TRUSTED RELATIONSHIP: A KEY FACTOR TO SUCCESSFUL FUTURE 3PL

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1 TRUSTED RELATIONSHIP: A KEY FACTOR TO SUCCESSFUL FUTURE 3PL Patricija Bajec, D.Sc. Marina Zanne, M.Sc. University of Ljubljana Faculty of Maritime Studies and Transportation Pot pomorščakov 4, SI Portorož, Slovenia patricija.bajec@fpp.uni-lj.si, marina.zanne@fpp.uni-lj.si ABSTRACT This report focuses on collaborative relationship between shipper and 3PL provider and its importance on 3PL success. The study is based on a systematic review of the literature and existing international and domestic survey. Given the interest of collaborative relationships, we decided to explore this question: how international and Slovenian firms engage in collaborative relationships and their importance for successful 3PL outsourcing. The report includes a brief description of collaborative relationship, its key elements and role in 3PL sucess and presents and analyses results of international and Slovenian survey. The paper is structured as follows. First part of section»collaborative relationship«describes and defines strategic outsourcing relationship, as a key factor of successful 3PL relationship. Its key elements, drivers and benefits are specified in second part. The research methodology is elucidated in section three. Section»Findings«reports the anaysis of surveys. Conclusions are presented in last section. 1 INTRODUCTION Today's business success depends to a great extent on logistics and supply chain performance. The role of supply chain has never been as critical as it is today [18]. Supply chain serves as a source of competitive advantage [15]. With increased importance of the supply chain, there is also constant impact and change affecting outsourcing strategies. As confirmed by the survey made by Georgie Institute of Technology, Capgemini, DHL Global Customer Solutions and SAP Americas, Inc in 2006 (figure 1) respondents continue rating the price of 3PL services as a key criterion (87 %) when selecting 3PL providers. However, this criteria is closely followed by the quality of tactical, operational logistics service (85 %), the range of available value-added services (63 %), strategic logistics services (41 %) and knowledge and advice on supply chain innovations and improvements (49 %). This realisation requires working more closely with a shared vision and trust. Successful outsourcing should no longer be a transactional relationship between buyer and supplier but one that requires integration, cooperation and collaboration [3] as a productive way to deliver higher value beyond simple cost savings [6]. Both service provider and receiver face an increasing pressure to exhibit the value of outsourcing. Investment in win-win processes and shift from the more traditional business models to collaborative, long term, sustainable supply chain business models are the best way to meet this challenge. To gain the full benefits of collaboration companies might need to develope a collaborative culture beyond their current organizational boundaries and be willing to invest in technology, integrate business processes, share information, accept accountabilities and, at the same time, give control to stakehoulders [6]. 1

2 Price of 3PL services Quality of tactical logistics services Range of available value-added services Global capabilities Knowledge Availability of and advice on strategic supply chain logistics innovations services and improvements Figure 1: Criteria for selecting 3PL provider; Source: Langley et al., COLLABORATIVE RELATIONSHIP Supply chain collaboration between a 3PL and a customer occurs when both organizations work toward a common set of goals and objectives, and when there is a meaningful exchange of information relating to planning, management, execution and performance measurement. To be meaningful and effective, collaboration must go well beyond vague expressions of partnership and aligned interests [8]. Collaboration should involve both aligning the economic goals and aims of the network and the development of the social dimensions in particular, mutual trust and commitment [14]. 2.1 The key elements of successful collaborative relationship The ability to forge, manage, and sustain strategic outsourcing relationship is increasingly critical to competitive success. Understanding the success factors is crucial for getting the best out of the collaboration and for avoiding the possible difficulties. The relationship success key elements are: people, process, technology [8]. An organization should have a process for building successful relationship. A company must have the organizational ability to use this process; in other words, the managers responsible for implementing a new outsourcing relationship must understand the key factors for successful alliance. Managers should look for people who have experience in managing outsourcing relationships, especially those who understand the spectrum of relationship that is possible and the best practices for implementing a strong strategic outsourcing relationship. An collaborative outsourcing relationship shouldn't begin without support from the top too. Senior managers must set a clear strategic direction and they must provide a supportive atmosphere that encourages collaboration and allays fears about trying new approaches [11]. When shippers outsource logistics functions to a 3PL, technology is an essential part of the relationship. The most commonly used technologies are visibility tools, web-enabled communications, transportation management systems, warehouse management systems etc. Customer Relationship Management, Supply Chain Planning and Yard Management are rarely used technologies [6]. 2

