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3PL Service
Provider
Management
Scott Leydin

3PL Service Provider Management
By Scott Leydin
Page 2 of 5 Copyright June 2009 ©
Introduction
In theory, the decision to outsource is driven by
the company’s choice to focus on core
competencies, or in its quest to improve
customer service levels, or as it strives to
develop more efficient processes. In reality, it is
mostly driven by cost, more specifically, a need
to reduce the existing cost base. Irregardless of
the driver, entering the world of outsourced
logistics activities can be a challenging exercise
even for those who are well prepared or have
had previous experience.
The outsourcing life cycle has three distinct
phases as represented by the diagram below.
The establishment phase commences with the
initial “go or no go” decision making process and
extends through to the actual implementation and
change management processes required to
transition to the outsourced model. The
management phase encompasses the processes
required to ensure the successful operational
management of the business relationship with the
service provider. The development phase
involves the transition from an operational
business relationship to a more strategic and
collaborative business relationship.
The following paragraphs will address each
phase of the outsourcing life cycle and are
intended to provide some guidance for those that
have already outsourced, or are considering
outsourcing, all or part of their logistics functions.
Establishing the relationship - Key Success
Factors
Far too often the importance of a properly
defined scope of work (what it is you want the
service provider to do) is overlooked. One of the
greatest frustrations of logistics service providers
is the lack of quality information that is provided
as part of the tender process. Each task within
each process should be clearly documented. This
is particularly important where you have specific
requirements outside of what would be normally
considered standard practice. Providing detailed
information should extend beyond a thorough
definition of the processes to be performed. It
should also include the provision of sufficient
shipment and throughput data. This will enable
the supplier to prepare the best possible and
most cost effective response to your
requirements.
The less data the higher the cost is likely to be –
the supplier will always add a premium to cover
the uncertainty.
It is important that service level expectations
are clearly articulated. There should also be a
differentiation between your standard
requirements and any non-standard
requirements. Even if 99% of your orders are
dispatched as standard shipments you should
still have all non-standard services included in
the scope of work and in the costing schedule.
Establishing well defined performance
measures will have two major benefits. Firstly it
will ensure that there is no ambiguity as to what
the service level expectations are. And secondly,
and as importantly, it will ensure that the service
provider knows exactly how the performance
measure is determined and how it is to be
calculated. As an example DIFOT performance,
when calculated on order line fill rate can paint a
very different picture than DIFOT performance
when based on the complete order fill rate. 9 out
of 10 lines delivered in full on time gives a DIFOT
performance of 90% when calculated on a line
item basis. When calculated on the complete
order the DIFOT is 0%.
A disciplined supplier management process is
essential. There is a perception that once you
outsource, you will loose control. Reality is, that if
done properly, control is increased, not diluted. In
order to maintain control, the customer must take
responsibility for the supplier management
process. They must define the reporting
methodology and format; they must set up the
reporting schedule and timetable; and most
importantly they must measure and monitor
performance diligently and consistently.
Establish
ManageDevelop
Diagram A – The outsourcing lifecycle ©

