What Goes WRONG in Logistics Outsourcing? (Role Play)

Key Concepts:

• Logistics Outsourcing Relationships
• Third-Party Logistics (3PL)
• Request for Tender (RFT)
• Warehouse Management System (WMS)
• Stock Keeping Unit (SKU)
• Fast Moving Consumer Goods (FMCG)
• Key Performance Indicators (KPIs)
• Implementation Planning
• Contract Management
• Cost-Plus Pricing Model

1. Introduction: The High Failure Rate of Logistics Outsourcing

• The video addresses the high failure rate of logistics outsourcing relationships, citing a figure of 83% of contracts not being renewed.
• The core question is whether the fault lies with the 3PL companies, their clients, or a combination of both.
• The video aims to identify common pitfalls and provide guidance on how to avoid them.

2. Case Study Setup: Oz Health and Triple-A Distribution

• The video uses a fictitious case study involving two companies: Oz Health (the customer) and Triple-A Distribution (the 3PL).
• Oz Health:
  • Health food company focused on the Australian market.
  • In-house distribution centers in Sydney and Perth.
  • Outsourced transport.
  • Local manufacturing (75%) and imports (25%).
  • Annual sales of $500 million.
  • 250 SKUs, with 25 requiring temperature control.
• Triple-A Distribution:
  • $200 million turnover business.
  • Focus on warehousing, primarily for FMCG customers.
  • Distribution centers in Sydney, Perth, and Melbourne.

3. The Outsourcing Process: A Step-by-Step Breakdown

• The video outlines the typical stages of an outsourcing process:
  1. Logic of Outsourcing
  2. Identifying Potential 3PLs
  3. Request for Tender (RFT) Process
  4. Shortlisting
  5. 3PL Selection
  6. Go-Live
  7. Ongoing Contract Management
• The video presents interviews with representatives from both Oz Health and Triple-A Distribution to illustrate the process and highlight areas of success and failure.

4. Oz Health's Perspective (John Jones, Logistics Manager)

• Logic of Outsourcing:
  • Rapid sales growth and expanding SKU range led to space constraints.
  • Increasing costs and declining customer service.
  • Need for improved technology, such as RF in the warehouse and a proper WMS.
  • Requirement for better functionality to handle recalls.
  • New MD focused on cost reduction and unwilling to invest in in-house improvements.
  • Poor inventory accuracy due to the lack of a WMS.
  • Inefficient processes, particularly in receipting and handling returns.
  • Need for coordinated inbound transport from local factories and overseas suppliers.
  • Outbound freight delays and demurrage charges.
• RFT Process:
  • Aimed for a "shotgun approach" to test the entire market.
  • Lacked internal expertise and the MD refused to hire consultants.
  • Compiled a list of 20 potential 3PLs through the purchasing team, Yellow Pages, personal experience, and the MD's contacts.
• RFT Content:
  • Created a very detailed RFT with information on warehouse space, SKU list, demand in pallets, and customer list.
  • Involved the purchasing manager and an accountant in the process.
• Shortlisting:
  • Received only 10 responses out of 20 RFTs sent.
  • Pricing varied significantly, ranging from $5 million to $10 million.
  • Different pricing models (unit costs, monthly fees, cost-plus) made comparison difficult.
  • Shortlisted the five cheapest bids, including both major and smaller players.
• 3PL Selection:
  • Five senior managers (logistics manager, MD, finance director, IT director, sales director) evaluated the proposals.
  • Companies presented varied approaches (one sent only the MD, another sent a team of eight).
  • The MD initially favored the cheapest option but ultimately agreed to a cost-plus pricing model for cost predictability.
• Go-Live:
  • Described as a "disaster from the start."
  • Issues with the "Quick Start" WMS and its interfaces.
  • 3PL expected Oz Health to handle IT interfaces at their own cost.
  • Inexperienced project manager.
  • Timelines and costs exceeded expectations.
• Ongoing Contract Management:
  • 3PL struggled to handle returns, especially during weekends.
  • 3PL requested more resources and higher fees.
  • Customer service declined, leading to complaints and pressure from the MD.

