Third party fulfilment – a successful choice?
The decision to outsource all or part of your operations is an extremely difficult one in itself, but once that decision is made how should you approach the selection process?
Make no mistake, this is a critical selection, as you are putting a key part of your operation in someone else’s hands, and your ability to influence the factors that affect your individual relationship with your customers will undoubtedly be reduced to some extent.
The first step is to be clear in your mind what is important to you. The easy answer is ‘I want the best service at the lowest cost’ and this whole area is constantly governed by the battle to balance service and cost. In reality, cost is often going to have the greater influence as it is more tangible, and this is even more influential when you are choosing a new supplier, because you do not know with any confidence what level of service you are going to get. I believe it is important to regard a relationship in this area more as a partnership and not a standard client/supplier relationship. One thing is almost certain – both parties will cause the other problems to the other from time to time and how you overcome those problems are paramount to the success of the relationship.
Formal or informal?
Although many of us rebel against formality and bureaucracy, this is an area where a formal document is critical. It may just be a 2 page brief or extend to a 20 page official ‘Invitation to tender’ (ITT) or ‘Request for proposal’ (RFP) but it is vital that all prospective suppliers are given the same brief. In fact, if one supplier asks for more information in certain areas, it is a good habit to pass on the same data to other suppliers as a matter of course (but perhaps give a brownie point to the supplier who asked, if the point is a good one).
Long List Selection
There are several information sources to help you select the recipients of your brief. Trade publications usually contain advertisements for some of the key players, trade organisations such as Catalogue Exchange, and there is a site that specifically covers suppliers in the area of product fulfilment – www.fulfilmentguide.com
Many of the suppliers on this site also offer the full range of services including contact centre and full order processing systems.
The long list should be in the range of 6-8 suppliers.
The Brief – what should it contain?
Any brief should contain the following key elements (the exact details would be determined by the range of services you are looking for):
- Background to your company, its history, size, planned growth over next 3-5 years and an outline of the products you offer
- Description of the services you are looking for, broken down into key elements
- The service levels you are looking for e.g. maximum % of abandoned calls in the call centre
- Activity levels for the relevant area e.g. overall order volumes per annum, peak weekly volumes, average items per order, % returns, average and weekly call volumes (plus average call duration)
- Other key information e.g. order channel split (% by web, phone and post), number of stock keeping units (SKUs) in your range,
- Any specific aspects of your product range or supply chain e.g. if any products require special packaging or two man delivery, or any of your products supplied on a direct despatch basis
- The pricing structure you are looking for (see further information under ‘PRICING’ below)
- Specification of information you want to know about the prospective supplier e.g. turnover, years in business, recent accounts, key current clients, references and if you are looking for the full order management service, the details of the system used for order processing.
- The timetable for the RFP process – when responses are expected to be received, timescale for any questions and clarifications, target date for short list decision, any planned dates for presentations and visits, and final decision point deadline
It can be a good idea to include some ‘open’ questions and ask for feedback on how the supplier would approach that issue. If nothing else it will act as a check on how well the supplier has read the document. I have seen on several occasions responses that have clearly been an ‘off the shelf’ RFP response that don’t of course answer these types of open questions, indicating the supplier has not read the document properly – not a good sign.
I have often been asked to outline (and then include in any contract) penalty charges to be applied if service levels are not met in any significant way. This can be an effective tool and go part way to answering the comment ‘what’s the point of an SLA (service level agreement) if there is no recourse if service levels are missed?’ Beware of the flip side though – a supplier may look for reciprocal arrangements such as a maximum out of stock level, minimum notice period to supply details of any marketing information, and look to apply ‘penalties’ on you if they are missed!
The RFP Process
Be prepared for questions to come back and set aside some time to process these – you are expecting suppliers to work to a timetable and you must play your part in helping that process, and this can take considerable time and effort, unless you have managed to anticipate every question in the brief!
Visits to potential suppliers are obviously extremely important, but time may not allow you to visit all the long list suppliers, and so selection of the short list may be based on actual responses, and research you have done on the company. This may include discussions with supplier reference contacts, but don’t be surprised if suppliers are unwilling to give you reference contacts unless they are shortlisted. This is not unreasonable, as suppliers do not want to irritate their best clients (who are the ones they put forward as references, naturally) by subjecting them to frequent calls.
It is really important in the brief to specify how you want pricing to be structured, as if you don’t you will get different structures from almost every supplier you contact, making it very difficult to compare overall costs. Be specific and bear in mind the following points:
- The preferred pricing solution from the suppliers point of view is to price each activity separately, and give you a long ‘menu’ of prices,
- The preferred solution for you is likely to be a single ‘all in’ price (probably per order) as that makes comparison easier and leaves you with only one or two lines in your budget and costing models
The problem with these two approaches is that in the first, you have little idea of what you will end up paying, and with the second, the supplier is taking most of the risk.
In practice, most companies demand a solution nearer to the second, which means that the supplier has to build in contingency to cover the risk, or he places lots of caveats on the ‘all in’ price, which if triggered means you end up paying more than your budget has assumed.
Clearly you should not just accept the first offering from suppliers and there is always scope to play one off against the other, but do bear in mind this relationship has to be viable for everyone concerned – it will be no use to anyone if the supplier hits financial problems or comes back and says he wants to terminate as he is losing money.
Making the Decision
In such a critical selection, a number of factors will come into play, for example:
- Cost (having done everything you can to ensure you are comparing like with like)
- The capability of the supplier system to support your business
- Supplier experience and capabilities
- Contractual aspects
Perhaps one of the most important aspects is your belief in how well you can work with the key people – this is likely to be a long term relationship (at least 3 years) and how you and your team ‘gel’ with the suppliers team is critical.
If the decision is not a clear one and more than one person in your company has been involved in the search, it can help if you design a decision matrix, where you list the key factors, put a weighting on them to represent their comparative importance to you, and then ask everyone involved in your team to mark each supplier out of 10 against each factor, independently. Apply the weightings to then get an overall score for each supplier. This should NOT be seen as the decision tool in itself, but can then be a good basis for debate if you find members of your team (including yourself) have scored aspects very differently.
Once you have selected your preferred partner, do allow time for sorting the contract. It will depend on how much importance you put on the legal aspects, but it is important and should not be glossed over, especially in topics such as service levels and pricing structure – these must be defined clearly.
The move from either your in house operation or another supplier is a major project and its timing and resource needs have to be carefully considered. You may be going from the worst possible supplier to the best in the world – but it will still cause you pain and disruption and cost you money!
by Andy Cable 4th September, 2012
Andy Cable is a highly accomplished Customer Service and Operations professional with over 25 years experience in senior positions in this field. With hands-on experience working in successful blue chip companies (BSkyB, Open Interactive TV (part of BSkyB), Innovations, Arcadia, GUS), he established his own consultancy in 2002, and has since worked with a range of companies from home shopping start-ups to established multi-nationals and High Street names such as Book Club Associates, De Agostini and John Lewis.
© Andy Cable and Tuffill Verner Associates, July 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Andy Cable and Tuffill Verner Associates with appropriate and specific direction to the original content.