IntroductionInsight from industryMuch of the material written about logisticsInsights from a logisticspartnerships presents the perspectives ofpartnershippartners shortly after the partmership hascommenced.Thispaper focuses on theevaluation of a logistics partnershipbetween aRobert G. House andlarge retailer and a provider of internationalTheodore P. Stanklogistical service based on five years ofoperating experience.The authors believethat the insights gained from this partnershiphave wide applicability and merit discussion.Following a brief discussion of the nature ofthe partnership,the problem areas areidentified. Next, the key lessons learned aresummarized and recommendations for otherlogistics partnerships are made.TheauthorsRobert G.House is Divisional Vice President of VendorAdministration, Kmart Corporation, Michigan, USA.An international logistics partnershipTheodore P. Stank is Professor of Logistics and SupplyChain Management, Michigan State University, EastThis paper focuses on the insights gainedLansing, Michigan, USAfrom a partnership formed between MelvilleCorporation, a leading specialty retailer in theKeywordsUSA, and Mercantile Logistics, a third-partyLogistics,Outsourcing,Organizational culture,provider of international logistical services.Internal communicationsMelvillewasaUSs12billion specialtyretaileroperating stores inthe continental USA.AtAbstractthetimeoftheformation ofthepartnership itHighlights insights gained from five years of operatingparticipated in the footwear, apparel, chainexperience in a logistics partnership between a large USdrug,toy, and home furnishing retail marketsretailer and a provider of intemational logistical service.Melville owned and operated CVS, KayBee,The insights gained from this partnership show that aMarshall's, Wilson's, Linen's N Things,third-party logistics provider can help a firm achieveFootaction,Bob's,AccessoryLady,Thomsubstantialresults.ThepathtoachievingtheseresultsisMcAn, Prints Plus, This End Up, andnot without its difficulties, but many of these problemsMeldisco (thefootwear segmentofKmart).can be anticipated and appropriate actions taken toMercantile was the logistics division ofminimize their disruption.Establishing a measurementMaersk, a worldwide transportation firm withsystem that allows easy and integrated reporting of thestatusoftheenterpriseisessentialifrealprogressistobeheadquarters in Copenhagen.made in a logistics partnership. An extensive formal andSeveral factors led Melville to seek theinformal communication strategy is essential to addressservices ofaconsolidatedinternationalthe issues arising from the difficulty of combining twologistics service provider.First, Melvilledifferent organizational cultures. Finally, this partnershiprecognized the need for international logisticshas shown that if the rewards for both partners are real.expertise in individual divisions that had nottangible, and substantial the partnership can endure.developedthosecapabilities,as well astosupplement the capabilities of other divisionsElectronicaccessSecond,consolidationofserviceswithoneThe research register for this journal is available atprovider would enable Melville to leverage thehttp://www.mcbup.com/research_registerscombined power of multiple divisions tosecure superior services at competitive prices.The current issue and full text archive of this journal isThird, Melville desired the ability to rapidlyavailable atexpand international sourcing without havinghttp://www.emerald-library.com/ftto develop logistics infrastructure to supportsuch sources.Finally, consolidating servicesSupply Chain Management: An International Journalwith one provider would facilitate a worldVolume6-Number1-2001-pp.16-20MCB University Press ·ISSN 1359-8546class control system to ensure full visibility of16
Insights from a logistics partnership Robert G. House and Theodore P. Stank Introduction Much of the material written about logistics partnerships presents the perspectives of partners shortly after the partnership has commenced. This paper focuses on the evaluation of a logistics partnership between a large retailer and a provider of international logistical service based on five years of operating experience. The authors believe that the insights gained from this partnership have wide applicability and merit discussion. Following a brief discussion of the nature of the partnership, the problem areas are identified. Next, the key lessons learned are summarized and recommendations for other logistics partnerships are made. An international logistics partnership This paper focuses on the insights gained from a partnership formed between Melville Corporation, a leading specialty retailer in the USA, and Mercantile Logistics, a third-party provider of international logistical services. Melville was a US$12 billion specialty retailer operating stores in the continental USA. At the time of the formation of the partnership it participated in the footwear, apparel, chain drug, toy, and home furnishing retail markets. Melville owned and operated CVS, KayBee, Marshall’s, Wilson’s, Linen’s N Things, Footaction, Bob’s, Accessory Lady, Thom McAn, Prints