By Andy Hunter, Sr. Director, Supply Chain Practice
Only one thing is constant with today’s supply chains…Change. In an ever-evolving world, businesses are constantly adapting and modifying their business models to keep up with the pace of change. This puts pressure on 3PL contracting to get the correct information to support a 3 to 5-year contract that allows both parties to succeed. Unfortunately, not every scenario or situation can be anticipated, so you are sometimes left with assumption gaps or differences in scope that need to be analyzed and understood. 3PL customer relationship management is critical for positive outcomes.
Lead with Facts & Data – How to Navigate Variances in Contractual Assumptions…Properly
It’s essential to have controls to identify when the profile/scope begins to vary from the initial contractual assumptions. Operations must fully understand the potential impact on the business – good or bad. This occurs by having the right performance expectations based on the contractual guidelines and measuring these metrics from the onset. Each party must understand the contract and translate it through their teams to execute it daily.
With labor being the most significant budget factor, tracking where labor is spent and comparing that to expectations provides a solid baseline for gap identification. Once gaps are identified, a transparent communication approach with the customer supports a path forward early in the process and keeps the need for lawyers out of it. It is almost guaranteed that there will be some difference in the contract that bubbles up – being armed with facts and data and proactively managing through it is a recipe for success.
Responding Reactively vs. Proactively to Changes in Assumptions: The Impact & The Best Way to Navigate
Being proactive and having the facts on variances in assumptions is often easier said than done. 3PLs often react to poor performance trends with feelings or emotions – “I think” or “I feel” are words often spoken. The reactive response usually starts from seeing results in the P&L that don’t align with the initial proforma of the deal. This puts pressure on the 3PL to respond to their customer and begin a painful negotiation process around the contract – while trying to gather the facts in real-time as to the reason for the performance gap. This significantly strains the relationship with each party as they react emotionally vs with facts. The once open and transparent relationship has turned for the worse, with each party trying to find a stronger negotiating position.
If not correctly handled and worked out, the result may be that the 3PL, the customer, or both are looking for a way out of the contract – with one or both of them significantly impacted financially. Even if a path forward can be agreed upon, the once promising relationship needs considerable mending.
If faced with this situation, a reasonable path forward is to engage a non-biased party to assess the current situation and offer recommendations for both parties. This level sets the current state, shows a comparison to the contractual assumptions, and outlines what changes are required to facilitate a path forward. This could include any necessary budget or rate changes, performance improvement expectations for the 3PL, and any needed changes for the customer to position the 3PL for better operational success. Each 3PL will be faced with a challenging situation – the key is to learn from it and put the necessary process changes in place for future operations.
To learn more about the 3PL customer relationship management, Connors Group, and their contract and scope analysis offering, please get in touch with us at: