Valerie Bonebrake from Tompkins Associates; Outsourcing Logistics Success: A Relationship Saga

Achieving Success in Logistics Outsourcing

June 21, 2010

How’s Your Chemistry With Your Outsourcing Provider?

Discussion Outline

Session Objectives

The Environment Today

A Look at Outsourcing

Managing Performance Expectations

Governance Best Practices

Strategies for Success

Session Objectives

Examine the State of Outsourcing Today

Review Best...and Worst Practices

Share Ways to Get More Out of Your Outsourcing Relationships

Have Fun!

The Environment Today

Impact of the Recession – 2009 was the first year of negative growth for LSPs

– Companies need to shrink and grow at the same time

– Continued uncertainty

– Lack of talent

M&A Activity in the LSP Space

Globalization and Emerging Markets

Shippers’ Organization Structure and Strategy

Why Do Companies Outsource? Reason for Outsourcing Importance to Them

(1-5 scale) % of Respondents That

Favor Outsourcing for That Reason

Flexibility to Grow Capacity 3.9 83%

Improved Service 3.8 78%

Peak Season / Overflow Capacity

3.8 79%

Lower Cost / Rate Structure 3.6 61%

Reduced Capital Investment 3.3 79%

Workforce Issues 2.9 62%

Initial Entry into Market 2.8 64%

Access to Skills Not Available Internally

2.6 52%

Access to Technology Not Available Internally

2.2 64%

Local Regulatory Requirements

1.7 57%

Source: Tompkins Supply Chain Consortium

They Need New Technology

Source: Supply Chain Digest

Understanding When to Outsource

Steps In Evaluating Outsourcing Decisions and Outsourcing Partners

1. Outline Areas of Opportunity » Current and Future

» Define Core versus Non-Core

2. Realistically Outline Your Strengths and Weaknesses » Skill Set (distribution, compliance)

» Regional Expertise

» Existing Infrastructure

3. Define the Scope of Services » Distribution Services

» Transportation Decisions

» Sourcing/Payment Control

4. Identify Providers Capable of Meeting Your Needs » Experience, Infrastructure, Cost, References, etc.

5. Select a Partner, Not a Service Provider » Outsource for expertise and flexibility

» A lower cost must come with improved service and commitment

Core Competency Matrix

Understanding When to Outsource

Some Key Benefits to Outsourcing? – Focus on Core Competency

– Reduction in the Cost of Logistics Operations

– Reduction in Head Count

– Improved Accuracy

– Flexibility and Wider Range of Services

– Access to Global Networks and Superior Technology

– Improved Service

– Improved Quality

– Reduced Capital Investment and Increased Cash Inflow

– Ability to Rapidly Expand and Handle Peaks

– Ability to Tap into Transportation Synergies

Common Drivers for Outsourcing?

• Desire to focus on your core strengths

• Inefficient and costly operations • Failing to meet service requirements • Evolving market dynamic (i.e. shift

from manufacturer to importer) • Outdated technology requiring

upgrades • Require flexibility in capabilities and

space • Entry into an emerging market • Lack of internal expertise in

markets/regions • Capital constraints • Need for rapid expansion

Identify an Executive Sponsor

Set Objectives Quality Requirements

Service Level and Delivery

Requirements

Prepare RFI/RFQ

Perform A Market Evaluation of

Service Providers

Map Current Key Functions or Processes

Define Customer Service

Requirements

Develop a Baseline Model

Identify Total Cost of

Operations

Create Your Outsourcing Plan

Lack of Adequate Scope Definition

Determine Your Evaluation Criteria

Ability to demonstrate proven methods Best-in-breed systems, easy to interface Defined scope of work Metrics and KPIs Program management Formal business review process Continuous improvement and innovation Cultural fit

Logistics Provider RFP & Solicitation Process Suggested Performance Categories and Weightings (Example)

Cultural Fit Criteria • Do they share your organization’s values?

• Have they been open during the process?

• Has working together been easy?

• Have your interactions been natural or forced?

• Are they excited about partnering with you and your company?

