Negotiating to Grow Global Capabilities

Serving a global clientele and keeping customers happy shook one e-retailer down to the ground—where logistics made the difference. Part of the dilemma was learning how to consolidate shipments into containers, sometimes even with competitor companies, so that no container left port in one country partially filled. Then there were traditional logistics problems to grapple with. Once in port at the receiving country, should goods be shipped by truck or via inter-modal transportation? These were decisions the retailer relied on their global logistics provider to make—but that wasn’t all.

There were issues with localization in the destination countries, like ensuring that instructions on the boxes of packaged goods were printed in local languages. Providing local services and order-taking were also challenges. The company considered whether it was more efficient to have their own employees “on the ground” in these distant locales, or enlist a 3PL (third party logistics provider) that could offer value-added services like localizing package instructions, warehousing and distribution, and even order taking and customer service.

It was decided to outsource warehousing, distribution, order taking and customer service functions to the 3PL. With the help of its 3PL, the e-retailer also rerouted much of its air freight to ocean freight, because the 3PL could expeditiously manage inventory demands locally with a make-to-order approach. This resulted in a seven-figure annual savings.

“Our customers are asking us to do more and more things for them that are not even thought of in traditional supply-chain logistics,” says Mark Sell, CEO of MD Logistics, a 3PL specializing in supply-chain solutions. “The services they are asking for and that we are offering include taking orders for goods, managing order systems, invoicing customers and even managing receivables. The largest growth areas for value-added services have been in packaging, kitting and labeling. Customers want us to deliver these elements as a turnkey service to them, so what we are seeing is considerable business process outsourcing.”

3PL value-added services become attractive as companies continue to seek ways to reduce their spending on transportation and back-office functions like warehousing, order taking and packing. A second supply-chain impetus is the push for visibility of everything that happens to an order or a shipment throughout the end-to-end process. It can be daunting for many retailers and manufacturers to acquire the technology that creates this kind of visibility—and have the people on staff who know how to run it. If they go with a sophisticated 3PL, chances are good that the 3PL already has the system and people in place. “We’ve seen great change over the past four or five years,” says Jason Pitt, vice president of Warehousing and Distribution for M&W Logistics Group, a 3PL with customized supply-chain solutions. “Companies are coming to us, and they are asking for a broad spectrum of value-added services. Just-in-time business processes are coming into play, and we find that customers are using multiple 3PLs throughout their distribution networks to address the work that has to be done.” This makes logistics an extremely competitive environment in which 3PLs must be able to offer solutions that streamline the supply chain, along with suites of services not even heard of in the past.

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Value-Added Services that 3PLs Provide Today

Over the past decade, 3PLs have added services that touch nearly every aspect of logistics. Most of these value-added services have evolved as customers have asked for them. Nearly all these services have one thing in common: the elimination of traditional headaches for customers.

“We do line sequencing and assembly work that we didn’t do 10 years ago,” says M&W’s Pitt. “This includes quality inspections for parts that are incoming or outgoing to overseas markets—at both the front and back ends of the logistics process. We also provide pick and pack services where orders are assembled from raw inventory. The items are packed to ship. We do the kitting of final assemblies and also special labeling. We even perform merchandising at the end customer sites by placing displays in aisles for the items to be sold.”

Pitt tells the story of a European customer maintaining an eight-person office in the U.S. for a localized presence. “They were taking orders on an 8 a.m.-8 p.m. basis,” he says. “We were able to handle the order process through our call center, and to leverage people we already had who were servicing other clients. It allowed the company to streamline its U.S. operations and to save money. In another case, we were able to take on a build-to-order process for a client. Because we were able to serve the local market in the U.S. and to build on demand, the company was able to reduce its inventory carrying costs and there was less waste.”