Plus, This End Up, and Meldisco (the footwear segment of Kmart). Mercantile was the logistics division of Maersk, a worldwide transportation firm with headquarters in Copenhagen. Several factors led Melville to seek the services of a consolidated international logistics service provider. First, Melville recognized the need for international logistics expertise in individual divisions that had not developed those capabilities, as well as to supplement the capabilities of other divisions. Second, consolidation of services with one provider would enable Melville to leverage the combined power of multiple divisions to secure superior services at competitive prices. Third, Melville desired the ability to rapidly expand international sourcing without having to develop logistics infrastructure to support such sources. Finally, consolidating services with one provider would facilitate a world class control system to ensure full visibility of The authors Robert G. House is Divisional Vice President of Vendor Administration, Kmart Corporation, Michigan, USA. Theodore P. Stank is Professor of Logistics and Supply Chain Management, Michigan State University, East Lansing, Michigan, USA Keywords Logistics, Outsourcing, Organizational culture, Internal communications Abstract Highlights insights gained from five years of operating experience in a logistics partnership between a large US retailer and a provider of international logistical service. The insights gained from this partnership show that a third-party logistics provider can help a firm achieve substantial results. The path to achieving these results is not without its difficulties, but many of these problems can be anticipated and appropriate actions taken to minimize their disruption. Establishing a measurement system that allows easy and integrated reporting of the status of the enterprise is essential if real progress is to be made in a logistics partnership. An extensive formal and informal communication strategy is essential to address the issues arising from the difficulty of combining two different organizational cultures. Finally, this partnership has shown that if the rewards for both partners are real, tangible, and substantial the partnership can endure. Electronic access The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft Insight from industry 16 Supply Chain Management: An International Journal Volume 6 . Number 1 . 2001 . pp. 16±20 # MCB University Press . ISSN 1359-8546
Insights from a logistics partnershipSupply Chain Management: An International JournalRobert G. House and Theodore P. StankVolume 6-Number1:2001-16-2040 origin points to as many US-basedthe international supply chain from point oforder to the point of delivery to the domesticdestinations.Thepartnership accounted forthemovementof nearly7000040ftDC.Mercantile was selected because itsequivalent (FFE) containers during this timestrategy,management,and capabilitiescloselyperiod. The volume of activity made thisaligned with these goals. The vision of thethird-party logistics contract one of the largestpotential of the relationship between the twofirms was shared at both the executive andof its kind to date. However, the partnershipwas dissolved after five years when Melvilleoperational level.Under the terms of the relationshipannounced a strategic realignment thatcreated three new operating companies,Mercantile Logistics managed all aspects ofincluding a drug chain holding company, aMelville's importprocessfrom vendorslocated in theFar East.Mercantile Logisticsfootwear company and a toy company.Somebusiness units were sold to otherwas responsible for coordinating vendorcorporations.Two of the remainingshipments,consolidating freight,bookingcompanies were primarily domestic in theirocean and airtransportation, coordinatingUsoperations,thus reducingthevolume ofCustoms brokerage activities, and schedulinginternational logistics to the point wheredelivervofshipmentstoavarietyofmany of the shared economies of scaleweredistributioncenterslocatedthroughouttheno longer available.Thus, the relationshipUSA.Melville's divisions provided electronicbetween Mercantile and the resultingcopies of purchase orders and purchase orderbusinesseswasrestructuredtoreflectthechanges to Mercantile Logistics dailymore individualized needs and requirementsMercantile Logistics managed the activitiesofthoseoperations.necessaryto ensure that shipments weredelivered in accordance with the instructionon the purchase orders and reported statusProblemareasinformation via daily electronic updates to theinformation systems of Melville's variousAlthoughthe outcomes of thepartnershipdivisions.havebeen positive, significantproblemswereThe partnership was structured to achieveencountered along the way.Notableproblemfour major operational objectives:areas included theplanning and start-up(1) reduce total logistics cost;process, documentation, measurement of(2) reduce transit time:progress, and cultural and organizational(3)improveinformation;andbarriers that proved difficult to overcome.