Category Category Rating Weight

Category Score

Maximum Score

Financial Stability 5 15 75 75 Service Offerings 4 15 60 75 Culture 4 15 60 75 Customer Satisfaction 3 15 45 75 Operations 3 10 30 50 Technology 4 10 40 50 Cost 2 10 20 50 Flexibility 3 5 15 25 Control Systems 5 5 25 25

Total Rating 100 370 500

LSP Provider X - Final Evaluation

Managing Performance Expectations

Gaps Still Exist between LSPs and Shippers

TOP SEVEN Continuing Problems Percentages Reported By:

Shippers 3PLs

Lack of continuous, ongoing improvements and achievements in offerings

Service level commitments not realized

Information technology capabilities not sufficient

Cost reductions not realized

Lack of project management skills

Unsatisfactory transition during implementation stage

Lack of global capabilities 30%

46% 31%

Source: 2009 14th Annual Global Third Party Logistics Study

Incentives and Gain-Sharing

Penalties Assessment on overall

performance

Lost and damaged product

Contract specific metrics

Reduction in volume stored, handled and produced

Incentives Bonus for exceeding

overall performance – Service levels

– Quality, responsiveness

– Delivery

Formal recognition programs

Gain-sharing plans

Source: Tompkins Supply Chain Consortium

Over Promising and Under-Delivering

Governance Best Practices

Don’t End Up in Court!

Failure to Align Expectations

Failure to Provide the Reality of What is Needed

Secrecy

Lack of Transfer of Knowledge

Lack of Agreement on KPIs

Not Agreeing/Addressing Modifications Over Time

Not Turning over Responsibility but Expecting Different Results

Unrealistic Implementation Schedule

Contract Negotiation

Steps to Success Joint Operational and Legal team

Involve experienced legal counsel early in the process

Ensure that legal counsel understands the objectives in the outsourcing initiative and the company’s negotiating position

Avoid heavy handedness, focus on mutual benefits

Maintain leverage (i.e. back-up option)

Key Questions to Ensure Counsel Is Up to Speed on: What is driving the decision to outsource – commercial, financial, technological?

What departments are impacted and what are the consequences to each?

How can the objectives be utilized in negotiations with the provider?

Unrealistic Expectations

Contract Negotiation

A good starting point for the negotiations is through a binding or non-binding term sheet which establishes the terms of the deal without legalese.

Term sheets should address at minimum the following areas: Integrate commercial, legal, technical, and financial issues

Balance risk and reward

Balance certainty and flexibility

Service levels

Performance Metrics

Provide price predictability

Plan for exit

Global Standard Contract Components

Key Components of a “Global Standard" Distribution Site Contract: Scope of services – transition, warehousing and/or transportation and value

Facility – address, size and general configuration

New equipment – statement of acquisition and ownership

Transition schedule – target dates and responsibilities

Lien waivers – it is important that the provider not be able to make any claim against the client’s inventory

Service levels

– Critical service levels will have non-compliance penalties attached

– Key performance measures are meaningful metrics but do not accrue penalties

– Measurement and monitoring tools

Global Standard Contract Components

Key Global Standard Components (continued) – Pricing

– Staffing

– Ownership and confidentially of data

– Performance Incentives

– Business Recovery

– Audits – particularly important in a “cost plus” arrangement

– Termination – conditions for termination and termination transition period

– Dispute Resolution

– Other areas of note are: payment terms, tax responsibilities, insurance responsibilities

– Master Agreement

Post Contract Relationship

Establishing the Relationship and Handing Over the Operation

Set initial expectations

Jointly identify resources up front

Establish operational baseline (current)

Establish future goals and destination

Plan for resistance

Determining the Relationship Structure

Metrics and reporting

Communication plan

Problem resolution

Change orders

Steering committee

Invoicing format

Fee Structures • Fixed Cost

• Transaction Fee

Cost Plus • Activity Based

• Management Fee

• Combined Structures

Strategies for Success

Keys to Success

Partnering – Joint goals

– Continuous improvement

Managing – Performance metrics

– Two-way communication

Nurturing – Ongoing involvement

– Celebrating mutual success

Perfect Relationship Recipe

Shared Vision Shared Values

Shared Expectations Shared Commitment Shared Confidence

Shared Responsibility A dash of Cooperation

A pinch of Collaboration

EQ Matters!

Relationships Matter

What’s Your EQ? – Self-awareness

– Self-management

– Social awareness

– Relationship management

Leadership: Attitudes and Behaviors that Relate to Humanity

“It’s About the People Stupid”

Begin with the End in Mind

HIGH VALUE LOW DIFFICULTY

LOW DIFFICULTY LOW VALUE

HIGH DIFFICULTY LOW VALUE

Don’t Get Out of Balance

CHANGE ONE PARAMETER AND THE OTHER TWO ARE LIKELY TO CHANGE AS WELL

TIME SCOPE

Don’t Be Like This Guy! Stay Engaged

Contact Information

Valerie Bonebrake Senior Vice President 6870 Perry Creek Road Raleigh, NC 27616

(913) 393-1051 Office (913) 219-6768 Mobile vbonebrake@tompkinsinc.com www.tompkinsinc.com

Valerie Bonebrake from Tompkins Associates; Outsourcing Logistics Success: A Relationship Saga

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