Art van Bodegraven was, among other roles, chief design officer for the DES Leadership Academy. He passed away on June 18, 2017. He will be greatly missed.
Um, yes it is—at least in the logistics outsourcing world. There are still companies out there that share the savings from productivity improvements with their service providers, although interest in the concept has waxed and waned over the years. Our working thesis is that this happens with almost any concept that turns out to: 1) require hard work, and 2) not be a "magic bullet" solution. Such is our need for instant gratification, as amplified by the demands and expectations of both management and the investment community.
But metaphoric old girlfriends have a way of showing up in new dresses in our business—once-attractive ideas parading among us, rebranded and repackaged. The latest incarnation of gain sharing is "vested outsourcing," a concept with roots in the military.
Our friend Kate Vitasek has done compelling and masterful work in organizing, extending, and communicating the power and potential of vested outsourcing. The basic premise is this: Instead of paying your service provider to perform specific tasks, you pay it to achieve specific outcomes or results—and then provide generous incentives for exceeding those goals.
Realistically, the concept requires truly committed partners in genuine business relationships, with a lot at stake. It's not a casual drive-by process for picking off easy targets.
A rose by any other name
Gain sharing has also been known as pay-for-performance, among other things, and we are confident that the future will bring additional variants. To confuse matters, what's called gain sharing or pay-for-performance takes on different shapes in different environments. One size doesn't remotely come close to fitting all.
At its core, though, the idea is that, as a service provider makes improvements in cost and/or productivity, some of the gain is retained by the provider and some is returned to the buyer of the services.
These agreements can be structured in any number of ways. In the simplest deals, the two parties just split the cost savings. Other arrangements include more elaborate incentive plans, with scaled rewards for various levels of, say, under-budget performance or performance that exceeds KPI (key performance indicator) targets. Then there's the "Olympic medal" model, which allows the provider to earn additional profit by surpassing KPI objectives, with silver-level performance earning a percentage premium over the base monthly charge, and gold earning an even greater premium. Bronze is a break-even, with no premium.
And pain sharing?
In the real world, there's got to be another side of the coin. Gain-sharing programs are no exception. To put it bluntly, a program that rewards for success and fails to penalize for failure is destined for a short, unhappy life.
The Olympic medalists who fall short of the "bronze" pay a penalty to the customer. In some cases of budget-based rewards, a shortfall results in the provider's paying the customer the same percentage it would have gained if the target had been exceeded. This latter example can get to be excruciating for the provider, with an ugly divorce to follow shortly.
What goes wrong?
It all sounds so simple and logical (at least on the surface). Why do these efforts fail, or fall out of favor? There are several reasons.
As mentioned, the one-sided arrangements have built-in time bombs, whether it's the provider or the buyer that momentarily appears to have the upper hand. Other agreements may have advantages for one or the other that take longer to surface, but are still deadly when discovered.
In a distressing number of cases, the parties include gain-sharing language in their agreements but fail to include enough specificity for effective implementation—or mutual motivation. Over the years, the consequent neglect of the potential leads to abandonment.
In one case we know of, the language was a little too specific—and difficult to change. The service provider figured out that it could easily hit the target order fill rate by making a modest over-investment in "C" SKUs (in order to eliminate stockouts) and then under-investing in "A" SKUs to offset the added cost. While these moves saved a lot of money and brought stockouts within the contractually acceptable percentage range, they also led to supply crises with the very items most critical to the client's business.
In a very few cases, and over a long period of time, both parties conclude that there's no longer any meaningful opportunity for improvement. To be candid, too many providers and customers use this as a cop-out for early abandonment when a little creativity and energy might lead to a better-constructed agreement and/or service arrangement.
The biggest problem, in our view? It's that not enough service providers and customers are building the kind of high-trust, high-communications, high-collaboration relationships that will support free and open examinations of the incentives, the disincentives, and their bases. In a notorious case of which we have first-hand knowledge, a customer refused to implement process changes that would save $100 per transaction because it would mean a $50 payout to the service provider's team, for which the customer had developed a visceral hatred. This scenario is played out in less-dramatic fashion every day in many "gain sharing" relationships.
What needs to go right?
As you might imagine, success factors in the various forms of gain sharing are largely the opposite of the things that go wrong.
Foremost is the mandate to build the right kind of business relationship. If a company's DNA compels it to seek adversarial, transactional business relationships, gain sharing should not even be contemplated.
Next is the requirement to be thoughtful about how to build an equitable, two-way-street gain-sharing/pain-sharing agreement, with specifics that are mutually understood—and defined in writing. It follows logically, but seldom does in practice, that the bases and specifics need to be reviewed regularly—maybe annually—for fairness (still equitable?) and currency (what should the new targets be?).
Finally, the joint recognition that the parties are in the game—together—for the long haul is vital. When the low-hanging fruit has been picked is not the time to go looking for another provider. When performance nears optimized steady-state levels is not the signal to go out for a low-price commoditized bid from strangers.
Bottom line
The good news is that our collective interest in high performance and continuous improvement has been sharpened by the challenges of survival in a tough economic climate. More good news is that our information systems are better than they've ever been in terms of providing timely and accurate performance data. So, foundational elements to support gain sharing are—in general—solid.
Gain sharing, under any name, doesn't have to wax and wane, and doesn't deserve abandonment. Done wrong, and/or with wrong motivations, it will disappoint at best. Done right, by companies in the right kind of business relationship, it can pay off for decades.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.