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Warehouse Outsourcing: 10 Deadly Sins

Logistic Thought Leadership Series

1. Presuming Outsourcing is the instant cure for all Supply Chain processes

The process of outsourcing Supply Chain functions is staged. Every stage comes with a learning curve for the 3PL as well as for your own organization. Besides managing the 3PL activities, processes beyond the span of control of your 3PL with a fundamental impact on the process (e.g. labeling inbound material, IT infrastructure and order consolidation) need to be addressed in parallel. “Not a one-off solution”

2. Insufficient IT Testing

A structured, well thought out IT test plan is fundamental for a successful implementation. The ERP system of the customer, the WMS and TMS of the 3PL and the interfaces in between have to be tested extensively. Due to time pressure sometimes the plan does not include all the processes including all possible exceptions. Furthermore these processes are often only tested per individual step and not always results in a complete end-to-end test. Testing the IT interfaces and systems accros the full cycle from order entry to delivery, including picking packing and shipping greatly reduces go-live errors. – “The Devil is in the Detail”

3. Poor Data Quality

During the RFQ data is shared with the 3PLs as a basis for a tariff quote. Often data like units of measure, weight, dimensions and units sold turn out to be unreliable in an operational context. For the purpose of the RFQ the data has been modeled and taken out of various source data systems. During the implementation project IT problems arise as the data does not have the same quality as presented in the RFQ and operation and costing issues can arise as the lacking data is generating more exceptions and manual work. Data quality is key for a reliable tariff quote from the 3PL and will make life during the implementation project a lot easier. “Garbage in, Garbage Out”

4. Overlooking non-documented processes

Over the years your supply chain organization has developed knowledge which is not necessarily stored in systems or process documentation. Examples like not capturing customer specific stacking patterns can lead to serious service issues during an outsourcing implementation project. Employees at all levels of your supply chain can have crucial, non-documented process knowledge which needs to be taken into account. “If it’s not on paper, does not mean it doesn’t exist”

5. Letting the exception become the rule

The majority of standard processes are usually well described and quantified in the RFQ. Less frequent all the exceptions to the standard processes are all identified and quoted. Moreover, the percentage of exceptions is often underestimated in the RFQ phase and not managed during go-live. The additional costs of exceptions to the standard process are usually not taken into the budget and lead to surprises at the moment the first invoices are sent. Especially in an implementation stage surprises in costs undermines the build-up of trust in the relation of the project team and leads to unproductive discussions. Exceptions to the standard process and frequency of exceptions need to be agreed in detail during negotiations. “Avoid unpleasant surprises”

6. Overestimating the project management skills of the line management organization

A logistics outsourcing project is a steep learning curve for an organization’s logistics professionals and management. The project-based nature and working methodology of the implementation is often unfamiliar territory for people working in logistics line management. The project manager counterparts should be experienced and be on the same level in terms of project management methodology to avoid 2 teams working in parallel instead of 1 integrated project team. – “Project Management is a specialist skill”

7. Not involving all stakeholders (or too late)

Outsourcing of logistics activities is a strategic decision that will have a functional and sometimes emotional impact on a wide range of functions in an organization. Where sometimes the Supply Chain manager has done everything right in terms of identifying saving potential, initiating the project, supplier selection, making a convincing business case and designing the optimal logistics solution, many projects proposals get stuck in the board room. Without involvement and commitment at each stage in the process from all stakeholders, including commercial, production and finance the project risks a last-minute veto on unaddressed objections. – “It’s not just a supply chain party”

8. Managing a 3PL like an own warehouse

Management of your logistics process through a 3PL requires different competencies compared to an owned warehouse. Negotiating the Service Level Agreement, measuring performance on unambiguous data, steering on pre-defined KPI’, implementing continuous improvement or Gainshare initiatives or managing a bonus/malus arrangement is fundamentally different than managing the typical line management of an owned warehouse. Instead of Ad-Hoc meetings and arrangements it is imperative to have periodical meetings between management, being held accountable, with the mandate to make structural changes to the Service Level Agreement. “Prepare to change”

9. Unproductive performance measurement

After the implementation project and a certain learning curve period most companies are eager to measure the 3PL and determine potential problems or improvements. In terms of measuring performance it is often problematic comparing apples & apples compared to the ‘old’ situation. It is important to understand where you’re coming from. The 3PL and the customer want to steer together to drive the performance up fast, performance management supports to agree the priorities. It is also important to share successes with stakeholders, to gain confidence in the operation. This cannot be done without performance measurement. - “Without KPI’s you are blind”

10. Introducing ‘nice to have’ IT improvements during implementation

Often the implementation project to a 3PL will involve an important IT component where ERP’s are linked to the 3PL WMS. The process of defining the interfaces is sometimes perceived an opportunity to introduce new, nice to have features like customized label printing, additional messages extra traceability etc. These request often lead to discussion in the negotiations as the RFQ has usually been based on the current process hence these features represent extra costs. Introducing requests for additional IT features (compared to the current situation) should be based on a solid cost-benefit analysis and be part of the RFQ process rather than the implementation project. – “Too much of a good thing…”

About the Experts

Thomas van Vliet has been active in the 3PL industry for 15 years in a variety of commercial roles. He is currently part of the Global Business Development group of DSV Solutions where he is responsible for Marketing and additionally does Business development and Account Management for accounts in the Industrial sector.

Jack Pool has been active in the Supply Chain function for over 16 years in various management and consulting roles. In his role as Managing Director of Districon Management Consultants he is leading the Supply Chain practice which also includes 3PL supplier selection and management.

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