Much has been written about outsourcing. Articles speak in grand terms about the reasons and benefits on the outsourcing path to business nirvana, or have tips on RFPs (requests for proposals) and SLAs (service level agreements), or how to manage outsourcing relationships.
However not much has been discussed about the success, or lack, of outsourcing beyond perhaps an anecdotal mention. There are no overviews of the turnover of customers by 3PLs and other logistics service providers (LSPs); no reference to the purpose of repetitive, even annual, RPFs. There is no mention of profit squeezes on 3PLs and LSPs; no discussion of the quality and quantity of customer leads and of customers.
Profit Margins Without a Value Proposition
What goes wrong? Why is there a lack of real, ongoing, definable sustainability in outsourcing relationships? Why is there a disconnect between the expectations by both parties and results?
There are reasons. One begins with the RFP itself which sets the selection decision in terms of price, not service. Another is the functional view of what is being outsourced, and what could be defined as work, that can create a defacto employer-employee situation between parties.
More could be added. Instead there should be recognition of something underlying, subtle and somewhat evasive with many outsourcing endeavors that lays the basis for problems. It is the lack of a value proposition (VP) by the 3PL or LSP.
The VP is not about the freight. It is not about the pallets or packagin the product. It is not a marketing spin. VP is not about the service provider, the service provided or the assumed benefits of the service. It is not about market share at any cost or imitating competitors or indiscriminately pursuing customers or flogging asset utilization.
The value proposition must be focused on the customer, not on the 3PL. A solid VP turns the discussion away from price and toward the customer and his need. It creates a value in using the 3PL that no other 3PL has and which the customer will pay for.
A 3PL can use the value proposition to differentiate itself from the competition and to break away from the zero-sum game of customer and market share pursuit. It should increase the quantity and especially the quality of sales leads. The VP is not a slogan or tagline. It requires 3PLs and LSPs to understand their services and what they are really worth to customers. The need for this is important since much of logistics service offerings are viewed as commodity services defined by price. The value proposition separates the 3PL form the commodity-service competition and breaks the 3PL out of a self-defeating price competition game that pressures profit margins.
Value proposition is strategic positioning and should have its roots in the company strategy. Strategy is how to achieve profitable growth. The VP is customer centric and requires understanding the customers' businesses. It targets real customer needs and does not apply to every customer or provide a universal sales methodology. It should be unique or distinctive. It may seem to have a niche approach. The VP should be measurable for the customer to see its impact and benefit. A clear, deliverable value proposition provides defacto branding.
Developing the value proposition is challenging. Determining what customers want and need takes effort. Again, it is not about 3PL-perceived benefits and is not for all customers. It should be measurable and answer the question on why a customer should use a particular service provider. A strong value proposition can overcome real or perceived similarities or weaknesses as compared to competitors.
Within Supply Chain Management. The need for a value proposition does not apply only to 3PLs and other logistics service providers. It also applies to supply chain management organizations. Many do not have a value proposition. There are two primary reasons for this lack of a VP. One is that the supply chain group has a strong functional mindset. This isolates the group and limits its ability to integrate its activities the company as viewed by top management. Functional mindset hinders the department across the breadth required for effective supply chain process.
Two is the company and its top executives do not really understand its customers and market. As a result, it does not make supply chain management part of its strategy and its competitive success. In essence the company lacks its own value proposition.
Conclusion. A value proposition is important to profitability and to growth. It differentiates the company from the competition and gives customers a definable, measurable reason to use the firm. Some companies understand that. Most unfortunately do not. These firms chase management du jour programs and have a self-fulfilling prophecy of continuing customer turnover, profit margin erosion and market frustration.