News / Does a culture of 'cost-bashing' remain a barrier to innovation in the supply chain?

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Last week The Loadstar ran a post: “Shippers demand innovation from their favourite 3PLs, but will they pay for it?” Behind the post was a report from SCM World which broadly concluded that “buyers speak out of two sides of their mouth”; that they “want innovative solutions and strategic thinking, but in the end it all boils down to routes and rates”.

Having worked on both the shipper and 3PL side of the equation this notion got me thinking. The whole standoff that exists between buyer and service provider on this subject of innovation is potentially toxic, and while I have to agree with SCM World’s observations, I think there are some important issues that need to be explored if the relationship is to flourish and develop.

Since the financial crash of 2008, things have been difficult. Back then a lot of businesses went into shock and, like patients experiencing trauma, the blood was restricted to the essential supply of internal organs. The classic crisis behaviours came into play: cash became king, core business was to be protected, it was back to basics, suppliers had to ‘contribute’ through discounted invoices (usually with some punishing and bizarre backdating) and projects were abandoned across the board.

On the logistics side of things, this coincided with the start of the engineered overcapacity game that the shipping lines introduced, with the difficulties in warehousing due to the fall of consumer demand and with customer logistics executives becoming the punchbags of the financial director – slash costs, rip out developments and sub-contract the pain to the supply base.

Since then, and before the first signs of a recovery were apparent, the tender and RFP market quickened its pace and, although it is an overused generalisation, contracts were very often won and lost ‘on a nickel’.

In the retail industry timing has been particularly cruel for both the shipper and the 3PL, because in the six years since 2008 the development of the e-commerce logistics infrastructure through omnichannel capability has started to be defined and has ballooned. At a time when intelligent strategic thinking and innovation in the face of an emerging trend were screaming imperatives, shippers had cut their suppliers off at the knees and expected them not only to innovate but also to put “skin in the game”.

Zen Yaworsky

It was in this period that the relationship between shipper and 3PL took a turn for the worse. Before 2008 it was a fairly honest transactional relationship; after 2008 expectations became unreasonable.

It’s perhaps a good time to take stock.

These days there may be four fundamental things that need to be determined by any party in a shipper and 3PL (or forwarder) relationship:

Is there a need for anything more than a transactional relationship?

In the case of garment manufacturing supply, then at one end of the scale there is a relationship with a factory that can be based on cut, make, trim (CMT), where the factory assembles provided raw materials to a contracted standard – a highly commoditised deal.  At the other end of the scale, the factory can play a part in garment design, bring new fabric processes to the table or offer services like flexible production scheduling. The wise buyer in dealing with this supplier will often trade a higher cost price for flexibility because it will deliver lower mark down charges. Both relationship types are important but each is differently costed and priced.

In logistics, and particularly in the freight element, the customer can often demand more than the CMT equivalent – reliability, speed of problem resolution, value for money – but in asking for it will not consider that there is a cost to the provision of such service. It’s as if the culture of ‘cost bashing’ that we created since 2008 is now the default, coupled perhaps with a suspicion that the 3PL is hiding a lot of profit down the back of the settee and so legitimising the approach.

The need for an active, innovative contribution from the 3PL is hard to determine. On many occasions there is a loosely defined requirement in a tender invitation for the 3PL to demonstrate the innovation that they can bring as a justification for a contract award. These sorts of requests can drive a 3PL nuts. The request often has no specification, it is a piece of undefined ‘consultancy’ the product of which is more than likely going to end up in a drawer. What, in many cases, the shipper is doing is chasing rates or routes, and then taking an unashamed opportunity to harvest some free IP.

http://www.zyconsulting.co.uk

Next up: Yes, 3PLs can deliver – but not to the shipper’s logistics team