How important is each logistics service provider to your business?
Your answer will depend on a range of factors, including the value of services purchased, the number of potential suppliers and the capabilities required of the service provider.
The analytical approach to identify those LSPs which are strategic to your business is to segment the LSP contracts into categories and sub-categories, as part of a larger supplier segmenting activity.
Segmenting indirect spend suppliers into categories and sub-categories enables a set of business rules to be applied against each category. An example of a structure is to commence with ‘logistics services’, which incorporates the three categories: goods movement services, materials services and professional services. Under goods movement services, one of the sub-categories can be named ‘freight forwarders’; another could be 3PL distribution.
Each sub-category is assessed, based on their potential financial and reputation impact (or risk) to the business. The higher the risk, the more critical (or strategic) will be the business relationship.
If your business does not undertake a risk analysis of LSP relationships, an unknown risk is that your LSPs could form a view of each customer or client. The analytical review will show:
- The percentage of annual sales obtained or forecast from each customer/client
- The gross margin obtained from each customer/client
- Attributes of the relationship with each customer/client and their cost to serve
The analysis may show a low percentage of annual sales from a customer, yet the cost to serve is high. In this case, the LSP will not view the business relationship as worth a lot of effort; they will not view the contract as strategic, whatever their customer’s view of the business relationship.
To identify your critical LSPs, segment your suppliers, then analyse those that meet your critical criteria.