ago, and if I did a survey today, I would bet the results would be the same. So, if “not being proactive enough” is how the eft survey defined (or the respondents interpreted) “dissatisfaction with level of service,” then I agree with the results.

The lesson is simple, yet many shippers still don’t get it: there is no incentive for 3PLs to be innovative and creative if your objective is to beat them down on cost, shift all the risk to them, and then put the business out to bid again in 1-3 years. Procuring logistics services is not the same as buying paper clips, yet that’s how many procurement organizations approach it. As many shippers ultimately discover, the cost and consequences of a failed 3PL-customer relationship are exponentially greater than the cost and consequences of buying cheap paper clips.

How can shippers and 3PLs take a more enlightened approach to building successful, long-term relationships? See the posts below for some insights and advice on this question, as well as our Talking Logistics YOUniversity course, Fundamentals of Selecting and Working with 3PL Partners

But here’s an idea to get you thinking in the right direction, which Kate put forward in a guest commentary last year: “Why not update and flip the old-school, transaction-based Request for Proposals into something much more meaningful and useful—a blueprint for a partnership? What if instead of a Request for Proposal, the RFP became a Request for Partner™?”

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