By Scott Leydin
The most critical factor that will determine the
success or failure of any outsourced process or
activity is the selection of the person that will be
given responsibility for managing the relationship
with the service provider. It should be recognised
that the skill set required to manage supplier
relationships is quite different to the skill set
required to manage the day-to-day activities of a
logistics operation. This is not to say that the
existing skills are not transferable, nor is it being
suggested that the required skills can not be
learned, it is however recommending that the
selection criteria should not be based on
operational knowledge alone. The candidate’s
suitability with regard to communication,
negotiation and facilitation skills should also be
carefully considered.
Common Pitfalls
Far too often the structure of the agreement
between the parties is developed in a manner
that will not necessarily support the dynamic
business requirements of the relationship. The
traditional method of embedding the business
requirements within the contract tends to restrict
the amount of operational flexibility of the
relationship. One of the best ways to achieve this
is to actually separate the terms and conditions
from the business requirements. This can be
done by including the scope of work, the pricing
schedule, the service level expectations and the
performance measures as addendums to the
contract. Not withstanding specific corporate
governance requirements of the organisation,
segmenting the contract may also remove the
need for legal and senior management approval
of changes to the business requirements that are
immaterial to the terms and conditions of the
agreement.
The value of ensuring that adequate training has
been undertaken prior to the transition is
frequently underestimated. This applies equally
when moving from an in sourced to an
outsourced operation for the first time or when
moving from one supplier to another. Far too
often we take for granted the amount of
operational knowledge that is held by a limited
number of key staff. Not even the best and most
thoroughly documented processes will capture
this type of information. It is essential that there is
a process to transfer this knowledge prior to the
transition.
Not enough time and effort that is invested in
planning for the transition. A project manager
should be assigned and detailed project plan
prepared in order to facilitate the transition. The
plan should not only include the physical aspects
of the move but also include such items as
communication and training tasks. It is far too
easy to overlook any number of tasks – many of
which have the potential to impact on the
success of the transition.
Managing and Developing the relationship
Although Diagram A shows the “manage” and
“develop” phases as independent activities they
are certainly not mutually exclusive. A disciplined
supplier management process will be the catalyst
for developing a strong business relationship.
The linkages are best illustrated in the following
diagram:
Developing sound management techniques will
allow you to monitor and measure the costs and
the efficiency of the processes that are being
employed to meet the service level expectations.
Developing a strong business relationship with
your service provider will allow you to effectively
collaborate when developing and implementing
new strategies and solutions.
Management techniques
The most important thing to remember about
managing a supplier relationship is that it is a
process and should be treated as such. As
previously mentioned the customer should take
responsibility for this process and they should
measure and monitor performance diligently and
consistently.
When determining the type of performance
measures that are required to manage the
relationship it is extremely important to
differentiate between the operational data and
measures that the supplier will require to manage
the business and the key measures that will be
Control
Cost Process
Collaborate
Strategy Solutions
Diagram B – Managing supplier relationships ©

By Scott Leydin
used to manage their performance. From a
suppliers perspective it is virtually impossible to
avoid having to collect substantial amounts of
data or have multiple operational measures to
successfully run an efficient operation. From the
outsourcers perspective there has been is a
tendency to do the same. The trick however is to
have as a few as possible – therefore we need to
try and identify what are really the key measures
- those that have the potential to keep you awake
at night if they are off track.
When establishing the management process,
serious consideration should be given to trying to
obtain a commitment from the supplier to provide
a dedicated program manager. Ideally this
person should not have any direct sales or any
direct operational responsibilities. The person
can act as a single point of contact for all of your
communication, internal coordination and
escalation needs. More importantly however,
they can become your representative within their
organisation. It could be argued that this type of
arrangement is only possible if you are a large
organisation dealing with large service providers
who, in theory, are more likely to have the
necessary resources. The resources required,
however are relative to the size of the businesses
and the importance that each party places on the
relationship. A small or medium sized
organisation will be better served by seeking a
relationship with a small or medium sized service
provider whereby both parties can grow and
develop together.
The frequency and the format of the interaction
between the customer and the service provider
can vary but as a simple rule - more is better. A
best practice supplier management process will
include daily, weekly and monthly operational
reporting as well as a corresponding face to face
or teleconference meeting.
The daily interaction could include a scheduled
telephone call or voicemail from the operations
manager summarising the activities of the
previous day and how things are looking with
regard to the day ahead. A daily report can be
sent via email to all stakeholders which lists all
orders shipped and more importantly those that
were not shipped and the reasons why.
A weekly operational review is undertaken to
ascertain the supplier’s performance in key
areas. The weekly meeting is not as detailed as
the monthly meeting but essentially focuses on
the same three areas. These being throughput
volume, process performance and process cost.
The throughput volume is simply data used to
monitor business activity, process performance
and process cost measures are used to monitor
service level attainment and the cost
effectiveness of the outsourced operation. The
majority of these measures should be set with
upper and lower limits and from a management
perspective you should only be interested in
those measures that are off track - management
by exception. Given the proper process, these
reviews can be effective regardless of wether
they are held face to face or by teleconference.
Where possible the monthly operational review
should take place as a face to face meeting. This
meeting should be a summary of the previous
weekly meetings but includes more emphasis on
examining and validating the operating costs and
addressing any issues relating to service levels
expectations not being met.
A common downfall of many supplier
management processes is the failure of both
parties to ensure that the actions arising form
the reviews are actually completed. There
should be a formal process to capture and
monitor the assignment of tasks or actions
originating from the weekly and monthly
operational reviews. This process should list the
task, the person accountable and the time frame
for completion. All task owners should then be
required to attend the various review meetings to
provide an update of their progress. Although
primarily used as a tool to monitor the supplier’s
tasks, this process can also be used to capture
tasks for which the customer is responsible.
There is also a need to undertake a strategic
review of the business relationship. These
reviews are best performed on a quarterly basis
and will include a brief summary of the quarter’s
operational performance but the main intention of
it is to create a forum for both parties to share
their strategic initiatives. Apart from being less
tactically focused one of the key differences of
these meetings is that the next level of
management of both organisations should
participate in the reviews. These meetings are
the building blocks that provide the framework for
developing long-term relationships and will
hopefully foster a collaborative approach to
achieving common goals.
Developing relationships
A successful supplier relationship will never
develop if there is not a mutual benefit for both
parties. At the end of the day, the goal of both
parties is to make a profit. If you have high
service level expectations you cannot realistically
expect the cheapest cost solution to consistently