(4)improve pipeline reliability.Each of these impediments is discussedEach of thesemajor objectives was achieved,below.and in some instances year by yearaccomplishmentswidely exceededPlanning and start-upexpectations.Overall cost was reduced byMelville implemented the new relationship in12percent, despite absorbing2-4percentperits largest importingdivision first to maximizeannum increases in ocean freight rates, andcost reduction potential.Unfortunately,thereliabilitywasimprovedtobetterthan96division was at the beginning of its importpercent (measured in terms of purchaseprocessing peak season.Hindsight makesorders deliveredtwo days of planned dueclear that this was not the most prudentdate). Transit times were reduced by morestrategy.Although Mercantile Logistics hadthan ten days through the use of anengaged in two months of planningprior toinformation system that tied purchase orderthe initiation of import management services,due dates to realistic pipelineplanningit still could not effectivelyhandlethe volumeschedules.Theinformation system alsoof cargo and data associated with thepeakprovided eventtrackingon20separatestagesseason.of the order cycle as purchase orders movedAnother problem stemmed from changes tofrombuyerto vendortodistributioncenter.vendor locations.The buying organizationDuring its existence the Melville/Mercantilewas engaged in shifting vendors and factoriesLogistics partnership was responsible for thefromKoreanandTaiwan-basedfirmstofirmsmovement of approximately$5billion oflocated in mainland China during the start-upgoods at retail.Product flowed from nearlyphase. This shift rendered all historical data17
the international supply chain from point of order to the point of delivery to the domestic DC. Mercantile was selected because its strategy, management, and capabilities closely aligned with these goals. The vision of the potential of the relationship between the two firms was shared at both the executive and operational level. Under the terms of the relationship Mercantile Logistics managed all aspects of Melville’s import process from vendors located in the Far East. Mercantile Logistics was responsible for coordinating vendor shipments, consolidating freight, booking ocean and air transportation, coordinating US Customs brokerage activities, and scheduling delivery of shipments to a variety of distribution centers located throughout the USA. Melville’s divisions provided electronic copies of purchase orders and purchase order changes to Mercantile Logistics daily. Mercantile Logistics managed the activities necessary to ensure that shipments were delivered in accordance with the instruction on the purchase orders and reported status information via daily electronic updates to the information systems of Melville’s various divisions. The partnership was structured to achieve four major operational objectives: (1) reduce total logistics cost; (2) reduce transit time; (3) improve information; and (4) improve pipeline reliability. Each of these major objectives was achieved, and in some instances year by year accomplishments widely exceeded expectations. Overall cost was reduced by 12 percent, despite absorbing 2-4 percent per annum increases in ocean freight rates, and reliability was improved to better than 96 percent (measured in terms of purchase orders delivered ‹ two days of planned due date). Transit times were reduced by more than ten days through the use of an information system that tied purchase order due dates to realistic pipeline planning schedules. The information system also provided event tracking on 20 separate stages of the order cycle as purchase orders moved from buyer to vendor to distribution center. During its existence the Melville/Mercantile Logistics partnership was responsible for the movement of approximately $5 billion of goods at retail. Product flowed from nearly 40 origin points to as many US-based destinations. The partnership accounted for the movement of nearly 70,000 40ft equivalent (FFE) containers during this time period. The volume of activity made this third-party logistics contract one of the largest of its kind to date. However, the partnership was dissolved after five years when Melville announced a strategic realignment that created three new operating companies, including a drug chain holding company, a footwear company and a toy company. Some business units were sold to other corporations. Two of the remaining companies were primarily domestic in their operations, thus reducing the volume of international logistics to the point where many of the shared economies of scale were no longer available. Thus, the relationship between Mercantile and the resulting businesses was restructured to reflect the more individualized needs and requirements of those operations. Problem areas Although the outcomes of the partnership have been positive, significant problems were encountered along the way. Notable problem areas included the planning and start-up process, documentation, measurement of progress, and cultural and organizational barriers that proved difficult to overcome. Each of these impediments is discussed below. Planning and start-up Melville implemented the new relationship in its largest importing division first to maximize cost reduction