Competition has proven highly effective in driving innovation and reducing costs. As a direct result of companies relentlessly seeking new ways to gain competitive advantage, we now have access to greater choice and an improved quality of life. Unfortunately the effects of competition do not always achieve the desired outcomes. Not all product innovation is reliable and not all low prices are sustainable.
Procuring Logistics Services Competitively
In many areas, purchasing a product or service that does not perform can be a mild inconvenience but not too serious. Within the World of Logistics getting it wrong can have a profound impact on the Business and, in the worst case, even threaten its very survival. The benefit of achieving a low price can quickly give way to acrimony and blame as things start to go wrong. Accepting that procuring logistics services competitively is still vital, how do you determine if a price is sustainable or simply a recipe for future problems?
SUPPLY CHAIN RISK VS COST
In considering a service from a particular supplier one of the first tasks is to determine how critical is it if the service fails and the operation has to be moved at short notice? The failure of the occasional use of a parcel carrier or the use of a transport contractor for an ad hoc load will be inconvenient but is unlikely to have a profound impact on the Business. Wholesale failure of a logistics operation involving warehousing and transport resulting in lost orders, lost customers, and requiring a rapid transfer to an alternative supplier is likely to have a profound financial impact. The initial task therefore is to determine how important it is that the supplier must be able to undertake the service over the long term and be able to fulfil their obligations.
FINDING A WINNING LOGISTICS PARTNERSHIP
We have outlined 11 key questions to help you find your winning logistics partner at the right price:
- Has the supplier correctly identified the resources required to undertake the operation? It is very easy to be over optimistic with regards to productivities when competing for business.
- Where higher productivities are assumed can they be justified with regards to the proposed method of operation or system support?
- Has the operation been properly costed? It is surprising how many smaller companies don’t understand their cost base.
- Is the cost dependent upon the contractor defraying some of the costs by using the resources for other clients perhaps through back loads or shared user activities? How sustainable are the revenue streams that support the operation?
- How dependent is the operation on one or more major clients? What happens if the supplier loses that client?
- Is the supplier hoping to generate additional revenue by overcharging for miscellaneous services?
- Are the contractual terms comparable or is the supplier hoping to undertake the operation at the client’s ‘risk’?
- Is the supplier taking a gamble and will simply walk away if the operation becomes too costly for them?
- Is the supplier relying on clauses in the ‘small print’ to get rate increase above actual cost increase? e.g linking charges to the RPI index.
- Is the supplier working on the assumption that once they have won the business they can get a price increase by threatening to walk away knowing the risk of change will force the client to agree?
- Will the supplier undertake the service at the agreed price or only when they have resources available? Using an online bidding process to select the lowest rates is only helpful if, when a haulier is called upon, they are prepared to provide the service. Many will not unless it is convenient or they are contractually bound to do so.
Is the price sustainable?
As a general rule, most contractors pay broadly similar amounts for the majority of their costs – fuel, labour, vehicles, property, local authority rates, utilities, planning systems, etc.
It is therefore essential that before entering an agreement for a service that is critical to your organisation, where the consequences of failure can be profound, the reasons that the contractor can provide the service at a lower cost are clearly understood.
Economies of scale can bring real benefit to a parcel operation but can be limited within a contract logistics solution. An advanced WMS can be of real benefit in an FMCG warehouse but of less relevance in a bulk store where only full pallets are despatched.
Your Outsourcing Solution
Taking the time to fully evaluate the service on offer, and satisfying yourself that the price is sustainable, will help minimise service failure and unplanned cost increases. If you would like to see how we can help you find the right supplier, call us on 01327 349090 to speak to one of our consultants or CONTACT US with your logistics outsourcing & tender management consultancy needs