3 Other factors affecting the success of relationships are: trust The general agreement is that, to be successful, the whole relationship has to based on trust. Trust is the decision to rely on a partner with the expectation that the partner will act according to a common agreement [15]. It develops gradually over time, but it also has to be earned [9, 13]. The degree of trust will determine the extent to which organizations are willing and able to interact [16]. commitment Commitment is one of the factors that are often used to describe a good partnering relationship [12]. Commitment means that both of the parties have been committed to the relationship, its needs and requirements, and are ready to do their best to fulfill them [13]. It involves pledges, credible commitments, idiosyncratic investments, and the dedicated allocation of resources. Commitment is demonstrated in three ways: idiosyncratic or customized effort, attitude and the long-term intention of the parties to remain in the partnership. openness Openness between the parties helps in many situations. Resolving conflicts and discussing difficult situations openly is good sign that the relationship is working well. Sharing information about company vision and plans for the future is also important [13]. shared risk and rewards Successful collaborations require that 3PLs and shippers develop mechanisms to share gains, losses and investments. This involves both parties knowing the benefits that result from the sharing (financial and non-financial) and the belief that the sharing has been»equitable«. communication Regular communication and sharing of information is central to an effective collaborative relationship [6]. Frequent and accurate communication, sharing of information willingly all help in preventing possible future conflicts. It includes internal and external communication between partners, as well as the ongoing measurement and communication of the results [17]. well-understood goals and objectives. Both partners need to understand each other's individual organizational objectives and be willing to share them openly. Both partners will then find it easier to discuss the objectives of their relationship and how they can create value for each other and partners involved in the supply chain [6]. The most successful relationships are based on immaterial factors listed above, rather than material, such as good contract or good personnel, even though those are, of course, substantial as well [13]. 2.2 Collaboration's role in 3PL success The advantages of working closely within 3PL are: Direct access to the outsourcing provider's extended capabilities, including research, development and consulting as well as the provider's own experience, best practices and know-how [10, 2]. Larger innovation opportunities. Higher service level al lower cost [2]. Improved new product introduction and management of new SKUs. Reduced inventory and stockouts as a result of collaborative forecasting activities. 3

4 Balanced cost reduction strategy for both 3PL and customer. Incentives for innoavation. The survey made by Georgie Institute of Technology, Capgemini Nederland B.V., Oracle Corporation and DHL Global Customer Solutions in 2008 [7] shows (table 1) that three-quarters of survey respondents from North America, Europe, Asia Pacific and Latin America list greater ease of managing outsourced logistics services, such as having one point of contact, as a benefit. Other popular reasons include reduced management time (69 %) and the ability of the company to focus on core business (67 %). The importance of cost and services are also clearly on the minds of 3PL users; more than half state that efficiency of overall logistics/lower costs and overall logistics effectiveness and improved level of service are important benefits. Other benefits, mentioned by focus interview experts are enhanced shipment visibility, quicker response, extended global reach, customer-build solutions, capability to work on more complex solutions, risk-sharing with integrated logistics service provider etc. Table 1: Benefits experienced from the use of 3PL customer collaboration Benefits All regions Greater ease of managing outsourced logistics services 75 Reduced management time and effort 69 Enabled our company to focus more on our core business 67 Overall logistics efficiency/lower cost 56 Overall logistics effectiveness/improved services 56 Reduction in the number of logistics services providers 51 Enhanced shipment visibility 39 Quicker response 37 Optimized capacity utilization 34 Extended global reach (network) 31 Custom-built solutions 24 Capability to work on more complex solutions 24 Risk-sharing with integrated logistics service provider 23 Inventory reduction 22 Early problem detection 22 Proactive IT approach 18 3 RESEARCH METHODOLOGY Source: Langley et al., 2008 Data for this study were obtained from international field survey of 3PLs and shippers and from our own survey on the Slovenian 3PLs perspective. 3.1 The International survey The University of Tennesse's Center for Logistics Research, Exel, Cap Gemini, Erns't & Young, FedEx and some other companies have conducted a comprehensive study of the use of third-party logistics services in North America, Western Europa, Latin America and Asia- 4

5 Pacific since the An important goal of annual 3PL study is to improve upon the previous year's studies. The general objectives of the studies are as follow: Measure the development and growth of the 3PL industry across several diverse regions of the world. Identify customer needs and how well 3PL providers responding to those needs. Summarize the current use of 3PL services. Investigate leading topics, including 3PL service offerings anf technology, how to structure and manage effective 3PL relationships, and how customer view success and value from 3PL relationships. Provide a strategic assessment of the future of the 3PL industry [1, 4]. The principal gear for gathering customer perspectives was a survey sent to the chief logistics executive at prominent companies in the following industries: automotive, chemical, computers, peripherals, consumer products, medical supplies and devices and retail. These industries were selected because they view logistics as strategically important and are making purposeful moves toward integrated supply chain management. The total number of surveys sent to companies in these industries varied from 572 in 1996 to more than 1000 in later research projects [1, 4]. 3.2 The Slovenian survey Based on the previous literature the questionnaire was first developed. It contains questions about factors of successful 3PL, level of collaborative partnership in 3PL, reasons for low level of collaboration and company's basic information. Except the company's basic information, the other items were measured using the five-point Likert scales anchored by»strongly disagree«and»strongly agree«. A survey questionnaire was then pre-tested among three individuals from logistics and commercial industry, who have significant expertise in the field of outsourcing. Some modifications to improve clarity were made. Data for this study were obtained from series of personel interviews in order to get a higher response rate and more authentic sample. Interviews with senior logistics managers in 26 large and medium sized logistics service providers presented on Slovenian logistics field have been carried out from February to August in Only 4 large logistics service providers have refused inteview. Large and medium sized logistics service providers were a particularly interesting sample for two reasons. First, only they provide advanced form of logistics outsourcing (3PL and 4PL). Second, other standard forms of logistics outsourcing (2PL) are based on transactional and not collaborative relationship. 4 FINDINGS This section presents some results and statistics on the current state of collaborative relationship in 3PL from the service provider's and shippers perspective, measured through international and Slovenian surveys. Figure 2, based on international data, details the factors that contribute to successful shipper experience with 3PLs. 5

6 3PLs Shippers Willingness to share risk The capability to provide valuable ideas/innovations Achieving improvements in service level Achieving target costs Effective partnering and collaboration Personal relationships Openness, Transparency, Good communication Figure 2: A number of factors contribute to successful shipper experience with 3PLs; Source: Langley et al., 2009 Survey findings suggest that opennes, transparency, good communication, personal relationships and effective partnership and collaboration are percieved as an important ingredient of success. 74 % of shipper respondents and 77 % of 3PL respondents identify opennes, transparency and good communication as contributing to successful shipper experiences with 3PLs. 65 % of shipper respondents and 72 % of 3PL respondents suggests that 3PL-shipper relationships are best served when members of both organizations develop personal relationships to enhance the people, process, and technology attributes needed for successful collaboration. Effective partnering and collaboration (64 % shippers and 65 % of 3PL respondent identify this factor) is of greater significance as well. The value of a more strategic relationship is clear. As visible in Figure 3, a substantial three-quarters of respondents feel a more strategic relationship with 3PL would reduce total landed and distribution costs, nearly 60 % of respondents indicate increase of operational flexibility and more demand driven supply chain, as well as reduce of capital costs. Reduce capital costs, head count and operational expenses Increase operational flexibility and become more demand driven Reduce total landed and distribution costs 75 Figure 3: The value of a more strategic 3PL relationship to shippers; Source: Langley et al., 2009 Both international shippers and 3PLs view their relationships as successful (figure 4). 6

