ARC's Adrian Gonzalex 3PL Customer Relationships @ ARC Industry Forum 2010 Maximizing the Value of Performance-based Outsourcing: 3PL-Customer Relationships Introduce you to the key concepts and benefits of Performance-based Outsourcing—aka Vested Outsourcing. Provide you with insights and “words of wisdom” from 3PLs and customers currently engaged in “PBO-like” relationships. Engage in thoughtful discussions about how to improve the status quo, overcome the challenges that exist, and maximize the value of outsourced logistics relationships.

1. Performance-based Outsourcing:
Maximizing the Value of
Performance-based Outsourcing:
Maximizing the Value ofg
3PL-Customer Relationships
g
3PL-Customer Relationships
Adrian Gonzalez
Director
ARC Advisory Groupy p
agonzalez@arcweb.com

2. Welcome!Welcome!
38 attendees from 30 different companies!
Goals of the seminar:
• Introduce you to the key concepts and benefits of
Performance based Outsourcing aka Vested OutsourcingPerformance-based Outsourcing—aka Vested Outsourcing.
• Provide you with insights and “words of wisdom” from 3PLs
and customers currently engaged in “PBO-like” relationships.
E i h h f l di i b h i h• Engage in thoughtful discussions about how to improve the
status quo, overcome the challenges that exist, and
maximize the value of outsourced logistics relationships.
Agenda: Presentations, Panel Discussions, Think Tanks
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3. Existing Hurdles and ChallengesExisting Hurdles and Challenges
Contract Structures Not Strategic
Creating Alignment: The Missing CEOCreating Alignment: The Missing CEO
Summary and Recommendations
Based on Think Tanks with 43 logistics and supply chain executives at Richmond Events’
The Logistics & Supply Chain Forum and an ARC-Richmond Events web survey completed
by more than 100 logistics and supply chain executives
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by more than 100 logistics and supply chain executives.

4. Do all relationships need to be strategic?Do all relationships need to be strategic?
Many (if not most) outsourced relationships do not
need to be strategicneed to be strategic.
In many cases, companies simply want to procure
a basic service, like transportation capacity orp p y
warehousing space, at a competitive price.
But most think tank participants were working with
at least one 3PL that played a more significant roleat least one 3PL that played a more significant role
in their logistics and supply chain operations.
How can we move these relationships up
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the value curve?

5. “3PLs are not proactive enough”“3PLs are not proactive enough”
Are not proactive enough in identifying continuous
improvement opportunities
Areas 3PLs are falling short of expectations (multiple answers allowed)
Cost and service performance below expectations
Slow to implement process changes or other requests
Performace issues not addressed in timely manner
p pp
Quality of employees (expertise responsiveness)
Poor reporting and visibility capabilities
Lack of strategic vision
None of the above--3PLs are meeting or exceeding
expectations across the board.
0 10 20 30 40 50
Other
High employee turnover
Quality of employees (expertise, responsiveness)
below expectations
0 10 20 30 40 50
Number of Responses
“3PLs should be more proactive in identifying solutions to concerns
we communicate to them. We tend to have to pull them along and
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we communicate to them. We tend to have to pull them along and
think outside the box for them.” - Web survey respondent

6. “Still want to maintain control”“Still want to maintain control”
Although we've outsourced, we still want to
maintain control Customers don’t see
Factors inhibiting creation of strategic relationships with 3PLs
Misalignment of interests (e.g. cost
reduction vs. maximize revenue)
Don't believe 3PLs can achieve results
without our direction
Procurement’s growing
role in the 3PL selection
process as a significant
factor that prevents
Pressure from our upper-management to
reduce costs annualy
Focused on short-term results (1-2 yrs)
instead of longer term payback
A Huge Factor
factor that prevents
creating more strategic
relationships…
b 3 i i
3PLs lack the talent and capabilities to play a
more strategic role
We view 3PLs primarily as suppliers not
partners
A Large Factor
A Factor
Somewhat of a Factor
Not a Factor
…but many 3PLs view it
as a problem, especially
when procurement folks
who only have experience
Little or no commitment/support from our C-
level executives
Risk of failure outweighs the potential
benefits
who only have experience
buying commodity goods
are put in charge.
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0% 10% 20% 30% 40% 50%
Increased role of our procurement
organization in selection process
% of Respondents

7. Cost Very-Extremely ImportantCost Very-Extremely Important
Cost
Important factors in 3PL selection process
Overall Quality and Creativity of Proposal
Talent (quality/experience of staff)
IT Capabilities
Vertical Industry Experience/Expertise
Customer References
Scope of Services (ability to provide multiple
services)
Extremely Important
Very Important
Important
Somewhat Important
Not Important
Number and Location of Assets (warehouses,
Geographic Reach (ability to provide services
in multiple countries)
Alignment with Culture and Strategic Vision
y p / p Not Important
0% 20% 40% 60%
trucks, etc)
% of Respondents
95% of the respondents characterized Cost as “Very or Extremely”
important in their 3PL selection process IT Capabilities Talent and
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important in their 3PL selection process. IT Capabilities, Talent, and
Quality/Creativity of Proposal also ranked very high.