potential. Unfortunately, the division was at the beginning of its import processing peak season. Hindsight makes clear that this was not the most prudent strategy. Although Mercantile Logistics had engaged in two months of planning prior to the initiation of import management services, it still could not effectively handle the volume of cargo and data associated with the peak season. Another problem stemmed from changes to vendor locations. The buying organization was engaged in shifting vendors and factories from Korean and Taiwan-based firms to firms located in mainland China during the start-up phase. This shift rendered all historical data 17 Insights from a logistics partnership Robert G. House and Theodore P. Stank Supply Chain Management: An International Journal Volume 6 . Number 1 . 2001 . 16±20
Insights from a logistics partnershipSupply Chain Management: An International JournalRobert G. House and Theodore P. StankVolume 6-Number1:2001-16-20on cargo movement (volume by origin port)Poor data quality presented anotheruseless in terms of planning futurechallenge to measurement systemdevelopment.Both the source data and themovements.The new sourcing locations also changeddata captured during the tracking process hadthe import process. Well over 100 e-mailto be carefully reviewed.Significant effortsmessages a day were sent from Mercantilewere made to establish editing processes thatLogistics operations in the Far East to thecleansed the data as it was entered into thedivisional headquarters as managerssystem. Vendor codes, port codes, vesselattempted to understand the new process.names, dates, and numerous other fields wereAs a result, attention focused on respondingcarefully checked and controlled. Even theto e-mail and diverted attention from cargomostminorproblems suchasthedifferenceininternational and US date formats createdmanagement, documentation, and reporting,causing delayed and/or poor qualityproblems.Vessels were often reported asmanagement reporting.Often the cargodeparting, for example, on 3/2 (3 February)moved but the information did not.and arriving on 3/3 (3 March).TheseMercantile Logistics made significantinconsistencies were commoninthefirstyearoperating database.The impact of dataincreases in its manpower assigned toinformation management, and within sixquality cannot be underestimated.A reportto eight weeks managed to correct thethat is 9o percent correct is worthless.Dataproblem. The difficult start-up, however,quality had to be managed to better thanstrained the partner relationship for almost99 percentbefore operatingdecisions couldbe based on reports.This level of accuracytwo years.took over six months to achieve.Documentation and measurementAnotherproblemfocusedonturningBoth organizations struggled with issues ofoperating data into information that seniorhowbestto measureanddocumentthemanagement found useful.The wealth ofachieved results during the early years of theoperating data generated by the informationpartnership. One issue that proved especiallysystem was summarizedand displayed inadifficultwas establishing clear baseline data atwidevarietyofwaysincludingcomplexa level of granularity that permitted accurategraphics accessible through a sophisticatedcomparison of results. Melville's historicaluser interface.Almost any operating questionrecord contained high-level data thatcould be answered but thekey managementindicated the number of containers shippedquestion,"Are we better off than we were?"by origin and destination, total expenditures,proved difficult toanswer.Eventually,aandestimates ofunitvolumes.Although exactconceptual model of productivitydetails of individual shipments were availablemanagement based on standard costingin ocean bills of lading, the cost of collectingconcepts was developed to relate thethis historical data was prohibitive.operating database to the financial database inShifting sourcing locations also hindereda simple format. The final result was adocumentation and measurementone-page, four-line report that indicatedComparing oneyear's numbers with anotheroverall performanceonayear-over-yearbasisbecame suspect when sourcing locationsThe first line displayed overall productivitysshifted. The movement into China for lowerthe next two lines showed Melville'sproduct prices, for example, resulted in highercontributions to productivity changestransportation costs and longer transit times.(volume shipped and lanes utilized); the finalIt was difficult to explain these resultswithoutlineshowedMercantileLogistics'lanecosta measurement system that provided theper cubic meter. It was possible to drill downcapability to reflect sourcing changes andfrom these measures todaily operating data tocompare new functional cost structuresexplain a particular element of theagainst a detailed base case. Three years ofproductivity equation if necessary.experimentation with analysis and reportingprocesses were required to develop aCulture and organizationcomprehensive approach to managementOrganizational culture and structure had asignificant impact on the Melville/Mercantilereporting that clearly revealed the program'sprogress to the senior management of bothLogistics partnership.Melville, based in theUSA, adopted a relatively short-term focuspartner firms.18
