Why Use a Third Party Logistics Provider

Why use a Third Party Logistics Provider and How to Implement a Successful 3PL Project

It has been proven time and time again why manufacturers, distribution companies, and those with supply chains need to outsource to third party logistics providers. Simply GOOGLE it and you will come across many articles which point out the benefits. Prominent reports also support the rising using of 3PLs as a way for shippers to take a competitive advantage. The below will give you the reasons why you should create a partnership with a third party logistics provider, and quick simple steps to implement a successful 3PL partner.

Why Use a Third Party Logistics Provider?

To Save Time: Partnering with a third party logistics provider will free up resources to focus on core competencies.

Because Someone Else Can do it Better: Even if you have resources available, another organization within the supply chain may be able to do it better, simply because its relative position in the supply chain, supply chain expertise and economies of scale.

To Share Responsibility: 3PL companies can share responsibility for managing global supply chains, keeping customers and stores properly stocked, and delivering the perfect order every time.

To Re-Engineer Distribution Networks: Logistics outsourcing to a third party logistics provider can be a quick way to re-engineer distribution networks to meet global market demands and gain a competitive edge.

Implementing a Successful Third Party Logistics Provider Project

Outsourcing Strategy: Without a strategy upon implementation of a third party logistics provider, there will be no clarity about outsourcing and outcomes to the organizations. It should be well thought-out and measured against the in-house solution and capabilities.

Document the Processes: To eliminate gaps in understanding and expectations of the third party logistics provider, organizations should develop Standard Operating Procedures for all the processes to be outsourced.

Analyze SWOT: This SWOT analysis helps to understand the strengths, weaknesses, opportunities and the threats of outsourcing logistics versus in-house solutions. Conducting a Comprehensive Study: The advantages, challenges and cost benefits of outsourcing to the third party logistics provider should be documented.

Create a Robust Selection Process: Adopt a scientific selection process. Invite eligible third party logistics providers for formal presentations on without giving any requirements. The organization can also hire a third party to help create a short list of service providers.

Document the Expectations: Set down expectations in clear terms and include current costs. This will help avoid confusion later.

Use a Request for Quotation (RFQ) or Request for Information (RFI): This tool will help gather information and measure strengths and weaknesses. Be as specific as possible, especially with forecasted quantities. The actual quantities cannot differ from forecasted or your prices may go up. Beware of third party logistics provider over-commitment.

Do Your Homework: Making a site visit. Interviewing the third party logistics provider’s existing customers. Evaluating responsiveness, ability to meet and exceed the expectations, management team quality, experience, flexibility and other factors important to company.

Create Good Legal Documentation: Document what is agreed and what is disagreed clearly. Address possible friction points and specify remedies.

Define Targets: Create specific performance targets not only to measure performance but also to initiate corrective action if needed. Explore the possibility of gain share arrangement for positive performance.

Measure and Review Performance: Use a Logistics Service Level Agreement (SLA) that is negotiated between the customer shipper and third party logistics provider so it is a win-win document. The key performance indicator (KPI) measurement system must be efficient and accurate. Create qualitative measures which focus on effectiveness and quantitative measures which focus resource efficient utilization. Some Fortune 500 companies measure performance daily, weekly and monthly and discuss it on a quarterly basis. Changes to measurements should be ongoing.

Develop an Efficient Costing System: This will help in understanding the costs involved in outsourcing and help the organization measure cost efficiency and answer the question, “Are we making any money doing this?” Gather detailed data about the true costs of receiving, storage, pick-n-pack, value-added processing, special packaging, staging and loading. Avoid “pallet in” and “pallet out” costing and consider adopting Activity Based Costing to understand variance between projected costs and actual costs.

Create a Project Implementation Strategy: Create a project plan or road map. Be clear with the service provider about who does what. Create a project management team should consisting of stakeholders from both organizations. Review progress vs. planned milestones periodically to make sure everything is on track.

Nurture the Relationship: Both the parties must nurture the relationship to make outsourcing successful, creating mutual trust, respect and a sense of integrity. Have you ever used or currently use the services of a third party logistics provider? What was your secret to success or what were your pain points/failures?