8. Contract structures not strategicContract structures not strategic
17.6%
4.4% Types of 3PL contracts
in use
44.0%
12.1%
17.6%
Transaction-based pricing
Cost plus percentage
Cost plus flat management fee
Gain-sharing/performance-based
Hybrid of above
Other
Almost 45% of the web
survey respondents have
transaction-based
11.0%
11.0%
N= 91
contracts with their 3PLs.
About 26% of the
contracts are just one
25.8%0.0%
12.9%
4.8%
1 year
2 years
contracts are just one
year in length (82% are
three years or less)
Typical length of
3PL contracts
12.9%
43.5%
3 years
4 years
5 years
More than 5 years
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9. Creating Alignment: The Missing CEOCreating Alignment: The Missing CEO
Supply Chain &
Logistics
People/Functions in 3PL selection process
C t S i
Procurement
IT
Logistics
President
Manufacturing
Customer Service
Completely Involved
Very Involved
Involved
Some Involvement
No Involvement
Sales & Marketing
CEO
CFO
No Involvement
0% 20% 40% 60% 80% 100%
62% of the web survey respondents said their CEO was not involved at all
i th 3PL l ti d l ti d l 10% id th CEO
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in the 3PL evaluation and selection process, and only 10% said the CEO
was very or completely involved.

10. “If there was one thing we could change…”“If there was one thing we could change…”
If there is one thing my company could change
to strengthen and expand our relationship withto strengthen and expand our relationship with
3PLs, it would be...
If there is one thing our 3PL(s) could change to
strengthen and expand their relationship with
us it would beus, it would be...
“We would change our culture they would changeWe would change our culture, they would change
their culture [with regards to outsourcing].”
- Web survey respondent
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Web survey respondent

11. Summary and RecommendationsSummary and Recommendations
Most 3PL-customer relationships are not structured to be
strategic, but most also don’t need to be strategic.g , g
The real opportunity is for customers and 3PLs to focus on
well-established relationships where additional progress in
terms of cost savings, service improvements, or other formse s o cos sa gs, se ce p o e e s, o o e o s
of continuous improvement has slowed or stalled.
The building blocks to achieve this goal include:
• Focusing on outcomes instead of tasks;• Focusing on outcomes instead of tasks;
• Creating alignment between the two companies—this
includes having ongoing and clear communication on
strategic initiatives and improvement opportunities;strategic initiatives and improvement opportunities;
• Getting the CEOs and senior leadership teams of both
companies involved upfront.
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12. Thank You.Thank You.
For more information, contact the author at
adriang@arcweb.com or visit our web pages at
www arcweb com and www logisticsviewpoints comwww.arcweb.com and www.logisticsviewpoints.com

13. Next StepsNext Steps
ARC will produce report based on key takeaways
from Think Tank sessions and send to attendeesfrom Think Tank sessions and send to attendees
Continue the education process and introduce
PBO/Vested Outsourcing to internal stakeholdersPBO/Vested Outsourcing to internal stakeholders
and 3PLs/customers
• Read Kate Vistasek’s book Vested Outsourcing: Five
Rules That Will Transform Outsourcing
• Attend University of Tennessee course (March 9-11)
• Have ARC coordinte1 day seminar at your company• Have ARC coordinte1-day seminar at your company
• Subscribe to ARC’s Logistics Viewpoints
(www.logisticsviewpoints.com)
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14. Next Steps (cont’d)Next Steps (cont’d)
PBO/Vested Outsourcing part of ARC’s Research Agenda
• Continue to track the progress of PBO/VO in outsourcedp g /
logistics relationships
• Understand the use of PBO/VO in outsourced
manufacturing asset management relationshipsg g p
• Document case studies and best practices
Other ways ARC can help…
f f• 3PL Assessment Service: assist with identifying short list of
3PL partners that align with customer requirements and
objectives
• Market Research: quantitative and qualitative research
focused on industry best practices and trends, and sizing
business opportunities.
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• Advisory Service: serve as external, objective member of
your cross-functional team (“Win-Lose” coach)