Top 3PLs Must Create “Incentive Based Continuous Improvement”
July and August logistics industry publications historically reflect on the top third-party logistics service providers (3PLs) in the industry. I personally am thankful to be part of an award-winning 3PL that has been recognized by both Inbound Logistics and Logistics Management for eight consecutive years. When I reflect on what has made us so successful, I think about the collaborative partnerships we have with our clients and how our savings and service model extends beyond an upfront year 1 commitment. Our solutions drive value year-over-year because we create incentive-based continuous improvement initiatives. In a perfect world, all business partners would collaborate to enhance the value of each party’s ownership. In reality, the value driven by these relationships is promoted through properly constructed incentives. To be effective, these incentives should be designed in a manner aligned with business objectives and be jointly owned by the collaborating parties.
3PLs design, implement and execute solutions that should result in supply chain efficiency and performance improvements. Shared savings programs in 3PL relationships are beneficial when they fairly compensate both the client and the service provider for the value delivered. However, the most successful shared savings programs result from both parties owning the process and the results. Furthermore, these programs work best when tied to long-term improvement — even when they’re measured through short-term performance indicators.
A properly designed shared savings program generates higher savings by focusing efforts on jointly developed goals, and frequently begins delivering benefits during the design process itself.
A well-designed program will contain the following objectives:
1) Document clear success criteria for the logistics engagement to immediately establish a better understanding of target performance.
Without this understanding, either party may easily lose its focus and stray toward non-value-adding activities. This step should be limited to 2-3 clear objectives such as “generate transportation savings of $250,000 per quarter” and “improve on-time delivery by 3 percentage points by year end.” There may be others, but be careful not to clutter the process by defining numerous “supporting” objectives. So, while “increase average order weight by 2,000 lbs.” may be a valid initiative, it is only valuable if it leads to transportation savings.
2) Define the metrics that will track performance and success.
Any savings number needs to define which components will be in scope and what benchmarks they will be compared against. Therefore, the benchmark must be documented and agreed upon at a very specific level. Components of transportation expense, like line-haul, fuel surcharge or accessorials, should be specifically designated as either in or out of scope.
3) Provide a structure for collaborative efforts.
Begin by determining who from each party will participate, be responsible and be accountable for execution and measurement of the program. This is vitally important when designing the program. A lack of agreement and “sign off” by both client and 3PL on benchmarks and definitions can lead to failure during the performance phase of the program.
4) Design compensation fairly for the 3PL.
Be sure to set reasonable goals and ensure that the compensation is tied to controllable factors. For example, the 3PL’s compensation should not be reduced due to mid-year spikes in fuel costs. On the other hand, the 3PL should not benefit if fuel prices drop, as the 3PL has no control over the national average diesel price.
I would love to hear your feedback concerning what you think are the key drivers for a successful partnership as well as opportunities to collaborate on supply chain savings. I also encourage you to subscribe to our Executive Vice President’s newsletter by emailing email@example.com.
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Continually Improving Partnerships!
Assistant Vice President of Business Development