With the aim of identifying potential areas for cost savings and heightening service levels, a manufacturing company recently underwent a rapid assessment of its multi-million-dollar spend for third-party logistics (3PL) services. This firm had already adopted lean operations best practices, and decision-makers now wanted to extend that lean thinking into their 3PL activities.
Company executives expressed numerous concerns about existing 3PL provider management. These problems included
- excessive delivery costs
- reporting issues and related deficiencies regarding problem-solving support
- poor instruction following and lack of accountability
- a clunky and difficult process for freight claims
- excessive damage to products
- deficient on-time carrier delivery performance
- inadequate access to documentation and accurate cost data
- too many expedited shipments and associated premium costs.
The main delivery modes at this firm were truckload, less-than-truckload, small packages, expedited deliveries, and some international transport. In less than two weeks, an appraisal was designed to identify directional data for improving cost and service levels, with a spend breakdown mode and site that suggested specific metrics, targets, and actions as well as a roadmap for implementing enhancements. The analysis suggested that, by using best practices offered by transportation management system (TMS) software and competitive analysis, the manufacturer could achieve significant savings.
Additional savings opportunities were identified through key metrics that support a lean approach to improving service levels while continuing to reduce costs. These measures included on-time pickup and delivery percentages, the damage-free shipment percentage, the cost per pound (from a given origin to a given destination), amount of incorrect freight bills and associated costs, and the ratio of noncompliant shipments to total transactions. An investigation of these areas follows.
On-time pickup and delivery percentages: The metric for on-time pickup and delivery percentages was very useful for supporting execution and continuous improvement at this manufacturer. It revealed that standardized procedures were required at both the company and the 3PL. In addition, it helped pinpoint the root causes for the failures to support problem-solving.
Damage-free shipment percentage: Appropriate metrics here were the dollar value of damaged parts and the frequency damage occurs in shipments. The firm worked to reduce company-caused damage, 3PL-caused damage, and the overall damage frequency. However, depending on the company, it may be even more helpful to consider the actual cost of the damaged parts and then identify the cause of each incident, the partners involved, the specific kind of packaging in use, and related attributes. Studies and corrective action then can be performed to eliminate the causes. It also should be made clear how the manufacturer itself contributed to any problems so that these issues also may be eradicated.
Cost per pound: Cost per pound was a very important metric to understand and effectively manage. Unfortunately, it is not nearly as precise a measure as one would hope for a few reasons:
- Constantly changing packaging, which affects the density of filling trucks; frequent design adjustments; and deviations of orders all add to complexity.
- Trying to measure cost per pound for a particular mode between locations and from various origination points in the supply chain is difficult. If, for a particular time period, there are many deliveries from a location farther away than occurred during the prior time period, this skews the results and indicates a problem.
- When performing a root cause analysis behind why cost is trending in a bad direction, it is challenging to differentiate between issues caused by the manufacturer itself and the services provided by its 3PLs—particularly when determining with which carrier or in which shipment the glitch occurred.
Amount of incorrect freight bills and associated costs: Although it might have seemed appropriate for the manufacturer to lay these issues at the 3PL provider’s feet, it’s not that simple. Aside from tracking the trends of error rates and the associated costs per period, sampling was required to find the true causes and responsible parties of any snags. Results could be seen from using the five whys, which the APICS Dictionary defines as asking why five times when confronted with a problem. “By the time the answer to the fifth ‘why’ is found, the ultimate cause of the problem is identified,” it states.
Ratio of noncompliant shipments to total transactions: This measured the effectiveness and accountability of the people preparing and making shipments on both the company and the supplier sides. A low level of discipline here can show up as a lot of noise and variation in period-to-period performance against the other metrics, such as cost per pound. If it’s out of control, this metric is a solid indicator of trouble looming over other areas. Good countermeasures include standardized work, mistake proofing, employee development, adoption of smart technology, careful monitoring of period-to-period performance, and a daily communication feedback loop to front-line associates.
Just getting started
For each of these topics, the manufacturer’s TMS captured data and provided it to decision-makers in daily, weekly, monthly, quarterly, and annual figures. Standard run charts and statistical-process-control graphics were critical to monitoring trends over time. Finally, for all failures, the data was classified and put through a Pareto analysis in order to facilitate lean problem-solving and kaizen activities to bring processes under control and drive continuous improvement.
This case study only scratches the surface of all of the possibilities of adopting lean approaches to 3PL provider management. Nevertheless, the ideas and lessons are a good place to get started or a way for those with more mature lean operations to evaluate their practices.
Ron Crabtree, CIRM, SCOR-P, MLSSBB, is chief executive officer of MetaOps, a master MetaExpert, and an organizational transformation architect. He is the author or coauthor of five books about operational excellence and the online magazine at MetaOpsMagazine.com. Crabtree also teaches, presents, and consults. He may be contacted at firstname.lastname@example.org.