Pitfalls in logistics partnerships
Tuesday, September 02, 2014
Four decades have passed since a logistics magazine published an article about how the relationship between the public warehouse operator and the customer should be one of partnership. In the next issue of the magazine, a letter to the editor contained an angry response for the author, a logistics service provider.
The writer of the letter was a manufacturing executive who was also former editor of the magazine. His attack ended with these words: "The public warehouseman is no more in partnership with his customer than a corpse is in partnership with the mortician."
Have we made any progress in the last 40 years?
The growth in size and penetration of the logistics service industry is ample testimony for significant change. In the 1970s, the largest American service companies were primarily regional, and many served only one metropolitan area. Family management was the norm, with professional management found in relatively few organizations. Many of the national and global service providers seen today did not exist at that time.
Long-term contracts for logistics services were rare, and more than one shipper probably agreed with the angry writer mentioned above. Logistics partnerships, when established, were often doomed to fail. Here are six reasons for failure:
- The shipper and provider do not have a realistic understanding about the job to be done.
- The seller has overpromised and is unable to deliver on that promise.
- Some managers at the shipper's company do not want the relationship to work and maintain a hidden desire to see it fail.
- The provider has discovered that the service contract is a money loser. Rather than renegotiate the contract, the provider loses interest in providing good service.
- The number and nature of service failures have become intolerable.
- An orderly termination procedure has not been outlined in the contract.
Failure to reach an understanding
A failure to have a true meeting of the minds is the most frequent cause for the collapse of logistics partnerships. There can be several reasons for lack of a realistic understanding. Perhaps the most common is either an accidental or deliberate failure on the part of the shipper to accurately describe the job that is to be done.
When it is deliberate, the buyer may oversimplify the project in the hope of achieving a lower price. In some cases, the buyer may be far removed from the business of warehousing and therefore does not comprehend the details needed to perform the job. In other cases, the service provider may have failed to spend the proper amount of time investigating the job to be performed and learning of all the necessary steps involved.
In all of these cases, the scenario usually begins with the discovery that the provider is operating at a loss. In some cases, the provider cannot perform the job because of complexities which prove to be a surprise. In other cases, the provider cannot sustain the volume of work within the required schedule.
When the discovery is made, the seller usually requests a substantial increase in fees, and acceptance of the increase will break the shipper's budget. Unless the problem can be corrected through negotiation, the only option is termination of the contract.
A desire for failure
Unfortunately, when a warehousing operation is outsourced for the first time, there may be managers in the shipper company who see this step as a threat to their job security. They view the new logistics contract as a development that could eliminate the need for the positions they hold. Because their bosses were involved in the outsourcing decision, they are compelled to hide any negative feelings they have about the new relationship.
However, these people feel they have nothing to lose if the logistics partnership fails. When this is the cause of the failure, the true situation will be concealed because of the political dangers of making their desire obvious.
Intolerable service failures
Service failures may take place because of the inability of the provider to satisfy the buyer's requirements. This can be particularly true when information technology requirements are beyond the capabilities of the systems currently used by the provider.
When service failures increase, sales and marketing people who had no part in negotiating the contract will create an irresistible pressure for change. They will point out that service failures threaten the relationship with major customers. When the situation becomes aggravated, logistics executives may lose control of the situation, and the partnership is ended to satisfy the demands of the sales department.
None of the conditions described above needs to happen, and the best way to prevent all of these situations is to be cautious in the process of writing the request for proposal. Similar care is needed in qualifying the potential bidders, selecting the best bid, and initiating the relationship.
When both sides want a relationship that will last for the long term, they should be able to avoid the pitfalls just described. Both buyer and seller must recognize that just as no marriage lasts forever, no contract is perpetual. Even the most successful marriage will be terminated by death, and the most successful partnership will also be terminated or modified by management changes or new conditions.
Therefore, every logistics contract should include detailed provisions for its dissolution. Before the ending of the partnership becomes emotional, both parties should agree on the ways in which they will separate if changing conditions make it necessary to do so.
In today's business environment, long-term logistics partnerships are a necessity. Those executives who see negotiation as a win/lose proposition, or who sacrifice lasting relationships to achieve short-term gain, are likely to create a destructive situation.
The most successful buyers and sellers of logistics services will recognize the pitfalls and will negotiate logistics contracts that are a win/win for all parties.
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