What is the Process for Selecting a Third Party Logistics Provider (3PL)?

Just what is a 3PL?

3PLs for your logistics

Third party logistics providers or 3PLs are becoming more and more common in the supply chains of companies throughout the UK and abroad. A 3PL generally accepts the outsourcing of either all or part of the supply chain management process of their partner business. Most 3PLs offer a wide variety of services, and craft a bespoke service package for each of the companies they work with. Common logistics functions and components handled by 3PLs include warehousing and distribution, order fulfilment, inbound freight and freight consolidation, freight forwarding and outbound freight.

So what are the benefits of using a 3PL?

 3PLs can generally offer reduced costs and improved performance over in-house logistics management departments, due both to their overall expertise and simple economy of scale factors. By and large, they are true specialists who only handle logistics management, and do so for many companies at once. Because they combine the logistics business of all of their partner organisations, they can manage the entire operation as one (or more) very large facilities. Up to a certain point, large warehousing and logistics operations are more efficient and less expensive than smaller ones, so it makes sense for smaller companies to turn over their logistics management function to a larger 3PL.

Third party logistics providers are becoming part of more and more large supply chains, so knowing what they do and how they do it is becoming more important, even to companies who do not actually use them. 3PLs started becoming big news back in the 80’s. At that time many businesses, especially in the US and Europe, saw the need to outsource their logistics management operations in order to focus on the other aspects of their business. It was inefficiently expensive to fully equip and maintain a top-notch logistics operation in-house, and if such an in-house operation was developed, it often found that it did not have enough flowthrough to operate at peak efficiency. Really good logistics operations were too big for all but the largest corporations to support. The need for 3PLs who could serve several businesses with high capacity, fully equipped warehousing and logistics capability was apparent.

FedEx is an example of one of the first really successful 3PLs. FedEx’s overnight delivery changed the face of both business to business and business to customer transactions. Businesses now had the option of using lean, lust-in-time processes which were both more efficient, less costly and less staff-intensive. FedEx pioneered some of the Efficient Consumer Response (ECR) techniques that are the basis for those in use today, allowing smaller shipments to be made economically.

As more companies entered the market for a good 3PL partner in the 90s and 2000s, more 3PLs arose to meet the demand, and each offered a unique blend of services. The presence of so many start-ups in the market led to intense competition, and lower prices. This in turn led to faster adoption of the 3PL model, and so on. In the last ten years, the 3PL market has been moving from a local or national one to a global market where 3PLs offer services to companies all over the world. The worldwide 3PL market is growing by some 145 a year, and shows no signs of stopping.

There are three broad types of 3PLs, and each has a different focus

  • Asset Based 3PLs maintain their own warehouses, personnel and often fleets of trucks or other vehicles.
  • Management Based 3PLs focus in providing technological solutions and management expertise, but apply them using their client company’s own assets.
  • Integrated Providers are often a hybrid of asset- and management-based 3PLs, using many of the client’s assets but supplementing them with owned assets.

How does a company go about finding a 3PL partner?

Once a company has decided to outsource some or all of their logistics function, they need to find the 3PL who offers all of the features they need at the best price and highest service levels.

In a typical scenario, an RFI or RFQ (request for information/quotation) is sent out to potential partner 3PLs. The request should be as detailed as it can be, and include all requirements that your company has, in order make the process efficient and accurate. At this stage, the company can eliminate many 3PLs who do not have the physical, technical, or managerial capacity to meet their needs, or cannot do so at a competitive price.

The RFI/Q should include, at a minimum:

  • The foreseen scope of the operation, including all departments, facilities and locations which will be involved.
  • The foreseen volume to be handled, including warehouse space, number of expected deliveries and individual item volume.
  • What performance levels are required, and desired.

After all the responses and bids have been collected, a team or committee should be assembled to review the bids. Make sure the team is composed of representatives from all effected teams or departments in your company. Remember, there are few parts of your business that are unaffected by your logistics function. Analysis is easier if you define which criteria are important before you begin. Common criteria include:

  • Is the 3PL offering all of the required services?
  • Do they have the technological sophistication to perform the requested tasks effectively?
  • Do they have enough excess capacity, in terms of warehouse personnel and space, dock capacity, etc.?
  • Is this 3PL in sound financial shape?
  • Are they located in a geographically efficient manner?
  • Has the response or bid been given in enough detail to be truly comparable to the other bids or responses?
  • Do references report that customer service is sufficient for your needs? Good or excellent customer service is more important than you may think.

Your team should review the bids based on your selected criteria, and assign an overall score to each bidder. The most important criteria should be weighted appropriately in scoring. The top two or three scoring bids are often chosen by management for closer investigation, including visiting them on site, interviews and in-depth financial review. Once the list has been whittled down as much as possible, negotiations with those who remain can begin.

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