Episode 4: Time to Decide

In the previous three parts we made the preliminary decision to outsource logistics services, prepared tender documents and sent them to the previously identified potential service providers. Along the way we gathered a wealth of internal figures, data and facts that we need for the decision-making process. In Part 4 we receive information from external sources as a basis for decisions.

Why do service providers ask questions about the tender?

Even with carefully compiled tenders there will be follow-up questions from potential service providers. That is quite normal and no cause for concern. The quality of the questions, however, is a good indicator of how intensively the respective provider has engaged with your tender. But why do questions arise at all? After all, we made every effort to supply all the information!

The tender contains only the information that the author considers relevant. That is naturally a subjective viewpoint. Not included, for example, are details that matter for the specific set-up of a given provider (such as alternative process options) but were no option in your in-house operation or would have had no relevant effects there. Questions are also a good way to clarify possible misunderstandings, for instance when you and the provider use the same term differently. Questions almost always occur in the process or interface section, both regarding the operational tasks and IT details. Questions from providers, as long as they are comprehensible, are therefore no sign of the provider’s inability but of thorough engagement with the subject. I personally worry more when I receive no questions. Quite honestly, among the many tenders I have dealt with in the last 25 years there was not a single one that left no room for legitimate questions, including those I drew up myself.

How do I handle questions from providers?

Answer as much as possible. If, in your view, a question is already answered in the tender documents, refer to that passage. You can certainly let the quality of the questions influence the overall assessment. A potential partner who asks important and understandable questions is, at least to me, more trustworthy than one who asks questions that are already answered clearly in the documents.

So schedule time to answer the questions—both the effort for you and your team and, in the initial project timeline, the turnaround time for the providers’ RFQ responses.

I recommend making the answers, of course anonymised, available to all providers participating in the RFQ. That ensures all potential partners have identical information when preparing their offers. It makes sense to describe this procedure, at the latest in the RFQ itself, for example that all questions received by Wednesday will be answered by the end of the same week. The questions and answers of all providers must then be binding for every provider when they submit their offers—in addition to the information in the RFQ. This is certainly a challenge for providers but saves both sides discussion later in the project.

Help! I do not know all the answers!

No panic if you cannot answer some of the questions; that is not unusual. Often information is requested that was irrelevant in your own operation or whose importance was not recognised. If you cannot give an exact answer, make an assumption and mark it as such when passing on the information.

Could the provider not make assumptions too? Of course, but you know your company and environment better than any provider, so your assumption is probably closer to reality. Moreover, you prevent potential providers from presenting the offer more favourably than it will be in practice through overly optimistic assumptions (and corresponding safeguards in the offer clauses). By providing your assumptions you also ensure that all invited providers plan and calculate on an identical data and information basis. Another argument for making all questions and answers available to every provider.

The offers arrive!

By the set deadline you will, hopefully from all participants, receive an offer. Do not be alarmed if that happens only at the last moment before the deadline; that is not unusual. Often optimisation and calculation continue until the final day. Many providers standardise the offer process with clearly defined milestones that involve all areas concerned. The milestones are aligned with the timeline you have specified; final approval is usually given shortly before the deadline in order to react to new information for as long as possible.

It also happens again and again that providers ask for an extension. That is not an easy decision. If, for example, two weeks remain until the deadline, granting an extension (then, of course, for all participating providers) is easier; if the request comes at the last second it is unfair to other potential providers (who may even have already submitted their offers). Better think beforehand how you will respond to such requests and inform the logistics providers early.

How do I evaluate the offers?

I am a fan of figures, data, facts. That does not mean I ignore gut feeling, but the better the data material available to me, the better my gut feels.

The financial side is easiest to compare, though even comparing numbers is not trivial, as we shall see a little further down. Finances should be only one part of the overall decision. You are not looking for the cheapest but for the best solution, the partner who offers the package that suits you at a good price. I like to work with an evaluation matrix. All relevant areas are given their percentage weight in the overall decision (such as cost, process reliability, KPI proposal, financial background of the provider). You can certainly make this multi-level, for example breaking down the part that evaluates the proposed processes into the main process groups. In addition there are knockout criteria—if a provider cannot fulfil one of these, they are out. You should define the evaluation matrix already while preparing the tender; that tells you which data you must request from the providers in their offers. Using this matrix, each provider is then assessed, for example with a school-grade system, a points system or a degree-of-achievement scale. Most important: your own in-house operation must not be missing from the evaluation; we have not yet finally decided whether outsourcing is really the better solution for you.

When you set the detailed results in relation to their weighting in the overall decision you obtain your ranking of the providers. Some assessment criteria are rather “soft” and the evaluation is subjectively influenced. In my opinion that is unavoidable and permissible. If several people in your company are involved in the decision, it is a good approach to let each of them carry out the weighting and rating. Even if the detailed results differ, the final ranking is usually identical in my experience, and by involving all stakeholders the acceptance of the decision increases.

How do I compare the costs?

Basically you have two ways to request cost information. Either you specify the billing system in the RFQ (that is, which positions in which quantities according to the volume framework the provider may bill per year) or you leave that to the providers.

In the first case comparison is easier, but it may force providers to quote costs in units that cannot readily be converted to the cost drivers. Either the provider tries to agree a conversion formula between your desired unit and the cost driver (that makes cost forecasting somewhat less accurate for you) or they have to include appropriate safeguards, which makes the service more expensive.

In the second variant comparison is apparently harder, but the provider can (and the RFQ should clearly request this) define the billing units as close as possible to their cost drivers. In addition to the unit prices you should in this case definitely demand an annual budget at billing-item level with the billing units and the calculated quantities as part of the offer.

Whichever variant and however you view the costs, the quantities and thus the calculated annual costs usually relate to historical data (for example of the previous year). Define already in the tender which volume fluctuations (in both directions) the providers must accept without discussing unit prices.

To make a statement about the costs actually to be expected you must look into the future across the planned contract term. Calculate the annual costs for different scenarios (changes in order structure, growth) and see how great the impact is in the assessment of the providers, always compared with in-house costs. In the various scenarios different providers may well be ahead in terms of cost. This approach lets you identify which developments have significant effects on the cost structure and, on the other hand, recognise which cost blocks you must renegotiate with the preferred partners.

Time to decide

However you design the evaluation process in detail, schedule enough time. It almost always takes longer than originally planned—and that can lead to dangerous time pressure in implementation. Only now, at the end of the process, do you decide finally whether you will actually outsource. It is legitimate, even at this point, to withdraw the project. The providers will of course not be pleased, but in the end none of them was able to offer you an overall advantage over performing the work in-house. Full stop.

Is there another way?

There are of course many other ways to design the award process or parts of it. I have tried to find an approach as generic as possible for different industries, experience levels and company sizes—a process that I consider very suitable, admittedly with corresponding effort, to find the best logistics concept offered for the respective requirements.

An example of a somewhat different partial approach would be the online bidding procedure in which, in the spirit of a reverse auction (prices continuously fall), potential providers enter cost information into a purpose-built online tool at a fixed time, usually in several bidding rounds.

Conclusion: Remain objective!

The more detailed, precise and unbiased your evaluation, the more thoroughly you document it, the better you will feel about the decision and the better you can argue it to the stakeholders.

How does the series continue?

If the final decision in favour of outsourcing is made, we will start in the next part with implementation alongside the chosen partner.

I very much look forward to your feedback on the series and will gladly answer your questions. My contact details can be found here. here.

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The complete blog series on outsourcing logistics services

Veröffentlicht am 3. Februar 2021

Titelbild: iStock.com/AndreyPopov

Outsourcing of Operational Logistics – Episode 4: Time to Decide