Continuous Improvement Is Falling Short
…What Can Be Done About It? 

When analyzing customer surveys, it regularly comes to light that many customers are more or less satisfied with the day-to-day execution of their logistics service provider, but particularly criticize the provider's limited efforts regarding continuous improvement. Once the business is won and implemented, there's hardly any effort toward further development and ongoing improvement – so goes the common criticism from many customers.

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Is this perception accurate – and if so, what are the underlying causes?

This criticism is not without merit; however, customers themselves share a significant portion of the responsibility.

Many industrial and retail companies have implemented internal management systems designed to support continuous improvement initiatives. This focus is reflected in their performance targets, which regularly include expectations for unit cost reductions and productivity gains.

These expectations naturally extend to logistics operations; however, execution often falls short in externally managed warehouses. Instead of achieving annual unit cost reductions of 2–3%, customers are frequently faced with price increases driven by rent indexation, rising energy costs, minimum wage adjustments, and overall labor cost inflation.

These increases in input costs are generally undisputed and can be clearly substantiated by the logistics service provider. However, the volume of resources deployed, particularly labor, as well as warehouse space, equipment, and other cost drivers, is rarely scrutinized and often lacks sufficient transparency for the customer.

Some industries have attempted to address this issue by incorporating flat-rate cost-reduction clauses into contracts, for example, 2% per annum. While simple, this approach is often ineffective, as such reductions are typically priced in from the outset.

More targeted mechanisms define limits on how much indexed cost increases the customer will absorb, such as caps or threshold-based adjustments. However, these structures make it difficult to offset future cost reductions against partially indexed price increases. At the same time, they provide limited price certainty, as they remain tied to the indexation of key cost drivers.

All of these arrangements, from non-binding letters of intent on joint improvement initiatives to modified cost-sharing mechanisms and flat-rate reduction requirements, primarily address symptoms rather than the underlying root causes.

If customers fundamentally expect continuous improvement from their logistics service providers, and providers are aware of this expectation, it raises a key question: why are such improvements delivered so infrequently? After all, providers have a strong intrinsic incentive to maintain customer satisfaction and prevent switching.

Why, then, do logistics service providers deliver so few continuous improvements? To answer this, it is useful to examine the situation from the provider’s perspective.

Logistics service providers operate within a framework shaped by a range of internal and external factors:

Figure 1: The logistics service provider’s dilemma 

In contract logistics, continuous improvement rarely focuses on reducing unit cost rates; instead, it primarily targets reductions in resource input, for example, fewer full-time equivalents (FTEs) rather than lower cost per FTE. Exceptions, such as subcontracting, are limited, as cost thresholds have largely been reached due to minimum wage regulations.

Why are we focusing specifically on labor as an example? Labor is a primary focus because, depending on the level of automation, it typically accounts for 55%–65% of operating costs and represents the most influenceable cost category.

Labor deployment can be optimized in two primary ways: improved workforce planning and process optimization, potentially supported by automation and IT systems. Both approaches require qualified resources, which, similar to the shipper side, are limited within service provider organizations. Simply calling for “more qualified resources” is insufficient, as it overlooks external constraints such as cost pressure, low margins, and ongoing skilled labor shortages.

The limited pool of qualified resources is typically allocated to critical operations, either where service levels (e.g., quality or throughput) fall short from the customer’s perspective or where the commercial performance is unsatisfactory from the provider’s standpoint. As a result, stabilized operations that are running adequately receive little to no ongoing optimization focus.

Even when improvement opportunities are identified, their implementation is often constrained by contractual structures. Under closed-book contracts, there is limited incentive to optimize or share resulting gains with the customer. At the same time, contract durations are frequently too short to justify the investments required for meaningful improvements.

Additionally, the constant prospect of retendering discourages providers from implementing certain optimization initiatives, as these may be reserved to strengthen future bids. Under cost-plus contracts, by definition, incentives for continuous improvement are largely absent.

The conclusion is clear: in stable operations, service providers often lack the necessary

• quantitative and qualitative resources, 
• economic pressure, and therefore 
• motivation

to drive continuous improvement.