on cargo movement (volume by origin port) useless in terms of planning future movements. The new sourcing locations also changed the import process. Well over 100 e-mail messages a day were sent from Mercantile Logistics operations in the Far East to the divisional headquarters as managers attempted to understand the new process. As a result, attention focused on responding to e-mail and diverted attention from cargo management, documentation, and reporting, causing delayed and/or poor quality management reporting. Often the cargo moved but the information did not. Mercantile Logistics made significant increases in its manpower assigned to information management, and within six to eight weeks managed to correct the problem. The difficult start-up, however, strained the partner relationship for almost two years. Documentation and measurement Both organizations struggled with issues of how best to measure and document the achieved results during the early years of the partnership. One issue that proved especially difficult was establishing clear baseline data at a level of granularity that permitted accurate comparison of results. Melville’s historical record contained high-level data that indicated the number of containers shipped by origin and destination, total expenditures, and estimates of unit volumes. Although exact details of individual shipments were available in ocean bills of lading, the cost of collecting this historical data was prohibitive. Shifting sourcing locations also hindered documentation and measurement. Comparing one year’s numbers with another became suspect when sourcing locations shifted. The movement into China for lower product prices, for example, resulted in higher transportation costs and longer transit times. It was difficult to explain these results without a measurement system that provided the capability to reflect sourcing changes and compare new functional cost structures against a detailed base case. Three years of experimentation with analysis and reporting processes were required to develop a comprehensive approach to management reporting that clearly revealed the program’s progress to the senior management of both partner firms. Poor data quality presented another challenge to measurement system development. Both the source data and the data captured during the tracking process had to be carefully reviewed. Significant efforts were made to establish editing processes that cleansed the data as it was entered into the system. Vendor codes, port codes, vessel names, dates, and numerous other fields were carefully checked and controlled. Even the most minor problems such as the difference in international and US date formats created problems. Vessels were often reported as departing, for example, on 3/2 (3 February) and arriving on 3/3 (3 March). These inconsistencies were common in the first year operating database. The impact of data quality cannot be underestimated. A report that is 90 percent correct is worthless. Data quality had to be managed to better than 99 percent before operating decisions could be based on reports. This level of accuracy took over six months to achieve. Another problem focused on turning operating data into information that senior management found useful. The wealth of operating data generated by the information system was summarized and displayed in a wide variety of ways including complex graphics accessible through a sophisticated user interface. Almost any operating question could be answered but the key management question, ‘‘Are we better off than we were?’’ proved difficult to answer. Eventually, a conceptual model of productivity management based on standard costing concepts was developed to relate the operating database to the financial database in a simple format. The final result was a one-page, four-line report that indicated overall performance on a year-over-year basis. The first line displayed overall productivity; the next two lines showed Melville’s contributions to productivity changes (volume shipped and lanes utilized); the final line showed Mercantile Logistics’ lane cost per cubic meter. It was possible to drill down from these measures to daily operating data to explain a particular element of the productivity equation if necessary. Culture and organization Organizational culture and structure had a significant impact on the Melville/Mercantile Logistics partnership. Melville, based in the USA, adopted a relatively short-term focus 18 Insights from a logistics partnership Robert G. House and Theodore P. Stank Supply Chain Management: An International Journal Volume 6 . Number 1 . 2001 . 16±20
