Outsourcing to 3PLs for improving workforce effectiveness Noel Watson, MIT-Zaragoza Program Zaragoza Logistics Center, Spain Oct 6 th, 2010 (Work here is joint with VillageReach, USA and Transaid, UK) Critical Issues Series: Strengthening Human Resources for Supply Chain Management of Health Commodities Panel: Increasing Workforce Effectiveness

Challenges for 3PL outsourcing in Government-run Drug distribution systems Sources of resistance for governments and policy makers – the operational dynamics of government run drug distribution systems are still mostly a mystery. – poor understanding of the performance potential for 3PL providers – not trivial to combine government run distribution systems and 3PL providers for targeted performance.

Our Approach Addressing the mystery of SC performance: – Understand the key drivers of the multi-dimensional performance of a government run drug distribution system – Determine the current costs of distribution in the sample country Performance potential for 3PLs - Cost Simulations (not focus of this presentation) – Create a cost model for the study to accommodate general performance prediction. – Estimate the potential costs and performance of distribution using outsourced models (including selectively outsourced hybrid models) Execution of Outsourcing – 3PL screening and engagement – Public Sector Development: How should they learn to manage 3PLs?

Addressing the mystery: Conceptualizing Supply Chain Performance and Drivers Basic Operational Capabilities – Capacities – Discreet Activities Storage, etc Advanced Oper. Capabilities – Service offering Product + – Problem Solving – Connectivity – Ease of monitoring 3PL related – Managing 3PL – 3PL managing client 4

Supply Chain Costing Challenges – Sampling methodology [1],[2],[3],[4] – Data Availability – Costing Analysis specific to the situation [2] Incremental cost, cost recovery, cost allocation – Estimating costs for collection system with varying transport options is difficult [1] – Estimating timing of wasted stock [1] – Resistance to costing [2] Our approach – Handles collection system settings – Incorporates cost of time of non-SC personnel involved in SC activities – Comprehensive; transportation, inventory, commodity, management etc.

Supply Chain Improvement Opportunities: 3PL Contribution & Cautions Supply Chain improvement Opportunities 3PL contribution Improve basic capabilities 3PL agent replace base activity Economies of scale in task aggregation Assign tasks to 3PL agent Better support for decision-making 3PL agent has better basic capabilities 3PL agent has contributive advanced capabilities Economies of scale in expansion 3PL agent provides additional capacity quicker SC structure redesign 3PL agent provides specific capacity quicker Base focus on more critical activities 3PL agent assumes non critical tasks Why not use 3PL Base’s Skill Atrophy/Retardation Increase Complexity – Adds another tier to decision chain requiring coordination and 2-way information sharing Risk of poor service – Poor oversight by base – Inappropriate or lacking 3PL’s experience » with current or redesigned management approach » with current or redesigned SC structure 6

Executing 3PL engagement Major Challenge: Developing 3PL Management Capability – Requires appreciation for good basic and advanced capability in order to appreciate/recognize it in 3PL – Management at a distance – A capability like that of basic/Advanced Time; Mentorship (Toyota Example) Visualizing improved performance – case studies, site visits Explicit Capability Development plan, e.g., starting small, planning Initiating 3PL Relationships: 3 step Screening process – Experience Screening – Capability Screening Basic, advanced, 3PL related – RFQ screening Needs description

Our approach to 3PL Outsourcing in Public Sector Sources of resistance – Understanding SC dynamics Focus on distinguishing capabilities Meeting costing challenges – Understanding performance potential for 3PL providers Cost-simulation modelling (Not focus of this presentation) – Complexity of incorporating and managing 3PL Challenges & recommendations for developing 3PL management capabilities Recommendations for initiating 3PL engagement Piloting ideas in Kano, Nigeria – Results will be available later this year

Bibliography 1.Huff-Rousselle, M. and S. Raja, Ghana: Estimating the Cost of Logistics in the Ministry of Health Supply System. 2002, Family Planning Logistics Management (FPLM)/John Snow, Inc., for the US Agency for International Development. 2.Vian, T., Uganda: Assessing the Costs of Distribution to Health Sub- Districts. 2003, John Snow, Inc/DELIVER and Boston University, for teh US Agency for International Development: Arlington, VA. 3.Vian, T., Zimbabwe: Assessing the Cost of Transporting HIV/AIDS Commodities: A Case Study in Financial Analysis. 2003, John Snow, Inc/DELIVER and Boston: Boston University, for the US Agency for International Development: Arlington, VA. 4.Baruwa, E., M. Tien, and D. Sarley, Zambia ARV Supply Chain Costs: A Pilot of the Supply Chain Costing Tool. 2010, USAID | DELIVER PROJECT, Task Order 1: Arlington, VA.