If customers expect continuous improvement, they must actively create the conditions required and address the three barriers outlined above.

How can customers create conditions that effectively address challenges rooted within the service provider’s operating environment?

What is in it for me?

Service providers must have clear incentives to pursue continuous improvement. This is achieved when they can share in the benefits of improvements and are not required to bear the associated risks alone. Key mechanisms include participation in cost savings and longer contract durations, which reduce investment risk related to staffing and equipment.

Figure 2: Requirements on the logistics service provider side for continuous improvements

How?

Ensuring adequate resource allocation

Service providers must allocate sufficiently qualified resources to proactively drive continuous improvement initiatives. This does not require large teams; even one to two dedicated resources at a larger site can be effective.

However, providers are often reluctant to include these roles in competitive bids due to cost pressures. Therefore, a mechanism is required to ensure that such resources are reimbursed, and, ideally, incentivized, contingent on the delivery of measurable improvements.

Why?

Establishing effective incentive structures

Service providers will only consistently deliver continuous improvements when appropriate economic incentives are in place. Creating a level of economic pressure is essential to foster intrinsic motivation and sustained performance. This dynamic is critical to generating the self-reinforcing momentum that customers seek.

Integrating incentives, capabilities, and motivation

The key question, therefore, is how to effectively combine economic pressure, organizational capability, and provider motivation within a single framework.
One approach that has proven effective in practice is the “Sow and Reap” concept, which is based on the following principles.

Consider a mid-sized operation with annual revenue of approximately €15 million, of which around 60% represents influenceable labor costs, with the remainder attributed to rent, overhead, IT, and other fixed components. This results in an optimization base of approximately €9 million.

The service provider establishes a small dedicated “Improvement Team” consisting of two additional project resources. Each resource incurs fully loaded annual costs of approximately €75,000, resulting in total incremental costs of €150,000 per year. These costs are initially borne by the service provider.

The target is an annual productivity improvement of 2%, corresponding to savings of approximately €180,000. These savings are first applied to offset the service provider’s annual investment. Any excess savings generated within the year are retained in full by the service provider as a performance-based incentive.

From the second year onward, the customer fully benefits from the realized improvements, while the service provider continues to fund its annual improvement costs.

Under this model, assuming excess savings are fully retained by the service provider, the following outcomes are observed:

• The service provider fully recovers its investment.
• It generates a cumulative profit of approximately €114,700.
• While the customer realizes no savings in the first year, savings increase significantly from year two onward, reaching up to €698,700 annually and totaling approximately €1.76 million over five years.

If the service provider achieves a 2.5% annual efficiency improvement, the outcomes are as follows:

• The service provider again fully recovers its costs.
• Cumulative profit increases to approximately €320,000.
• Customer savings begin in year two and reach up to €866,800 annually, totaling approximately €2.19 million over five years.

If performance reaches only 1.5% annually, the following outcomes result:

• The service provider does not fully recover its costs.
• A cumulative loss of approximately €94,900 is incurred.
• Customer savings still materialize from year two onward, reaching up to €528,000 annually and totaling approximately €1.33 million over five years.

This model effectively addresses the three critical dimensions:

• What is in it for me? Incentives: The provider recovers its investment and participates in additional savings upon successful performance. 
• How? Capability: The model enables the allocation of dedicated resources for continuous improvement. 
• Why? Accountability: The provider bears financial risk if targeted improvements are not achieved.

Percentages and staffing levels should be calibrated to the scale of the operation to ensure realistic cost coverage. However, the underlying mechanics offer clear advantages over many conventional market approaches, which often result in limited improvements or shift risk disproportionately to the service provider, ultimately driving higher initial costs.

Organizations seeking to embed continuous improvement effectively within their contract logistics operations can benefit from structured support, from concept development through to implementation, with a focus on delivering measurable results.

If you are looking to embed continuous improvement across your contract logistics operations, contact us to discuss how a structured approach can unlock measurable productivity gains and sustainable cost savings.