At 32 years and counting, Yamaha Motors Corp.'s relationship with APL Logistics (and predecessor companies) is one of the industry's most enduring partnerships. It also may hold the record for continuity of personnel. Tom Wade, Yamaha logistics manager, and Bob Gaughan, group general manager and head of APL's Atlanta operation, have been key players in the arrangement for more than 20 years. And here's one more surprising fact: this 30-year deal, until very recently, operated under a 30-day renewable contract.

There doubtless are many reasons for the longevity and success of this relationship, but the one that Wade "underlines three times" is flexibility. "What we have found with APL is a continued willingness to develop new aspects of their business and new value-added services," he says. "I say 'continued' because this really goes back to the foundation of the company and is something that hasn't changed-thankfully so, from my seat."

Yamaha first began its outsourcing partnership with the Unit Companies in Jacksonville, Fla., which later was acquired by GATX. GATX, in turn, became part of APL Logistics, Oakland, Calif., in 2001.

Over the years, there have been many changes in Yamaha's business. "But APL Logistics management has been very consistent and energetic in providing whatever services Yamaha needs and in realizing that those needs continually change as our business changes," says Wade. "There is a lot of understanding of our business and business practices."

One example of how APL Logistics has responded to changes involves Yamaha's 1985 opening of two U.S. manufacturing facilities. Prior to the opening of these Atlanta-area plants, Yamaha had imported all of its products. "We still are a large importer, but what changed is that APL Logistics expanded tremendously into domestic transportation for us," he says. The logistics company brings raw materials and CKD (complete knocked-down) products from rail heads to Yamaha's plants and distributes finished product to its regional distribution centers. "We originally started with one product and we now produce four very distinct products," says Wade. "APL has adapted to all of this very, very well."

Critical Challenge
New business operations, as in this example, provide a natural opportunity for 3PLs to expand and enhance customer partnerships. But finding untapped value potential -particularly after the initial engagement has taken "easy money" off the table-is a continuing challenge for service providers.

Yet it clearly is a critical issue for customers. In the Ninth Annual 3PL Study, conducted in 2004 by Capgemini, Georgia Tech and FedEx Supply Chain Services, respondents said that they expected core capabilities, but based their selection of a 3PL provider on value-added services. "Core or basic services continue to become commoditized, while value-added services and relationship management skills are becoming points of differentiation," the study says. "Sustainable relationships require equitable and creative deal structures, continual improvements and mutual investments."

However, as a relationship matures, "it becomes more difficult to find improvement of the magnitude of that which usually exists early in the relationship," says Joe Gallick, senior vice president of sales at Penske Logistics, Reading, Pa. This is particularly so in an economy like today's, he adds, where the pressures for continuous cost reduction "are paramount."

Brooks Bentz, associate partner at Accenture, Reston, Va., underscores this point, noting that 3PLs recently have had to grapple with a capacity shortage as well as sharp increases in core cost components like fuel and labor.

"If you are a 3PL providing a service that includes warehouse management and arranging line-haul transportation, you are having to go to your customer and say something like, 'I know I saved you 8 percent or 10 percent over the last three years, but now I need a 12 percent increase,'" he says. Since real freight dollars have steadily declined for the past two decades, that shouldn't be much of an issue. "But a lot of these people have seen nothing but decreasing prices for their entire careers," he says. "Every year they have been able to get a 5 percent decrease. Now, for the first time in 23 years, they are having to convince their boss that they did a great job by limiting the increase to 5 percent. That story doesn't sell quite as well."

It is situations like this where it really counts to have a business relationship in which the provider is a true partner and not just a vendor, says Jimmy Rodriguez, chief commercial officer at ServiceCraft Logistics, Buena Park, Calif. "If you understand the customer's business model, the markets and geographies it wants to penetrate, the verticals it wants to target, its different manufacturing options and so on, you can continue to find low-hanging fruit. But if your relationship is just as a vendor of logistics services, you hit a brick wall."

He is quick to add that this is a two-way street. "The partnership has to be on both fronts. The customer has to allow the service provider to become an intricate part of its business and look beyond the services it currently is providing."

