How long should be my contract with my logistics service provider?

As a consumer we are used to 1-year contracts, such as health insurance, club memberships, and other subscriptions. Most of these contracts are automatically renewed after a year. Should this be any different with regards to your contract with your logistics service provider (LSP)?

Most manufacturers and traders (shippers) outsource their transportation, warehousing, value added logistics, freight forwarding, and supply chain management to a LSP. Shippers want the contract as short as possible (1 or 2 years), whereas the LSP prefers the contract duration as long as possible (5 to 10 years). As competition is fierce in today’s logistics industry, many contracts with LSPs today are just 2 or 3 years. But what is the most optimal contract period?

Risk management

Shippers are traditionally hesitant to engage in a long term outsourcing engagement for the reason that they become overly dependent on the LSP. Furthermore, shippers might be concerned with the continuity of operations and LSP commitment in case of big organisation (like merger or acquisition) or market changes during the contract period, demanding major adjustments in the supply chain.

LSPs on the other hand need to optimise logistics operations and supply chains for their customers, requiring significant investments in specialised buildings, racking systems, conveyor systems, automation, trucks and people. This becomes a big risk when the payback period is longer than the contract duration.

Guidelines on contract terms

Basic transportation and freight forwarding contracts can be 2 years. There should be of course a cost escalation clause in case of for example significant petrol price changes, which are outside the control of the logistics service provider. In this way the transportation rates can be adjusted accordingly to maintain a win-win business relationship. However, transportation contracts where the logistics service provider is expected to invest in a specialised fleet (like refrigerated trucks, double decker trucks), contract terms should be longer. In these cases, I would suggest a contract period of 5 years.

Warehouses used to be basically sheds: a storage space under a roof. Unless you are dealing with bulky construction materials, these times are far-gone. Warehouses today need tailored mechanised and automated operations, meeting high environmental standards through investments in solar energy and water catchment, and specialised equipment and training of manpower. Many warehouses also require various licences and certificates (like food safety, halal) that are facility specific. Obtaining licences and certificates for the best location of the warehouse takes time. Warehouse contracts of 2 years are therefore absurd, making it impossible for logistics service providers to seriously invest. Warehousing and value-added logistic contracts should be in the range of 5 to 10 years.

In supply chain management outsourcing engagements, also called fourth party logistics, the LSP controls and optimises client supply chains. However, the biggest cost reductions and synergy advantages are only generated through intensive vertical (within your own chain) and horizontal (with similar chains) collaborations. Contracts up to 3 years, will not allow a LSP to embark on these advanced collaboration models, leaving the biggest savings potentials on the shelf. Supply chain contracts should be preferably 5 years.

In short, a more mature logistics and supply chain management operations require a relook at contract terms with your LSP.

Five strategies to fight warehouse pilferage

Is pilferage a problem in your warehouse? Pilferage is an issue for many industries and particular disturbing if your own employees are doing this. Next to warehouse staff also managers could be possible culprits. Research shows that in most pilferage cases there is internal involvement, and in 90% of the cases are colleagues aware! But more importantly, what can you do about this? Below I discuss five strategies to fight pilferage in your warehouse.

Measuring is pivotal to quantify pilferage. However, if you just rely on your annual stock count, you are playing catch-up in the dark. You are just too late and making it is very difficult to isolate pilferage cases. Hence you need more frequent counting, better known as cycle counting. Cycle counting is the process of selecting a small daily sample of your inventory, and systematically moving through the entire inventory over time. Normally this process is supported by specialised cycle counting software. The lower the inventory accuracy tolerance you want, the more often that item will be counted over a year. This allows you to systematically identify and analyse the exact causes of inventory differences.

Maintain a high level of cleanliness in your warehouse creates a more professional working environment. Such practices include, but are not limited to, regular cleaning of toilets, warehouse floors, machines, and materials handling equipment. Pick-up dirt anywhere you see it and throw it in the dustbin. When operations are clean and clear, it is easier to spot irregularities and cargo left around.

