Achieving continuous improvement is one of the greatest challenges for organisations that have outsourced their logistics operations. At a time of rapid change it is essential that organisations continually review what they are doing - and how it can be improved. This is relatively straightforward for an in-sourced environment but can be problematic when outsourced.
If the contractual agreement is ‘closed book’ what incentive is there for the contractor to pass on the financial benefits of efficiency improvements to the customer? If the contractual agreement is ‘open book’, what incentive is there for the contractor to invest time to reduce costs if the consequence is a reduced margin?
Whilst attempts have been made to address this issue through ‘Gainshare’ mechanisms, where both parties share in the financial rewards of operational improvements, in reality very few actually work. Part of the problem is the way they are written which often fails to address the issue of what each party brings to the project with regards to time, investment and risk. A more common issue is the reluctance of the contractor to invest scarce planning resource supporting an existing customer where the prospect of financial gain is uncertain. At a time when margins for contractors have been driven down to an all-time low, few can afford the planning resource to meet demands that are placed upon them. This includes supporting the sales team to achieve the growth demanded by the shareholders, providing project support for operations that are being retendered and supporting continuous improvement initiatives.
Unless the existing business is seen as being at risk, reviewing the current method of operation is left to the immediate line management team who have been directly costed into the contract. That is fine if the potential improvements are within their capabilities, and available time, but can fail dismally if the review requires specialist skills or an investment in significant resource.
All too often customers swallow their frustration and wait until the contract is up for renewal, then use the power of competition to drive innovation and new ways of working. This is acceptable if the contract is relatively short, as may be the case for a straightforward transport operation, but a less attractive option if the contract is for five years or more as is likely to be the case for a dedicated warehouse operation.
So, what is the solution?
You may be lucky, your contractor values your business, and really does put existing customers first before winning new ones. Unfortunately, these contractors are few and far between. For most the reality is that continuous improvement will only happen by design, and needs to be addressed head on, and included in the contractual agreement at the negotiation stage.
- One option is for the customer to take responsibility for reviewing the operation themselves. In the case of a large organisation this may simply mean using their own resources. For small and medium sized organisations, it may be necessary to draft in specialist third party support. In these circumstances, all that is required in the contract is an appropriate operational review clause that protects the contractors’ margin in return for implementing operational change requested by the customer.
- The alternative is to write into the contract an ongoing continuous review process detailing the resources that will be allocated and the time that will be spent. This will need to be appropriately enforced with ‘service credits’ or breach of contract clauses to encourage compliance. This approach forces both organisations to be a lot clearer with regards to what they are committing to. It may result in an additional cost but, sensibly managed, this should be more than outweighed by the financial benefit.
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Davies & Robson have assisted many clients with their outsourcing requirements. Our team will be pleased to help. Call us on 01327 349090