As I was scanning my daily accumulation of e-mails last week, I happened on one with the subject line "Do you really know what is in a $5 footlong?" Since I did not, I decided to take a quick look and found, not surprisingly, that some of the subs sold by a well-known chain contain as many as 100 different ingredients. Even in this age of nutritional enlightenment, most of us still confine our sub due diligence to such matters as wheat vs. white, Swiss vs. cheddar, or spicy mustard vs. regular. Rarely would we ask for even a partial list of the other 97 or so ingredients.
I bring this up because all too often, companies select logistics service providers (LSPs) based on an evaluation that's not much more sophisticated, then wonder why the relationships fail. Although the LSP industry for the most part consists of strong, competent providers, not every potential matchup will be a good fit for both parties.
Much has been written about the selection criteria for LSPs, and it is not my intention to review all these checklists here. Still, there are two areas that I believe require extra effort. As with the footlong selection process, sometimes we just do not dig deep enough.
The first potential troublespot is financial stability. This should be at the top of everyone's list of selection criteria. Many providers are privately held, and some owners may be reluctant to reveal financial information. Yet it is absolutely critical that the prospective client satisfy itself of the provider's financial stability before a contract is signed. For one thing, it will want assurances that the provider will be around for the long term. For another, if it's signing a sizable contract (as is common today), it's important to ascertain that the LSP has adequate financial resources to provide the required support and services. If a provider is financially healthy, responsible, and capable of handling the business, it will find a satisfactory method of demonstrating this to a serious prospect.
Depending on the size of the contract, the client may also want to set some financial eligibility criteria for prospective partners. For instance, it might decide to establish minimum limits on financial assets—in other words, the company might stipulate that it will only enter into a relationship with a provider that meets a certain net worth threshold. It might also decide to establish a policy of awarding contracts only if the total value of the deal is below a certain percentage of the provider's total revenue. An LSP should not be too reliant on one or two clients.
The second potentially risky area is information technology (IT). In any logistics operation, state-of-the-art systems are critical, and in such specialized areas as cross docking, order fulfillment, and freight bill payment, they are an absolute necessity. Any involvement with electronic commerce will require systems much more sophisticated than those usually available from logistics service providers. Contemporary order processing systems, including such functions as the ability to verify credit cards, will be a must.
The evaluation of IT assets will require knowledgeable experts from the outsourcing company to ensure important details aren't overlooked. The due diligence should include such areas as hardware, software, operating systems, bar coding, imaging, handheld devices, sensor-based systems, satellite and other tracking systems, and Internet access. A particularly important consideration will be whether the provider's systems are compatible with the client's existing ERP (enterprise resource planning) system and other software.
Obviously, there are many other important considerations in choosing a provider, and due diligence should be thorough and detailed. Outsourcing will always involve some degree of risk, but particularly close attention to financial stability and IT capabilities will go a long way toward minimizing that uncertainty.