5. Triple-A Distribution's Perspective (George Smith, Operations Manager)

• RFT Process:
  • Surprised to receive an RFT from Oz Health, a relatively unknown company.
  • Critical of the fact that Oz Health sent the RFT to 20 companies.
  • Decided to participate due to the MD's interest in entering the healthcare sector.
• RFT Content:
  • Described the RFT as "garbage" and lacking essential information.
  • Difficulty in costing the contract due to insufficient data on service requirements, service levels, and volumes.
  • Costing was done by a business analyst due to the absence of the Business Development Manager (BDM).
• Shortlisting:
  • Surprised to be shortlisted.
  • Prepared a presentation to differentiate themselves.
• 3PL Selection:
  • The BDM and analysts did the presentation.
  • Managed to propose a cost-plus pricing model.
• Go-Live:
  • Described as an "absolute bleedin disaster."
  • Took eight weeks to implement, with the WMS not functioning for the first six weeks.
  • Oz Health had no experience operating a WMS.
  • Orders and return authorizations were received via fax.
  • Oz Health denied responsibility for IT interfaces.
  • The project took twice as long and cost twice as much as expected.
• Ongoing Contract Management:
  • The contract went downhill after implementation.
  • Unexpectedly high volume of returns, which were not costed into the contract.
  • The WMS was not configured for returns.

6. Analysis of What Went Wrong: Fault on Both Sides

• The video identifies eight key areas of fault for both Oz Health (the customer) and Triple-A Distribution (the 3PL).
• Oz Health's Faults:
  1. Unclear Outsourcing Objectives: Lacked a clear understanding of why they were outsourcing and what costs to expect.
  2. Unclear Scope of Outsourcing: Failed to clearly identify all processes being outsourced, particularly returns.
  3. Unsuitable Supplier Approach: Approached too many suppliers (20) without a clear understanding of their capabilities.
  4. Insufficient Data and Service Needs: Provided inadequate data for the 3PL to accurately cost the contract.
  5. Poor RFT Structure: The RFT was not structured to allow for easy comparison of bids.
  6. Ineffective Evaluation Approach: The evaluation process was not rigorous or objective, and the MD was biased.
  7. Lack of Joint Implementation Planning: Insufficient collaboration with the 3PL on implementation planning.
  8. Inadequate Contract Management: Lacked clear KPIs and expectations for contract performance.
• Triple-A Distribution's Faults:
  1. Pursuing Unsuitable Business: Attempted to enter a new market (healthcare) without sufficient expertise.
  2. Mismatched Capabilities: The client's requirements did not align with the 3PL's capabilities.
  3. Lack of Holistic View: Failed to consider the client's long-term strategic goals.
  4. Failure to Address Data Concerns: Did not raise concerns about the quality of the client's data.
  5. Lack of Alternative Solutions: Did not submit a non-conforming RFT response with alternative solutions.
  6. Failure to Clarify Evaluation Criteria: Did not ask the client about the evaluation criteria.
  7. Inadequate Implementation Resourcing: Did not involve the implementation manager in the early stages of the process.
  8. Failure to Raise Issues Early: Did not proactively raise potential issues and suggest solutions.

7. Key Takeaways and Recommendations

• Outsource for the Right Reasons: Ensure a clear understanding of the objectives and benefits of outsourcing.
• Realistic Expectations: Set realistic expectations for cost savings and service improvements.
• Allow Sufficient Time: Allocate enough time for the outsourcing process.
• Open and Honest Communication: Maintain open and honest communication throughout the process.
• Objective Evaluation: Evaluate responses objectively and involve a diverse team.
• Responsible Contract Management: Take responsibility for managing the contract and monitoring performance.

8. Potential Future Topics

• The video suggests potential topics for future videos based on audience interest:
  • How to identify suitable 3PL partners.
  • How to structure an RFT for success.
  • How to objectively evaluate 3PL proposals.
  • How to plan and manage the implementation process and ongoing contract management.

9. Conclusion

• The video concludes by emphasizing the importance of learning from the mistakes highlighted in the case study.
• It encourages viewers to like, share, and comment on the video to suggest topics for future content.