Insights from a logistics partnershipSupply Chain Management: An International JournalRobert G. House and Theodore P. StankVolume 6 - Number 1: 2001 - 1620characteristic of publicly held retailLessons learnedorganizations and believed strongly inAlthough problems were encountered, thedivisional autonomyand accountability.Melville/Mercantile Logistics partnershipMercantile Logistics was part of the largeachieved its objectives.In retrospect severalDanish firm, A.P.Moller.The culture waslessonswerelearnedthatwould haveallowedprivate, centralized, and focused on the longthose objectives to be achieved earlier andterm, as is characteristic of organizations inperhaps with less effort. These lessons arecapital-intensive businesses. These twodiscussed below.cultures and structures did not mesh easily.Cultural differences are often not easy toFocused measurementcharacterize. Differing attitudes toward e-mailThe success of a relationship such as theby thepartnerfirms in the MelvilleMelville/MercantileLogistics partnershipMercantile Logistics relationship exemplifiedrequires a sharp focus on mutually agreedthe gap that initially inhibited effectiveupon objectives.In any multi-divisional andworking relations. When e-mail was firstmulti-party effort there are a myriad ofintroduced it was deployed as an office-to-opportunities to exploreand ideas to evaluate.office communication system. It was notClearly defined objectives provide a way topossible to address individuals within offices.screen those opportunities and ideas to ensureMercantile adopted the European“"model"that the partnership's efforts remain focusedthat e-mail responses represented the entireonwhatisimportant,and unproductiveofficewhile Melville's culture represented thebehavior directed toward agendas that fallcontrasting belief that e-mails were addressedoutside agreed-upon objectives is minimized.to individuals and individuals assumedA well-designed measurement system thatresponsibility for action.This fundamentalclearly and unequivocally tracks anddifference in approach to responsibilitysimplifies reports is necessary to ensure thatproved to be both educational and frustratingboth parties stayfocused on the objectives.for each party. While these and otherThefocus created by appropriatedifferences were eventually overcome andmeasurement was evident in the quarterlyneverpresentedseriousproblems,itismanagement board meetings of the Melville/instructive to note that when twoMercantile Logistics partnership.Before theorganizations come togetherin apartnershipmeasurement system was fully refined, theeach brings a distinct cultural tradition andagenda of board meetings was dominated byset of operating assumptions.Failure tooperating data reviews and problemrecognize the differences and to be receptiveto reviewing existing culturally drivendiscussions.Later, almost all of the board'stime was focused on strategic decisionsassumptions generates conflict that is at bestrequired to determine new avenues of co-counterproductive.Organizational structure of eachof theoperation.The experience clearlydemonstrates thatfocusandmeasurementarepartners also impacted relationship success.intertwined and self-reinforcing.OtherThe relative autonomy and individualorganizations entering into logisticsaccountability of the Melville divisionsworked against some aspects of thepartnerships should rememberthatfocuscannot be achieved without emphasizing apartnership.It was difficult to secure supportfor efforts that produced significant savingswell designed measurement system thatfor one division and neutral results foreliminates ambiguity regarding objectiveanother.It was impossibleto implementachievement.programs that traded off benefits betweendivisions. The same was true at MercantileGain sharingPartnerships are predicated upon the mutualLogistics as decentralization was rolled out asneed to share operating assets and resources.an A.P.Moller initiative.The interestingUnfortunately, sharing the financial risks anddilemma in this partnership was that theoverall size of Melville in internationalgains that accompany shared operations islogisticspermitted development of somedifficult to achieve. Logistics service providersprogramsbuttheindividualaccountability ofarenotmotivated toputforthmaximumthe divisions retarded the development ofeffort if they are not provided with anopportunity to sharefinancial rewards.other programs.19
characteristic of publicly held retail organizations and believed strongly in divisional autonomy and accountability. Mercantile Logistics was part of the large Danish firm, A.P. Moller. The culture was private, centralized, and focused on the long term, as is characteristic of organizations in capital-intensive businesses. These two cultures and structures did not mesh easily. Cultural differences are often not easy to characterize. Differing attitudes toward e-mail by the partner firms in the Melville/ Mercantile Logistics relationship exemplified the gap that initially inhibited effective working relations. When e-mail was first introduced it was deployed as an office-to- office communication system. It was not possible to address individuals within offices. Mercantile adopted the European ‘‘model’’ that e-mail responses represented the entire office while Melville’s culture represented the contrasting belief that e-mails were addressed to individuals and individuals assumed responsibility for action. This fundamental difference in approach to responsibility proved to be both educational and frustrating for each party. While these and