Companies are also turning to 3PLs for new shipping strategies. “One value-added service that is still under the radar for many companies is collaborative distribution,” says Alex Stark, director of marketing for Kane is Able, a consumer packaged goods (CPG) logistics provider. “It’s not exactly a new concept, but we are finding today that more companies are willing to consider it. In collaborative distribution, the goal is to fill each trailer to the max, even if it means combining your goods with the goods of a competitor. Companies used to hesitate doing this, because they didn’t want to collaborate with competitors. However, working together in a shared infrastructure, consumer goods companies efficiently deliver their goods to retailers in less time in full truckload quality, which is a win for the retailer as well. Shippers don’t compete on a pallet; they compete at the shelf.” Stark says that many companies see as much as a 35 percent savings in their shipping costs by collaborating in this way.

Companies will also look for savings by relying on 3PL systems that give greater supply-chain visibility. “We’ve had many customers do this,” says Tim Nolan, senior vice president and general manager, international division, Yusen Logistics, a 3PL with supply-chain and freight-forwarding services. “They leverage us for supply-chain data and information.” Services like this help companies bridge gaps in supply-chain systems, as the logistics providers can offer visibility in areas that a company’s system can’t. “The other thing we try to do with information is to provide intelligent, real-time exception reporting,” says Nolan. “In other words, instead of giving the customer’s supply chain manager a report that details out everything happening in the supply-chain, we deliver an ‘exception report’ that allows him to focus on the ‘hot spots.’”

Successful partnerships between a company and their 3PL go beyond operations into strategy-setting and execution. Nolan’s example of intelligent exception reporting demonstrates this—because the 3PL can’t be in position to “exception report” if it isn’t aware of the key performance indicators (KPIs) in the customer’s business.

“Understanding the customer’s business is very important in a good partnership,” says MD Logistics’ Mark Sell. “This is why we spend a great deal of time consulting with our customers on how to grow their businesses. We also build a relationship matrix with each customer so they know exactly who to go to with any question that they might have. We have KPI meetings and we meet quarterly to review SLAs (service level agreements) and rate. We are always addressing business objectives like our clients’ new promotions, initiatives and sales goals. We talk about new products that are being released, and how we are going to address these from the logistics side.”

Effective Negotiation

Since logistics today is multi-faceted, it gives companies great opportunities to optimize their strategies with of all the value-added services that are available. At the same time, it is equally important for companies to effectively negotiate for these services, since it is the negotiation that ultimately results in a contract—and the contract sets the stage for how the partnership will operate. The following is a set of negotiation “best practices” that companies with logistics needs will want to put in their “bag of tricks.”

1. Know your business and know your 3PL

3PLs differ in their core competencies and in their value-added services. The better you understand the nature and the pressures of your business, and the most beneficial types of value-added services, the likelier you are to find a “best-match” 3PL partner. If in your strategy you are also looking to outsource business processes because you feel a 3PL can do them better, have these processes identified prior to negotiation—and know what your expectations are (in the form of KPIs).

2. Present both SLAs and KPIs to the vendor

Logistics providers know their business and most have their own internal sets of KPIs, but a business is better positioned for negotiation for 3PL value-added services if it comes to the negotiation table with its own set of KPIs. This is an important point, as many companies present 3PLs with a set of SLAs to ensure service effectiveness—but SLAs may not be as impactive to the business as KPIs, because KPIs actually measure end results for the business like time to market, revenue capture and cost reductions.

3. Thoroughly check references before you negotiate a contract

“Existing customers, especially those with similar businesses, are the best source of information about a vendor,” says Tim Nolan. “When you speak to the vendor, get six to eight different references, not just the first two the vendor provides you with.”

4. Use more than one vendor

It always helps a negotiating position if you aren’t locked in to just one vendor

5. Approach the vendor as a partner with a negotiation that can grow the vendor’s business as well as your own

When the two of you sit down together, explain how you are going to grow your business. Often, you can secure tiered pricing based upon the increases in sales volumes you anticipate. This helps your business as well as your vendor’s, and you are able to grow together.