Outsourcing isn't just for the big guys anymore—or just the tiny ones, for that matter. With the explosion in global trade, companies of all sizes are looking for outside help managing their rapidly expanding supply chains.
For those new to outsourcing, the first challenge is choosing a partner. What should you look for in a logistics service provider (LSP)? Though one company's service needs will differ from another's, we think there are some basic criteria that every prospective outsourcer should consider. (See the accompanying sidebar for a sample checklist.) What follows are 14 factors to weigh when choosing a partner:
- Financial stability. Though it might feel awkward to question a candidate about its financial stability, it's an essential part of the due diligence. For one thing, you want assurances that the provider will be around for the long term. For another, if you're signing a sizable contract (as is common today), you'll need to ascertain that the logistics service provider has adequate financial resources to provide the support you require.
- Business experience. How much experience does the candidate have in providing logistics services in general? How about in your particular industry? Finding a partner that already knows something about your industry shortens the learning curve.
- Management depth and strength. When you sign an outsourcing agreement, you're not just purchasing services; you're also purchasing expertise. Make it a point to check out the people at the top.
- Reputation. Seek out some of the provider's clients and talk to them about their experience with the company. One question to ask: Does the provider simply do what it's told or does it constantly seek out ways to improve operations?
- Strategic direction. Just as your company should have a business strategy, so should the provider. Surprisingly, many do not—and a large percentage of those that do seem to have a planning horizon of approximately one afternoon. You might argue that the provider's strategy should be the same as the client's, and that's true to a point. But a well-managed service firm should have its own goals and objectives as well. It should also have commitment and direction.
- Operations. There's no substitute for a careful, in-depth evaluation of the provider's current operations. Assign a qualified person or team to assess the quality and efficiency of the candidate's services.
- Global capability. Can the candidate meet all of your global needs either by itself or through existing alliances? Be careful on this one. It's not enough to be able to locate China on the map!
- Information technology. Don't accept any excuses here. In any logistics operation, state-of-theart systems are critical. In specialized areas like international shipping, cross docking, order fulfillment, and freight bill payment, they are an absolute necessity. You also have to make sure that the provider's systems are compatible with any ERP (enterprise resource planning) or other systems you use.
- Commitment to continuous improvement. Is the provider committed to ongoing performance enhancement? Does it have a formal procedure for continuous improvement?
- Growth potential. If, like most companies, you anticipate growth in sales volumes, product lines or markets, you need a partner who will be able to keep up. Make sure the logistics service provider is in a position to support your growth.
- Security. The events of Sept. 11, 2001, awoke Americans to the realization that terrorism is more than a theoretical threat. Today, it's essential to secure your supply chain against not only theft and pilferage but also against infiltration by terrorists. Make sure the candidate has sound security precautions in place.
- CHemiätry and compatibility. CHemiätry isn't just a factor in picking a spouse. It's also something to consider when choosing a logistics partner. Follow your instincts and heed your intuition. If you have concerns about personal cHemiätry and compatibility at the outset, think twice about going ahead with the deal. The situation is unlikely to improve over time.
- Ethics. If we've learned one thing from the recent corporate accounting scandals, it's this: You need to be extremely careful about whom you deal with. Ask candidates about their codes of ethics. Though only the larger providers are likely to have formal ethics policies, even the smaller players should at least have some kind of code of ethics for their employees. But keep in mind that a written policy is no guarantee of ethical conduct. In the words of Mason Cooley, "Reading about ethics is about as likely to improve one's behavior as reading about sports is to make one into an athlete."
- Cost. Though price need not necessarily be the least important of your selection criteria, neither should it be the foremost consideration. The manager who selects a provider based solely on cost has committed to an outsourcing strategy that has little chance of success. Ideally, cost should be a factor only in deciding among candidates that meet all the other criteria.