People management and culture are other critical areas to look into. The right people in your warehouse start with hiring the right personnel. Less than 20% of the companies are checking the CV of an applicant. Many applicants lie about their CV, in particular their working experience, height of salary, and reason of resignation. In the personnel advertisement, please state that an antecedent examination is part of the selection process. This might already deter certain people to apply with your company. A simple call to the former employer reveals a lot about the candidate. Make it a habit to ask the applicant about his experience with pilferage situations in his previous jobs. This clearly conveys that the company is alert on this matter. Pilferage cases require swift action. Inadequate responses from management not only continue pilferage cases in your warehouse but exacerbate the situation.

Facility design and flow management is another prime area to address. Emergency exits provide potential entrance to outsiders. Are all entries to the building properly supervised? Is the fencing around the building high enough to avoid people climbing over it or throwing expensive cargo over the fence? How are trucks and cars routed at the site? Can vehicles be parked next to the warehouse (door)?

Many advances have been made over the past ten years in new security technologies that are today affordable for even small companies. For example video surveillance as a service today is a good alternative to physical security around the clock. During odd hours this technology further allows companies to have deliveries or pickups when no staff is around in the facility.

As insurance clauses are continuously revised and assuming extensive prevention by the company, you better stay on top of this!

The Logistics of Steel Pipes

Transportation via pipeline is by far the cheapest mode of transport, and for oil, gas and other chemicals the safest method too. For this reason the application of pipes are numerous in the transportation of liquids, gas and capsules with other cargoes. Steel pipes are also used in the construction of buildings, bridges, cranes and even lampposts.

Traditional high quality pipes and tubes were manufactured mainly in Europe, USA and Japan, whereas today you see a clear shift where China is the largest manufacturer of steel pipes in the world (an estimated 65% of the market). However, overcapacity in China forced the closure of several steel plants.

For most industries there are stringent regulations on the quality of steel pipes to ensure safe applications in the industry. As a result the pipe business comes with a lot of certificates and tests, where the weight of documentation could almost equal the weight of the pipe itself!

As steel pipes are heavy their main mode of transport is by sea. In order to avoid damages, there is a preference for sea containers instead of break bulk. Interesting to note is that steel pipes are traded in their standard size of 6 meters or 20 foot. This is just 10 centimetres longer than the internal length of a 20-foot sea container, forcing the entire industry to transport them in 40-foot containers instead! You can imagine that this cost the industry a lot of money in transport inefficiencies.

Most steel pipes are made of either carbon or stainless steel and its price is directly related to the commodity price of steel. As the steel price is volatile, holding stock is risky. For example in 2015 the price for seamless pipes went down by around 40%, making this industry a high-risk business if you are involved in this trade.

The practice

According to Mr. Ruud Langeveld, General Manager Van Leeuwen Pipe & Tube Malaysia, it is important to hold stock locally in Malaysia in order to deliver fast to the industry. Regional stocking is difficult due to stringent import and testing regulations that take time. Although the purchase price of the steel pipe might be relatively small in comparison to the total costs, a pipe can be a critical component for an industrial production plant. Companies can lose millions (in Ringgit Malaysia) every day when production is on halt because of a missing pipe. Therefore urgent deliveries require sometimes even transport of a steel pipe by air, just to avoid very costly production disruptions.

In the opinion of Mr. Langeveld the steel pipe trade is a global business, forcing steel pipe suppliers to have a global footprint. Only in this way you are able to meet high performance service level agreements from the industry. The future of the steel pipe trade is in integrated supply chains, where value adding and service will determine success in the industry.

The future

Cargo volumes via pipeline transport will soar by extended applications of capsule pipelines. Pipeline transport could be more cost effective in supplying goods to and waste from metropolitan areas as compared to trucks and vans that are increasingly clogging up the cities with the introduction of e-commerce. Other expected applications are cargo movements between high-tech industrial parks and airports.