ServiceCraft found such an opportunity with a customer that imports a consumer electronics product from China. While receiving and repackaging this product for various retailers, ServiceCraft realized that significant savings could be achieved if the individual packaging was eliminated at the point of manufacture. It recommended that the client combine products into a Gaylord-type unit before shipping. This change not only saved the cost of cardboard, but it allowed the customer to optimize cube utilization in the container, which had been very low under the prior system because of the packaging configuration. Now ServiceCraft is doing final packaging of the product in the U.S. to retailer-specific requirements. "Even though labor is more expensive here, that cost is more than offset by the transportation savings," says Rodriguez.

Process Improvement
Process improvement is one of the ongoing ways that Penske Logistics uses "to take a relationship further and excavate deeper into the customers supply chain to find more efficiencies," says Gallick.

As a GE company, Penske often turns to 6 Sigma methodology as the basis for this undertaking. "We don't necessarily look at the processes we are providing, but rather at adjacent processes that are either inputs or outputs to what we do. Then we work to take out defects or speed up cycle times," he says.

If Penske were operating a warehouse for a customer, for example, and another provider controlled the inbound material flow into that warehouse, "we might work on a project that measured the process efficiency of the inbound material flow," Gallick explains. "Let's say it was at a 3 Sigma level, which is about 6.5 defects per 100 opportunities. If we were able to improve that to a 4 Sigma, we would reduce the defects to fewer than one per 100. That type of yield would be recognized by the customer and would also make the process that we provide more efficient and enable us to drive more cost or better service levels."

APL Logistics has been able to lower outlays for some automotive customers-in the face of higher logistics costs-by enabling better supplier compliance. Improving the accuracy of parts quantities and dates of release "can save OEMs and Tier One suppliers quite a bit of money," says Mike Pilver, vice president of global automotive sales. "So while costs might be rising in one area, if we can show we are reducing costs in another area, it's a win-win."

Often new technology can be the basis for additional value. "Integrating and interfacing with SAP systems is another area where we have found savings," says Pilver. 'If there is a disconnect between the customer's material ordering system or procurement system with the supplier, and yourself as the 3PL, additional costs are built in because you are getting information hand-offs that are manual." IT interfaces can save significant dollars, but they also require a significant commitment and investment. "Both parties need to put a reasonable amount of skin in the game to have a successful outcome," Pilver says.

Ozburn-Hessey Logistics, Nashville, Tenn., last year implemented voice picking for a client, after both companies agreed to share the cost of this investment. The technology, "has improved our efficiency substantially within that facility," says CEO Scott McWilliams. OHL also is working on consolidating multiple LTL shipments from various customers going to mass retailers in order to reduce transportation costs. Some companies are more open to this type of innovation than others, he says. "There definitely is a correlation between the amount of creativity we can bring to the table and the amount of information a customer is willing to share with us."

The need for companies to master RFID provides another opportunity for 3PLS to develop new ways to assist customers. When the Ninth Annual 3PL Study asked what future IT-based capabilities users are going to expect from their 3PL provider, the overwhelming response was radio frequency identification and asset tracking.

Miami-based Ryder has responded to this need by opening an RFID lab. "Customers are invited to come down to the lab and we show them how RFID works," says Chuck Lounsbury, senior vice president. "We can demonstrate the use of passive and active tags at the pallet and carton levels, and even down to eaches, with applications in both the back room and the front room."

Since most 3PLs serve multiple industries, they are in a good position to help clients understand best practices and to provide industry benchmarking data. "At Ryder we are continuously looking at what we have learned from other industries and bringing those ideas to our customers," says Lounsbury. As an example, he notes that the company has adapted several techniques from the automotive industry, such as sequencing, and applied them to consumer electronics. "The goal is to find ideas that will make us a better supplier and that will result in continuous improvement for our customer," he says.

Again, it all comes back to partnership. "If you can get a company to do some strategic visioning with you, you can help them become more efficient," says Lounsbury. "If they exclude you or view it more as a transactional relationship rather than a partnership, then you don't have much chance of doing that."

Convincing the customer to move in this direction is something Menlo Worldwide, Redwood City, Calif., has worked hard on, says Lonny Warner, vice president of marketing. "The challenge is to present information to the customer in a way that hits home, which means tying it into the goals and objectives for their corporation," he says.

"We have to make sure we understand what those goals and objectives are-and when they change-so that we can translate our information into an impact on those issues. We need to show them, if you make this change or that change, here is how it will impact these specific goals and objectives. We have gotten better at this but it still is our biggest challenge in this area."

To facilitate such exchanges, 3PLs typically hold regular meetings with their clients, at both the operational and strategic levels.