other differences were eventually overcome and never presented serious problems, it is instructive to note that when two organizations come together in a partnership each brings a distinct cultural tradition and set of operating assumptions. Failure to recognize the differences and to be receptive to reviewing existing culturally driven assumptions generates conflict that is at best counterproductive. Organizational structure of each of the partners also impacted relationship success. The relative autonomy and individual accountability of the Melville divisions worked against some aspects of the partnership. It was difficult to secure support for efforts that produced significant savings for one division and neutral results for another. It was impossible to implement programs that traded off benefits between divisions. The same was true at Mercantile Logistics as decentralization was rolled out as an A.P. Moller initiative. The interesting dilemma in this partnership was that the overall size of Melville in international logistics permitted development of some programs but the individual accountability of the divisions retarded the development of other programs. Lessons learned Although problems were encountered, the Melville/Mercantile Logistics partnership achieved its objectives. In retrospect several lessons were learned that would have allowed those objectives to be achieved earlier and perhaps with less effort. These lessons are discussed below. Focused measurement The success of a relationship such as the Melville/Mercantile Logistics partnership requires a sharp focus on mutually agreed upon objectives. In any multi-divisional and multi-party effort there are a myriad of opportunities to explore and ideas to evaluate. Clearly defined objectives provide a way to screen those opportunities and ideas to ensure that the partnership’s efforts remain focused on what is important, and unproductive behavior directed toward agendas that fall outside agreed-upon objectives is minimized. A well-designed measurement system that clearly and unequivocally tracks and simplifies reports is necessary to ensure that both parties stay focused on the objectives. The focus created by appropriate measurement was evident in the quarterly management board meetings of the Melville/ Mercantile Logistics partnership. Before the measurement system was fully refined, the agenda of board meetings was dominated by operating data reviews and problem discussions. Later, almost all of the board’s time was focused on strategic decisions required to determine new avenues of co- operation. The experience clearly demonstrates that focus and measurement are intertwined and self-reinforcing. Other organizations entering into logistics partnerships should remember that focus cannot be achieved without emphasizing a well designed measurement system that eliminates ambiguity regarding objective achievement. Gain sharing Partnerships are predicated upon the mutual need to share operating assets and resources. Unfortunately, sharing the financial risks and gains that accompany shared operations is difficult to achieve. Logistics service providers are not motivated to put forth maximum effort if they are not provided with an opportunity to share financial rewards. 19 Insights from a logistics partnership Robert G. House and Theodore P. Stank Supply Chain Management: An International Journal Volume 6 . Number 1 . 2001 . 16±20
Insights from a logistics partnershipSupply Chain Management: An International JournalRobert G. House and Theodore P. StankVolume 6 - Number 1: 2001-16-20Merely “keeping the business" is not aLimit and define the scope of operationssufficient incentive to make a provider applyMany start-up problems intheMelville/MercantileLogistics partnership could havethe necessary effort to outperformbeen avoided by initiating the program with aexpectations.TheMelville/Mercantiledivision that transported smaller volumes ofLogistics partnership included sharedimportedproduct.Thelowervolumewouldfinancial savings in the contract. Melvillehave provided more time for personnel tocreated financial incentives by establishinglearn the issues that were involved in aattainable yearly productivity targets and thenprogram of this magnitude.The pressure tosharing all savings beyond those targets withachieve dramatic cost reduction, however,Mercantile Logistics.This method ofdictated the more risky path. Other firmscompensation mirrored Melville's internalwishing to initiate long-term logisticssystem, which provided bonus payments topartnerships arecautioned toestablisha pilotemployees after yearly targets are exceededprogram to iron out operational difficulties orat least plan for changing operationalCommunicationprocesses during slow points in the annualFrequent, even repetitive,communication ofbusiness cycle rather than peaks. Experienceobjectives,measurements, and upcominghas shown thatgoing after the brass ring onchanges is essential to keep all parties to athe first trip around is an extremely riskyrelationship informed and focused. Periodicstrategy.lapses in communication encourageparticipants to dissociate themselves