Online Sales: how C-19 is changing the logistics landscape, and our top tips for successful logistics arrangements
16 April 2020
C-19 continues to have an unprecedented impact on businesses and is accelerating shift from brick and mortar stores to greater online presence.
I recently wrote about how the pandemic has accelerated the need for businesses to transform their digital sales platforms and the corresponding use of agile software development (see here).
In addition to this, businesses are having to respond to the complex logistical changes raised by a shift to online selling, including significant changes in what goods are now being purchased, and how goods are sourced, stored and distributed. Some businesses have had to mothball premises whereas others, particularly those selling online, are flying. This is a real test of the flexibility of 3PLs (third party logistics providers). Many 3PLs are sharing resource with their customers in a different way. It will be interesting to see whether the impact of C-19 leads to even more automation.
There is a delicate balancing act for businesses and 3PLs to achieve on-time, accurate and cost-effective logistics solutions. This involves navigating a complex web of (capital intensive) distribution centres and transport arrangements, managing the integration of data flows and addressing emotive workforce requirements. Add to the mix the need for new skillsets and complex employment laws, and there are plenty of pitfalls.
Getting products from A to B may seem straightforward, but it is becoming an increasingly complex and in-demand service. Logistics can include picking and packing, packaging and labelling, inventory management, transportation, warehousing and reverse logistics (returns). Logistics often requires ‘just in time’ or ‘same day/next day’ delivery, which can now be as important as the underlying product. Logistics is complex, especially for larger businesses, and requires detailed planning, the integration of complex information flows and increasing amounts of (capital-intensive) automation, and substantial collaboration.
While some businesses operate in-house logistics functions, most outsource at least some of their requirements to 3PLs. This is because 3PLs offer scale, expertise, experience, economies of scale and the ability (cost effectively) to handle high fluctuations in demand (including over ‘peak’ periods). They can also take cost off the balance sheet.
We advise a wide array of businesses on how to achieve optimal outcomes in their customer-3PL relationships. Working with a 3PL is about a long-term relationship: the vendor will become a customer’s crucial partner and not just a service provider, so the relationship needs nurturing from both sides. Below are some of our top tips for customers and 3PLs:
- A 3PL should be selected because of its specific expertise in what the customer needs. For example, if goods are perishable, the customer should ensure its 3PL is used to dealing with these high-maintenance products. Equally, if packaging is a key part of a customer’s brand strategy, a 3PL that values aesthetics and is detail-obsessed would be well suited. The 3PL should be aligned and bought into the customer’s goals and the customer clear as to what is driving its use of the 3PL.
- A customer should avoid the temptation to select its 3PL purely on price: scale, experience and expertise go a long way in this game. Customers should run a fair comparison between competitors, which includes cost versus value in respect of all key elements of its supply chain.
- On price, is ‘open book’ or ‘closed book’ pricing appropriate? Closed book pricing offers more certainty. However, open book may offer more transparency, flexibility and the opportunity to drive incremental savings. However, many customers underestimate the time, resource and contractual tools needed successfully to manage an open book contract. Managing any 3PL contract takes a substantial amount of time and resource. Managing an open book contract takes even more time and resource and also senior expertise where the 3PL’s management (and/or overhead) fee is calculated as a percentage of ‘allowable costs’ (which creates an inherent tension).
- In open book arrangements, the following issues should be carefully considered and addressed:
- the extent to which the customer can influence the 3PL’s workforce, including its composition (staff v agency)
- whether there is alignment on approach for dealing with unions representing 3PL workforces
- allocation of the potential employment liabilities, including redundancy and TUPE liabilities on entry and exit, in-life redundancy exposure and liability for employee/employer claims.
- What IT integration work is needed to ensure that each party’s sales, inventory and reporting systems speak to each other? Is there a need to license third party software or SaaS solution? Who will undertake any configuration, customisation or API work? Also, how will this be funded and can this be structured in a way that avoids an over-reliance on 3PL systems (which may otherwise mean that it is harder to move to a more cost effective solution in the future).
- What are the 3PL’s automation plans and what is the impact on the workforce and the contract?
- Can the 3PL scale to fit customer needs: does the 3PL have or can it access sheds and depots in the right places at the right times? Does the 3PL own its sheds or lease them, and if leased what security of tenure does it have? How can you structure the arrangement to avoid an over-reliance on a 3PL (which can happen where the customer does not own or lease any of its own sheds)?
- Does the 3PL offer co-located space and/or the opportunity for the customer to earn incremental revenue?
- Don’t discount the importance of culture. Make sure your cultures are similar. At the very least, ensure you are aligned on core values such as transparency, fairness and honesty and, ideally, also in respect of more granular values such as opportunities for disadvantaged workers, roles and environmental values. A customer’s 3PL may end up being in the spotlight too, especially if they carry the customer’s livery.
- Set shared KPIs and incentivise good performance. Some sanctions may be necessary, but we humans tend to respond better to incentives. Ensure the 3PL is incentivised to help ensure that stock is delivered to the right place and on time. Key KPIs might include stock loss, stock damage, strong customer feedback, delivery condition and order accuracy.
- Is a ‘gainshare’ mechanism appropriate to drive the right behaviour? This needs careful thought to ensure that the 3PL is incentivised but also that it is not being overpaid. Issues to consider here are whose idea was the gainshare project, who has gainshare eligibility approval rights, is gainshare calculated on net or gross savings, for what period is the pay-out to be made, and do gainshare savings floors and ceilings apply.
- Ensure you take the time to understand and identify each party’s responsibilities, liabilities and remedies. A broad brush approach won’t cut it. One of the key benefits of spending time negotiating a contact thoroughly is that misunderstandings can be flushed out before signing the contract. This seems far more attractive than ending up with unhappy customers and/or a major dispute with your 3PL. A sophisticated contract will include generic and specific requirements and remedies, and strong reporting and other governance processes. It can take time to do all this (several weeks at least), but it is worth it.
- Trust and communication are key. The 3PL relationships that are working well, including during C-19, are the ones that successfully adopt and implement these principles.
The outcome of C-19 will be long lasting, but there is little doubt that businesses selling great products online, who have well-thought-out and strong relationships with 3PL providers, and have invested in effective e-commerce platforms are well placed to weather the storm.
Do get in touch if you need help.