Outsourcing to logistics service providers

Outsourcing to logistics service providers

Outsourcing to Logistic Services Provider (LSPs) continues to be a popular option, with 81 percent of shippers reporting some outsourcing of domestic transportation activity.  The decision on which Logistic Services Provider to select is managed through an RFQ bid process in which both parties place considerable time and emphasis on the price associated with outsourcing. By continuing to engage in an RFQ process that focuses too heavily on the price tag and not the quality, outsourcers are limiting the benefits of outsourcing to a Logistic Services Provider.
In To Sell is Human, Daniel Pink argues that buyers have moved from the dark ages of the used-car lot, where they were wholly dependent on salespeople and price when making buying decisions, and can now bask in the glow of the information age and have access to information that frees them from being “the hapless victims of asymmetrical information they once were.” In the former, salespeople were perceived as untrustworthy, and the only protection against poor quality a buyer could invoke was to put downward pressure on the price. In the latter, buyers expect a hassle-free buying experience in which the playing field is level between themselves and the salesperson. From buying used cars to homes, the internet and the information age have given potential buyers a wealth of information that allows them to evaluate the quality of a product before ever engaging with a seller to discuss the price of the item. Once a buyer engages with a potential seller, the discussion can focus on actual information and not get bogged down in price negotiations. So how has the relationship between outsourcers and Logistic Services Provider changed? Are today’s companies supply chain savvy enough to engage with potential Logistic Services Provider partners and conduct an RFQ that will reap quality responses? Or do companies still feel like they have walked onto a used-car lot circa 1985 when dealing with potential Logistic Services Provider partners? If companies still approach supply chain outsourcing with trepidation due to the asymmetrical information, then it is no wonder outsourcers and LSPs dig in and lock horns over the price of a response without considering the quality of the response.
Current StateAn RFQ is by definition a forward looking document. The outsourcer spells out what it wants in a future state, and LSPs make projections on how they would help to achieve that state and how much doing so would cost. Then an outsourcer makes a decision on which Logistic Services Provider to award the business by weighing the cost and quality of the response. Therefore, we can assume the following applies: A potential outsourcer will select an LSP when the perceived quality of an RFQ response exceeds the price. An Logistic Services Provider will provide a response to an RFQ where price exceeds the quality. To put it another way, buyers in the Logistic Services Provider market are looking for value and suppliers in the Logistic Services Provider market are looking for profit. Due to the lack of attention paid to quality, however, when evaluating RFQ responses, both outsourcers and LSPs tend to spend an inordinate amount of time and energy on the price associated with a response but very little time evaluating the quality of the response. Ask yourself this: The last time you selected a hotel for a trip, did you go with the lowest-cost hotel, or did you look into which hotel chains offer you points or perhaps map which locations would suit your needs best for the trip and then select a hotel? What about when selecting a health insurance plan: Was your decision based solely on the lowest-cost monthly premium, or did you look at which plans offered coverage and cost savings in areas you felt would best serve you? As individual consumers, we regularly evaluate the quality of an option in addition to the cost of a particular option before making a buying decision. More often than not, though, outsourcers are left to use cost as the primary metric for selection because the RFQ process is not currently designed to provide information that lets outsourcers evaluate the quality of the response. This paper posits three ways in which a potential outsourcer can increase the quality of the responses to an RFQ and select a provider based on quality and price, rather than price alone:
 1. Include failures and issues outsourcers are aware of in the current network. 
2. Offer detailed cost information or illuminate major cost drivers in the network. 
3. Provide change management and continuous improvement project (CIP) information to the LSPs. 
The benefits to outsourcers go beyond just getting an increase in the quality of responses to RFQs by soliciting quality responses; both the outsourcer and LSP align on what success will look like in the future state
1. Past Failures Help Define Future Success Of all the information outsourcers can provide in an RFQ, some of the most important relates, perhaps surprisingly, to network failures. No company wants to broadcast its failures, but answer this: Why would a potential outsourcer with a consistently poor on-time-delivery performance ever consider outsourcing if the Logistic Services Provider responding did not have an improvement plan in place from the start? Outsourcers are content to fill pages of the RFQ document with instructions on how LSPs can submit questions for clarification, but they spend very little time covering what is broken that is causing them to look to LSPs in the first place. Some RFQs will make references to growth in a new market, product, or distribution channel as a reason for outsourcing, but outsourcers rarely discuss current network problems in the RFQ materials provided to LSPs. How disclosing challenges adds to the quality: An Logistic Services Provider responding with a transparent plan on how to achieve improvement with regard to a challenge an outsourcer faces is looking at more than just the final price; the LSP is attempting to improve the network, even if it means the LSP will not be the lowest-cost respondent to the RFQ. How an LSP presents its plan should make it clear whether the Logistic Services Provider has demonstrated experience overcoming the sort of challenge faced by the outsourcer. A quality RFQ response by the LSP should include a cost estimate to remedy the outsourcer’s issue (and it will be up to the outsourcer to decide whether it is worth the cost). An Logistic Services Provider that cannot provide a clear plan for success may have little to no experience with the issue presented by the outsourcer, so, regardless of that LSP’s final price, the network may continue to experience the same challenges as before, only now the outsourcer is paying a third-party to handle that issue. Or, in an even-worse-case scenario, performance could drop below where it was before outsourcing to an LSP, as was the case with Armstrong World Industries. After selecting an LSP to manage transportation in 2007, Armstrong began to experience an increase in late deliveries and complaints surrounding the new provider’s service, causing Armstrong to end the relationship with the Logistic Services Provider and pursue an in-house solution that they completed two years later.