"It is important to regularly communicate with your customer so as to stay aware of how its business may be changing and how that impacts its needs and priorities," says Dave Lamolinara, vice president of business development at TNT Logistics, Jacksonville, Fla. "We need to make sure we are in tune with that so we can readjust or recalibrate our own goals and objectives. It helps avoid surprises."

Customer meetings also give the 3PL an opportunity to demonstrate for upper management the less obvious benefits of its service. "We all manage by exception, so we try to help the customer understand the value of the things that didn't happen, the problems that were avoided," says Lamolinara. "They don't typically hear about those."

"These are the settings in which you address how the operating metrics feed the overall strategy of the business," says Gallick. "It also is the best time to learn from the customer, at the strategic level, what their vision is, where they are taking the company and what factors may change their business going forward."

Regular meetings also provide a forum for both sides to discuss the possibility of additional work outside the specific solutions included in the contract. "When we bring an idea to a meeting with a business case and an engineering solution and an ROI expectation, we know it is being presented to a level where it will be considered," says Gallick. "If we have done a good job in selecting the companies we partner with, these opportunities will always emerge as the relationship matures."

Such conversations help lay important groundwork for the contract renewal process. If done well, the decision to continue the relationship becomes almost automatic.

"From our perspective, the absolute worst time to renew a contract is when it is due for renewal," says Robert Bianco, president of Menlo Worldwide. Ideally, Menlo likes to identify additional ways to bring value to clients 12 months to 18 months in advance of a contract expiration, he says. "If the client likes the idea, what we will do is bring that into the current contract's scope and just push out the termination date."

Typically there are three triggers for an early contract change, he says. "One is that we have achieved the level of value that we originally sold and the customer asks what we can bring to the table next; a second would be a business model change that occurs within the existing scope of work and that might require reengineering or reoptimization. "The last trigger is just getting within a year of renewal. Then we have all hands on deck to look for ways to bring more value and to keep it out of a bid environment."

Lamolinara also says that conversations about service extensions should not be tagged to a contract term but should come "at the point where the customer and TNT begin to realize that that bridge (created by the original solution) is no longer as effective or as suitable as it was when we started the relationship." Not surprisingly, TNT has found that customers who are willing to collaborate and that have strong executive sponsorship of the outsourcing project "are the ones where we tend to have greater success in investing early to renew the relationship. With these customers, he says, "we might begin to discuss the next stage of the relationship months or years before the first term expiration is even on anyone's radar screen."

To further facilitate this approach, most of TNT's contracts are structured with a master services agreement followed by a series of addendums. "The master services agreement basically stays in place and covers all of the legal elements, but the addendums that spell out the scope of work and the rates and the processes are able to be flexible and fluid as customers' needs change."

Pricing
As relationships mature and contracts enter a second, third or fourth term, pricing arrangements generally need to change as well. This is particularly true if the first engagement was based on gain sharing.

"Usually our gain-sharing agreements sunset at the end of the term," says Bianco. "If the decision is to continue it, then it is incumbent on us either to re-mine the existing field for additional new opportunities or to go outside the original scope of the contract and look at other ways to bring value."

"Gain or risk sharing is really a mechanism to overcome or bridge the fact that trust isn't fully developed in a new engagement," says Gallick. Even when a company performs the proper amount of due diligence, there still is a certain amount of uncertainty, he says. "In those cases, the concept of gain-sharing adds stability to the relationship. So, in many cases we will put a portion of our management fee at risk if we don't meet the operating and financial metrics that we have agreed on." On the other hand, he says, Penske asks to share in the financial benefit if it exceeds those metrics.

After the initial engagement, gain sharing is more difficult because gains typically are less dramatic and often are harder to quantify. "Going from 3 to 4 Sigma is a lot easier than going from 4 to 4.2," says Gallick. As a result, he says, when Penske goes to version two or three of an agreement, "the gain-share approach generally dissipates and we operate more on cost-plus, again with requirements to reduce costs below a set baseline."

A good example, he says, is Penske's relationship with General Motors' operations to Mexico. "For the first three years we operated on a cost-down, gain-share basis," he says. "We were successful in achieving the cost-downs and GM to Mexico certainly benefited from those process improvements. When the relationship renewed we still had a cost-down mechanism, but gain-share was relegated to a minor component of our compensation. I think that is generally what happens."