Challenges when buying and selling Logistics Services

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

Negotiating a deal

Documenting a Logistics Service

Logistics Services occur through interactions between a buying organisation and the contracted Logistics Services Provider (LSP). But, how will the parties work together in delivering an outsourced service for the client’s customers?

To determine the scope and content of logistics services, initially consider them at two levels of deliverables:

  • Tasks, such as a line haul truck service between two cities, which can be defined and written into a standard contract
  • Functions, such as national distribution service, which is outsourced in its totality. It requires a negotiated contract, with substantial input from all involved at the buyer and prospective supplier organisations. This is to negotiate a service supply contract with a new LSP, or to test the current provider against the market.

The previous post discussed steps that a shipper should complete before going to the supply market for an outsourced logistics service. These steps were the organisation’s Supply Network map (led by Logistics) and a Supply Market analysis (led by Procurement).

To build their understanding of the current and changing supply market and of suppliers’ capabilities, Procurement and Logistics professionals must be in contact with the supply market. This is through industry forums, professional organisations and informal meetings with staff at LSPs.

Concurrently, Procurement must identify the internal stakeholder departments and groups and determine to what extent and how they are affected by and/or involved with the logistics service. Then, discuss the intended approach with the affected people, supported by the supply market research and analysis.

The next step is writing the Purchase Plan. This identifies the importance (and therefore internal visibility) of the buy, the expected scope and outcomes of the service, the service requirements and most suitable type of contract.

With the Supply Network map and Supply Market analysis as addendum to the Purchase Plan, the organisation can write a documents to assist discussions and then approach the supply market with a high degree of confidence concerning its real needs.

This approach differs from the traditional (and still used) ‘RFx’ approach of providing detailed documentation for suppliers at stages through the buying process: 

Request for Information (RFI): the buyer sends potential suppliers a RFI to gather additional information about the services provided. The responses are used to align with the buyer organisation’s stated needs.

Request for Proposal (RFP):  used when a buyer organisation is unsure of the direction required to address an issue. Responses (based on specific guidelines) are used to develop a potentially viable solution.

Request for Quotation (RFQ):  responses from potential suppliers state how the buyer’s requirements will be addressed, together with the associated price. The RFQ must clearly state the service requirements, acceptance criteria, pricing model and bidding rules. The selected supplier can be based on responses received, or the RFQ responses used to decide a short list of suppliers that enter into final negotiations with the buyer organisation.

However, applying the RFx approach to outsourced logistics functions e.g. a national distribution services, can be a mistake from the perspective of both the buyer and prospective suppliers.

Buyer’s overarching need

As outsourcing a major logistics function is a critical decision, trust in the business relationship will be a paramount need of the buyer. Trust in business relationships can be expressed as “predictable mutual behaviour through honouring commitments made and dealing with unforeseen contingencies in a mutually acceptable manner” Sako M. (1992).

Sako states that trust in business relationships is about perceptions of the other party’s abilities, expertise, knowledge, motives and intentions, which can be summarised as:

  • Contractual: adhering to written and oral agreements; keeping promises and upholding ethical standards
  • Competence: managerial and technical capability
  • Goodwill: dependable; willing to do more than is formally expected and take initiatives without taking advantage of the situation

As these features only show over time in a familiar working situation, major outsourcing contracts should have a minimum duration of about five years.

Buyer conditioning

LSPs that have the capability to address the shipper’s needs are unlikely to be sitting around waiting for an RFx document to arrive. They will be actively working to influence the buyer organisation, to gain some advantage in future negotiations.

As logistics outsourcing contracts do not happen very often, buyer conditioning by LSPs can occur over a long period. Typical approaches are:

  • Invitations to attend local seminars and workshops, with lunch or dinner
  • Invitations to attend interstate, region or international conferences. with all or part payment of expenses
  • Provide entertainment e.g. soccer and tennis matches; theatre tickets
  • Offer gifts to individuals

However,the sales staff may not gain the advantages they hoped, because of their approach to the prospect. It is unfortunate that in business degree courses, marketing is usually one of the compulsory subjects, but rarely are sales and selling discussed. Graduating students may therefore enter the workforce in a sales role with limited understanding of how to act.

If their employer is driven by sales quotas and bonuses, the moto could be ‘ABC’ – always be closing! The urgency to close a sale is therefore likely to override the three basics of selling logistics services:

Understand the prospect’s business: LSPs should not consider prospects as generic businesses. Selling a solution based on features and benefits of the LSPs offering before the problem is understood, is not the way to achieve a working relationship. Building personal relationships can help, but identifying and analysing facts about prospects through market research is more important.

Listen more and sell less: Listening helps the sales process, because it allows the buyer to discuss logistics and its challenges from the buyer’s viewpoint. The sales person can summarise what they have been told and with sufficient knowledge and skill concerning logistics, can add value through proposing alternative approaches for consideration. This is consultative selling.

Build trust and be honest: This aligns with the buyers overarching need to build trust between the parties. As an example, a LSP should identify what it cannot do well (but propose ways to overcome the challenge) and avoid making unsubstantiated ‘benefits’ claims.

So, reaching an agreement concerning outsourcing a major logistics function requires research and analysis by the buyer and seller. It requires care in selecting the supplier and time to negotiate an agreement that is acceptable to both parties and which can be adapted to suit revised circumstances.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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