7 3PLs Shippers Extremely successful Somewhat successful Neither successful nor unsuccessful Somewhat unsuccessful Extremely unsuccessful Figure 4: Evaluations of the success of 3PLs and shippers relationships Source: Langley et al., % of shipper respondents rate their relationships as extremely or somewhat successful, while the parallel figure for the 3PL respondents is 96%. Consistent with the other ratings, far more 3PL respondents termed the relationships extremely successful (45%) than did shipper respondents (25%). Success ratings reported by shipper respondents tend to be highest for Asia Pacific (94%) and lowest for Latin America (81%), with North America (84%) and Europe (85%) in-between [8]. Using statistics from Slovenian survey based on 3PL perspective, figure 5 presents key factors of successful outsourcing. The charts indicate that the most significant factors are the importance of mutual relationships (96,2 % strongly agree), high level of trust (96,2 % strongly agree) and high level of communication (96,2 % strongly agree). The areas of lowest impact are high level of commitment (61,5 strongly agree) and sharing risks and success (65,4 % strongly agree). 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0,0 Mutual relationship High level of trust High level of communication High level of transparency High level of commitment Sharing risks and success strongly agree partly agree strongly disagree Figure 5: Key factors of successful outsourcing; Source: Authors 7

8 100% 80% 60% 40% 20% 0% mutual trust collaboration communication transparency commitment very low very high Figure 6: Level of trust, collaboration, communication, transparency and commitment between Slovenian 3PL and shippers; Source: Authors As seen in Figure 6 just over half of 3PL respondents have very high level of collaboration and half of them have very good communication with their client. While all other data indicate low level of trust (38,5 %), transparency (26,9 %) and commitment (23,1 %). 5 DISCUSSION AND CONCLUSION Changing market dynamics is influencing supply chain design. Shippers want responsive supply chains, capable of reacting more quickly to rapidly changing customer demands. They also want to create more sustainable, environmentally conscious supply chains. They search custom-built solutions within supply chain, which will improve their effectiveness. In order to be successful, supply chain processes and activities both system and services must be integrated. Historically, the needed integration of the systems and services was accomplished by companies themselves as they purchased individual logistics service. Today, many 3PLs are capable of providing this system and services integration for their customers. Entrusting the integration of logistics services to a 3PL requires trust, commitment, openness, shared risks and rewards, communication and preparation on both sides of the deal. This paper investigated significance and level of trusted collaborative relationship of international and Slovenian 3PL market. International and Slovenian survey allows us to draw following three conclusions: one on the relevance of effective partnering for international shippers and 3PLs and Slovenian 3PLs; a second on the current level or success of relationship on international and Slovenian 3PL market; the third concerns the differences between international and Slovenian 3PL market. The first conclusion is that both international shippers and 3PLs are aware that effective partnering and collaboration contribute to successful outsourcing and what is more important, brings not just the reduction of capital, landed and distribution costs, but also increases operational flexibility and allows shipper to become more demand driven. Slovenian survey, based on 3PL's point of view emphasis the significance of mutual relationships, high level of trust, communication, commitment and sharing risks and success too. A second conclusion is that both international shippers and 3PLs view their relationships as successful, while for Slovenian market currently this is not the case. Just over half of 3PL respondents have very high level of collaboration and half of them have very good communication with their clients. All other responses indicate low level of trust, transparency and commitment. The third conclusion is that there are some significant differences ragardin level of collaborative relationships between international and Slovenian market, which is solely due to the fact that Slovenian logistics market has not achieved superior level of 3PL (dedicated 3PL outsourcing) yet. The other reason are shippers, who are not yet aware of the possible positive impacts of outsourcing to 8

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