Logistics procurement is hard – but powerful new tools can change that (part 2)

PART 2

In the first part of our discussion on Logistics Procurement, we highlighted the disadvantages procurement teams are under due to lack of data transparency, and the essential limitations of a procurement process more fitted to commodities than services. In this second part, we look at the pitfalls to be avoided in RFP generation, and the gains offered by working with multiple providers.



The risks of a poorly-defined RFP

Logistics behaves more like a service than a commodity. It’s worth re-stating this, because it’s the key to understanding why a standard procurement approach doesn’t get the best results. Compared to, say, a mechanical component or a raw material, it’s extremely difficult to pin down a specification for a service as complicated as logistics, so cost can tend to be seen as the primary metric for procurement ‘success’ – but this can lead to disaster.

Simply structuring RFPs for a logistics service can be fraught with hazard because the vital ingredients that make a service work can be hidden from the procurement team’s view. The seeds of failure may be sown at this initial stage, by issuing an RFP that only partially describes the reality of the service required. Doing this forces the tendering parties to quote only for what’s specified – not what’s really needed to make a successful service.

When this happens, it’s not unknown for the incumbent provider to respond with a bid that is lower than its current contract price. The provider responds to the brief as it’s written, despite knowing about the many complexities inherent in the job which were not included in the RFP. They have to respond this way because the competitors don’t know the business or how it works, and will only bid on what’s specified in the RFP.

Even large, well-resourced organisations can make this mistake. Take the recent example of KFC and DHL.

KFC and DHL - what happened?

When the UK contract for fresh chicken deliveries was moved from the existing supplier Bidvest – a food specialist – to DHL, nearly all KFC branches in the country were forced to close within days because chicken deliveries stopped. Looking at how and why that happened, it’s impossible to ignore one key difference between the two logistics suppliers: Bidvest used six distribution centres, while DHL had only one. And on the first day of the new contract, DHL’s single distribution hub was put out of action by traffic accidents on the access route. There was no way to get chicken to KFC branches.

Had the procurement team structured its RFP in full knowledge of this vital resilience feature provided by Bidvest? Possibly not, because it’s difficult to see how they could otherwise have overlooked the obvious vulnerability in DHL’s proposal.

 

Procurement catastrophes such as KFC’s (and there are many other examples) highlight the danger of prioritising cost and disregarding, or having only a partial understanding of, service.

This case also emphasises the risk of ignoring resilience as a critical factor in supply chain design. A resilient supplier is vital to a resilient supply chain. But understanding and evaluating resilience is not part of the standard procurement team’s brief – although it should be.

For KFC, the decision to use a single logistics provider (especially a non-specialist one) was a risky one, and within a week KFC was forced to re-hire the previous supplier to share the load with DHL and get supplies moving again.

In general, putting all or most of your logistics with one supplier is a high-risk approach. But it’s an approach that many organisations take because they see it as a simple option. It simplifies operations, and it simplifies procurement.

Now, imagine if it were just as easy to use ten suppliers, and save a lot more by doing so.

 

Limited savings with one contract – big savings with many

 

Hindered by lack of data, inaccurate RFPs, complexity of evaluation, and pushback from supply-chain colleagues, a head of procurement might settle for modest incremental savings. Yet even within a single contract, a data-driven approach can yield faster results and much bigger savings.

Within each contract negotiation, a procurement team fully-armed with big data can do much more.

We’ve actually created a detailed 14-step guide to logistics procurement, including an RFP template that you can access for free. This will explain how to gather and structure the data you need, in order to run a data-driven procurement exercise.

But of course, gathering big data is one thing - analysing it is another. This is where AI can help!

Logistics and supply chain data analysis powered by AI in the 7bridges Procure module accelerates the process, from data cleanup and ingest to RFP generation, through proposal evaluation and reporting, and multi-step negotiation. This tool gives users the ability to:

  • Pinpoint which lanes, services and regions are not providing best value
  • Flag every case in which the incumbent 3PL failed to meet the SLA
  • Identify and list overcharges through incorrect invoicing
  • Reveal losses through process failures over the past year of operation (wrong choice of service, wrong size packaging etc)

Equipped with this information and more, it’s easy to strip out waste in a contract to achieve bigger savings. But taking it a step further, Procure makes it possible to compare quickly and accurately between proposals from a number of suppliers, with point-by-point value comparisons between them.

With Procure, each contract or proposal’s terms can be mapped to the procuring company’s previous 12 months of logistics data to test whether the proposed contract would have delivered the claimed savings. Using the same comprehensive base of data, the procurement team can make side-by-side comparisons of the existing and proposed contract terms to pinpoint gains (and find losses, if any).

One of the big advantages for a procurement team is that Procure offers detailed insight from suppliers across the industry, so team members will always know when suppliers they aren’t using offer better terms than the current contract holder. These insights are granular, so it’s easy to see if supplier C does better with packages over 25Kg between Milwaukee and Berlin than supplier A; or that supplier D is the most reliable on time-critical cold-chain deliveries in Eastern Europe.

With this level of insight, it’s a short step to creating very big savings and service improvements by building a multi-provider portfolio. 7bridges data shows how much more organisations save when they do this. The rewards are far greater than any savings that can be achieved in a standard negotiation with a single provider. And the benefits are multi-dimensional; not just cost savings, but greater resilience, and unprecedented agility that will allow any organisation to adapt supply chains rapidly when required to.

To make a multi-provider supply chain as easy to operate as a single contract, the 7bridges platform’s other modules handle all the process complexities of rules application and best service selection – package by package – leaving the operational staff a much simpler workflow to implement. The advantages of using multiple providers don’t have to be offset against any operational disadvantages.

Assisted and informed by the right technology, procurement personnel can negotiate a much bigger cost saving than before, and be able to demonstrate it convincingly to colleagues.

In the third part of our discussion on Logistics Procurement, you will learn how organisational differences can be smoothed out during a procurement exercise, and how to ensure a good deal on paper stays a good deal in practice.

Read part 3