fromresponsibility for partnership objectives andConclusionsfollow their own agendas. In the Melville/Mercantile Logistics partnership this wasThe Melville/Mercantile Logistics partnershipparticularly true when anticipated resultsin international logistics has shown that awerenegative.Onewaythatthiswas avoidedthird-party logistics provider can help a firmwasto begin all official communications withachieve substantial results.The path toa list of events scheduled in the next sixachieving these results is not without itsmonths to ensure that that all parties weredifficulties,but many of theseproblems caninformed and that there were no surprisesbe anticipated and appropriate actions takenFrequent formal and informal face-to-faceto minimize their disruption.Establishing acommunication also transformed themeasurement system thatallows easyandrelationship from atransactional-orientationintegrated reporting of the status of theto a partnership. When participants learnenterprise is essential if real progress is to bethrough frequent contact that both sides aremade in a logistics partnership. An extensivemaking efforts to achievepartnershipformal andinformal communication strategyobjectives,thefocus of discussionsis essential to address the issues arising fromconcerningproblems shifts from“why didthe difficulty of combining two differentyou... " to "how can we... ?"organizational cultures.Finally, thisCommunication builds a bridge betweenpartnership has shown that if the rewards fororganizations. Once this bridge is built,both partners arereal, tangible,andpartnerships based on trust can be developed.substantial the partnership can endure20
Merely ‘‘keeping the business’’ is not a sufficient incentive to make a provider apply the necessary effort to outperform expectations. The Melville/Mercantile Logistics partnership included shared financial savings in the contract. Melville created financial incentives by establishing attainable yearly productivity targets and then sharing all savings beyond those targets with Mercantile Logistics. This method of compensation mirrored Melville’s internal system, which provided bonus payments to employees after yearly targets are exceeded. Communication Frequent, even repetitive, communication of objectives, measurements, and upcoming changes is essential to keep all parties to a relationship informed and focused. Periodic lapses in communication encourage participants to dissociate themselves from responsibility for partnership objectives and follow their own agendas. In the Melville/ Mercantile Logistics partnership this was particularly true when anticipated results were negative. One way that this was avoided was to begin all official communications with a list of events scheduled in the next six months to ensure that that all parties were informed and that there were no surprises. Frequent formal and informal face-to-face communication also transformed the relationship from a transactional-orientation to a partnership. When participants learn through frequent contact that both sides are making efforts to achieve partnership objectives, the focus of discussions concerning problems shifts from ‘‘why did you . . . ?’’ to ‘‘how can we . . . ?’’ Communication builds a bridge between organizations. Once this bridge is built, partnerships based on trust can be developed. Limit and define the scope of operations Many start-up problems in the Melville/ Mercantile Logistics partnership could have been avoided by initiating the program with a division that transported smaller volumes of imported product. The lower volume would have provided more time for personnel to learn the issues that were involved in a program of this magnitude. The pressure to achieve dramatic cost reduction, however, dictated the more risky path. Other firms wishing to initiate long-term logistics partnerships are cautioned to establish a pilot program to iron out operational difficulties or at least plan for changing operational processes during slow points in the annual business cycle rather than peaks. Experience has shown that going after the brass ring on the first trip around is an extremely risky strategy. Conclusions The Melville/Mercantile Logistics partnership in international logistics has shown that a third-party logistics provider can help a firm achieve substantial results. The path to achieving these results is not without its difficulties, but many of these problems can be anticipated and appropriate actions taken to minimize their disruption. Establishing a measurement system that allows easy and integrated reporting of the status of the enterprise is essential if real progress is to be made in a logistics partnership. An extensive formal and informal communication strategy is essential to address the issues arising from the difficulty of combining two different organizational cultures. Finally, this partnership has shown that if the rewards for both partners are real, tangible, and substantial the partnership can endure. 20 Insights from a logistics partnership Robert G. House and Theodore P. Stank Supply Chain Management: An International Journal Volume 6 . Number 1 . 2001 . 16±20