By Scott Leydin
meet these expectations. Nor can you realistically
expect to add additional processes to a scope of
work without expecting an increase in cost.
Ensuring that there is open and honest
communication will help to expedite the process
of developing trust between the parties. There
will always be information that cannot be shared
but in all other cases both parties should
endeavour to be as transparent as possible. Any
change in circumstances that may potentially
impact on the success of the relationship should
be communicated and discussed as early as
possible. These principles are applicable not only
to the strategic aspects of the business but
should also be adopted when addressing
operational elements such as changes to
performance levels and costs. This approach
may result in some difficult discussions but the
quicker that these changes are addressed the
more likely a satisfactory resolution will be
achieved.
The supplier should strive to obtain a thorough
knowledge of the business. This does not just
apply to the process for which they are
responsible; it should also include both upstream
and downstream activities. The process of
gaining or transferring this knowledge should be
the responsibility of both parties. The customer
should also make every effort to share as much
information as possible with the supplier as doing
so may help identify any cost reduction or
process improvement opportunities. At the end of
the day – there is still a vested interest in
ensuring that the outsourced operation is
functioning as efficiently as possible.
With the knowledge comes the opportunity for the
supplier to add significant value. Let then help
you to improve your processes and solve your
problems. Involve them as soon as possible in
the development of strategic initiatives. Consider
it as free consultancy but don’t underestimate the
value that they could potentially add. Don’t forget
the fact they will have an abundance of other
customer solutions to draw from. This approach
will also ensure that there is shared ownership
and responsibility for the solution.
It is important to respect the expertise of the
supplier. We sometimes forget that as a result of
our decision to outsource we are by default
acknowledging that our supplier can perform the
process better or cheaper than we were able to
do ourselves. There is a tendency, particularly for
first time outsourcers, not to want to let go of the
operational reins. Let the supplier do what they
have been engaged to do and focus your
energies on developing the more strategic
aspects of the business.
The old adage that customer is always right
should be actively challenged by service
providers when it comes to assessing the validity
of their customers current or future supply chain
initiatives. The last thing you should want from a
supplier is for them to go ahead and implement
an initiative just because you believe it is the right
solution. If they see that there are risks or there is
a more viable solution then the supplier must
have the courage to at register their concerns
and offer an alternative solution.
A concerted effort should be made to establish a
number of relationships within the supplier’s
organisation. In addition to the normal peer-to-
peer relationship, it is also important to develop
relationships at both the more senior levels and
at lower levels within organisation. The lower
level relationships will help to create operational
benefits whereas a relationship at the CEO level
for instance, will result in more strategic benefits.
It is also reasonable to expect that the service
provider may want to adopt a similar strategy
within customer’s organisation. The previously
discussed strategic reviews are the perfect
forums for establishing and fostering a number of
relationships within your supplier’s organisation.
At the other end of the scale a final word of
caution - avoid relationship fatigue.
Relationship fatigue will occur in otherwise
successful and long-term supplier relationships
when both parties start to become complacent
about the disciplines required to sustain an
effective supplier management process.
Symptoms of this “condition” manifesting include
the cancellation or postponement of operational
reviews on a regular basis, letting time lines slip
for the submission of performance reports or
accepting reports that are incomplete. The
conundrum of relationship fatigue is that it will
most probably start to occur when the operational
performance is at its peak.

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