"We're goin' to the chapel, and we're gonna get married," sang the Dixie Cups in their 1964 mega-hit. The song was covered by such giants as the Beach Boys and the endearingly rowdy Bette Midler. Today, we talk a lot about deeper relationships among supply chain partners and entering a redefining era of collaboration.
Clearly, the old model of relationships with logistics service providers (LSPs)—which could best be characterized as adversarial transaction management—is facing a sea change, although it will be with us in some degree for a long time to come. More and more, though, service providers and their clientele (or suppliers and their customers) are goin' to the chapel to establish a broader, more intense, and more strategic relationship.
Why do we bring this up? Because it has implications for the way companies choose their LSP partners and build working relationships with them. Although dozens (at least) of excellent guides for building LSP relationships have been published, many were written some time ago and do not reflect the realities of business today.
Supply chains are changing, thanks to sourcing shifts, right-shoring initiatives, growth in e-supply chain activity, and the emergence of mobile transactions. Then there's the trend toward closer collaboration and sophisticated relationships, as well as the possibility that older models might need a little burnishing to shine in the (relatively) new century.
So, we thought it might be useful to put a few items on the table that are not found in the older approaches or could benefit from additional emphasis. They are as follows:
• Vesting is not about three-piece suits. Maybe, as a service relationship is being contemplated, this is the time to assess whether the work and commitment involved in constructing an outcome-based relationship is the right approach. In the universe of options for incentivizing high performance, performance targets have been the norm, often accompanied by some form of gainsharing.
Outcome-based metrics and targets don't ignore traditional performance indicators but provide the possibility of much more robust options, including asset utilization, customer satisfaction, and revenue generation. There is a growing body of implementation success stories, involving a number of supply chain innovators and leaders. The conceptual train left the safe station of academic research quite some time ago.
• Golf is not a relationship; it is a contest. Enlightened business developers from the last century saw the value of investing in business relationships. In them days, to quote the late poet and light-heavyweight boxing champion Archie Moore, a solid relationship was thought to be built on a foundation of social activities—golf and drinks, dinner and drinks, drinks and drinks—all designed to make the buying and selling of transactions easy and pleasant.
Today's relationships begin with an authentic exchange of mutual personal interest between the parties. The seller is ultimately committed to the success of the client and the individuals with whom he or she interacts. The service provider, overall, is focused on the mutual gains that result from working together to serve the customer's customers.
It is not about drinks (although Mr. Jack Daniel and/or Mr. Robert Mondavi might join the festivities at some point); it is about mutually beneficial continuous improvement. It is not about unit price; it is about value-adding. And speaking of value, shared perspectives and values are critical starting points in building the relationship.
Communications, trust, and open books are the lubricants that keep the marriage together.
• Beware the cost-plus trap. "Everybody knows" nowadays that cost-plus is the invention of Satan, a safety net that becomes an entitlement and a disincentive to improvement. And yet ...
Truth is, almost no request for proposal (RFP) is well enough constructed and written to be fully descriptive and complete. As a consequence, the service provider that is forced to quote a price (too-often purely transactional) can get burned, with relationships getting strained on both sides when the provider loses money and the customer balks at a proposed price increase.
It can make good business sense—and great relationship sense—to begin a contract with a cost-plus arrangement for a defined period, during which the service provider can learn enough to be able to develop a fair price quote and commit to cost improvement targets, performance objectives, and the like. That way, "everybody knows" that the ultimate cost and performance targets will be based on solid experience, and "everybody knows" that all targets and objectives will be changing, and maybe changing often, over time.
• Any contract over 20 pages long is only a collection of loopholes. It is tempting to try to put everything that everyone can think of in a service provider's contract, especially when the buyer's legal department gets involved. Look, they're only doing what they think their responsibilities are: 1) to safeguard the company against any possible event in which the service provider might have a hand, and 2) to nail the service provider to the wall with no hope of escape in every imaginable dimension of price and performance.
That level of adversarial contest amounts to trying to determine, on paper, which party has the most power— who can crush the other. Not a great way to reinforce the idea of a high-trust relationship, we would contend. A few years ago, we facilitated a workshop for a mixed group of customers and service providers that dealt with what relationship ingredients were most important. The two groups spontaneously expressed a stunning level of agreement. The telling "aha!" moment was the further agreement that very few of the relationship-critical elements could be reduced to effective contractual language.
So, we are all in favor of brief contracts with frequently changing addenda regarding price, cost, metrics, and performance.
• Learn your prospective partner's deep secrets. The nature of the service provider business has been changing for the past several years. We have long ago left behind the idea of service companies with a few focused product offerings. Today, the scope and range of services (and genuine capabilities) available from a service provider are staggering.
There has been a huge shift from small family-owned and -operated companies to larger and larger merged operations, which also grow through functional expansion. The really major players have become, or have been acquired by, massive global corporations.
The logical questions include those related to the possibility that a behemoth will swallow up the candidate. Or whether the candidate will over-reach and make an acquisition that strains its resources during the integration process.
Perhaps even more ominous would be a recent infusion of cash to support growth by a private equity firm. Those are generally accompanied by an infusion of board-level participation by representatives of the ostensibly "hands-off" new ownership. Soon to follow? Strong suggestions—even ham-handed demands—for top-line improvements, soon, and at double-digit levels. That can lead to detrimental behaviors in both the selling and execution processes.
Of course, general investigation of a candidate's overall financial status is only prudent in nearly all cases. Sheer economic necessity can sometimes lead to an overemphasis on sales.
AT THE END OF THE DAY
The world has changed and is continuing to change. Being smart about that is up to you, although in a decent world, the experienced service provider has a responsibility to give impartial guidance to the rookie buyer.
The real point is that the demand of sorting out service provider solutions is more complex and nuanced than following a checklist. And for optimal—and mutual benefit—outcomes, you've got to get beyond and behind the practices, processes, and perspectives of the past.