Examination Time - Scrutinizing Potential Logistics Savings Can Pay Off in the Long Run

by Bob DeVos, Senior VP GENCO Supply Chain Solutions
Transportation Logistics

This article comes from the June 2009 Supply Chain Link e-newsletter.

“Our solution will save you money and improve your service offerings.”

This refrain, touted by logistics providers and supported by customer testimonials, is certainly familiar to companies seeking to outsource their supply chain operations.

But what is the viability of realizing savings and providing more and better services? Common sense says both can’t possibly coexist.

Or can they?

Realizing Your ROI

Your company has a lot riding on the logistics provider to which it ultimately decides to outsource. You’ve made a major investment, and a successful outcome depends on the alignment of several factors. Fortunately, your company can take some critical steps to help achieve the return on investment that it expects.

GENCO Supply Chain Solutions, a 111-year-old third-party logistics (3PL) provider, recommends using the following four-step process for realizing your ROI.

Analyze your current and future state. In this step, you will exchange a significant amount of supply chain data and disclose your company’s order-fulfillment process. This will take several weeks, but the result will be the baseline cost associated with your existing operation. In addition, you will have identified a course of action for advancing your supply chain into a more efficient and optimal state.
Create a baseline. With the supply chain enhancements identified and accepted by your company as a realistic solution, you need to quantify the existing baseline. It’s critical to match this baseline to existing costs in your general ledger. And although it will require additional time, have your company’s key stakeholders examine and approve these costs. In the ensuing months, your 3PL will be required to report on cost improvements and potentially pay a gain share. To avoid disputes, make sure all departments agree that the baseline is representative of actual costs.
Develop a KPI map. With the supply chain strategy in place and the baseline created, map out the key performance indicators (KPIs) for future measurement. This involves identifying what’s essential in driving efficiency. These measurements typically include cost per pound, cost per mile, mode shifts, on-time pickup and delivery, and carrier compliance by location. Remember, establish these measurements during the implementation phase and incorporate them into your contract with your provider.
Create a timeline to savings. The implementation phase includes many time-consuming tasks, most of which are defined by a milestone. Although many tasks, by sheer visibility and importance, garner the most attention (connectivity, plant start-ups, resource training), do not overlook the importance of timeline to savings. Have your 3PL provider develop a month-by-month description of which savings areas will be operating throughout the first six months of operation. Typically, early savings can be derived from carrier and mode selection. However, later in the process, LTL consolidation, cube utilization, vendor compliance, pooling, and claims enhancements represent opportunities to accelerate savings. It is critical to plan these savings components to meet the ROI originally discussed.

Your Competitive Advantage

The competitive advantage your company can gain through cost savings and improved service is predicated on several factors. Although it’s impossible to predict the unknown, your company can take proactive steps to increase the likelihood of a solid return on investment when it partners with an outside logistics provider.

By following the four-step process presented here, your company can be more confident in its decision on a solution, maintain a long-term relationship with the logistics provider, have a well-executed supply chain, and enjoy the surprise of savings beyond expectations.