Logistics Outsourcing: Tips for Successful Selection of a 3PL

One area that the world's most successful companies attribute their success to is outsourcing their logistics and supply chain activities/operations to a third party logistics provider (3PL). Faced with increasing competition in the global marketplace of the twenty-first century, many companies world wide are turning to logistics outsourcing as a way to increase profitability and gain sustainable competitive edge. 3PL companies offer services that can allow businesses to outsource part of their routine logistics and supply chain management functions. The growth of 3PL companies has been driven by the need for organisations to become leaner, reduce costs and focus on core competencies. Many organisations are increasingly identifying the non-core functions within the organisation and outsourcing them to increase flexibility and operational efficiency and improve customer service levels.

In responding to global outsourcing needs, 3PL companies have been transitioning from basic commodity-service (transportation and warehousing) to a more comprehensive service offering. There is a growing trend for 3PL companies to expand their global networks and diversify by offering various services and ensuring various activities in order to meet the requirements of their customers. Services provided by 3PL companies have improved productivity and significantly reduced costs in many instances. That is why sixty percent of Fortune 500 companies have outsourced logistics relationships.

Outsourcing a company's supply chain is a big step. If your company has always managed its own logistics, outsourcing with a 3PL for the first time can be daunting, but if you find the 3PL partner that works for you, your company will benefit from a 3PL to create a higher performing supply chain and allow you and your people to focus on what you do best.

The benefits and risks of outsourcing

Before any organisation embarks on the 3PL selection process it is necessary to take care of certain risks in order to make the benefits of outsourcing a reality. The potential risks associated with outsourcing are:

Finding and attracting partners of the right quality

Downsizing of operations creating extra capacity

Deteriorating quality of service

Cultural differences between home and host markets

IT systems – dependency on 3rd parties

Rising wages

The outcome of outsourcing arrangements with a 3PL often depends on how the original contract is structured, how the customer/provider relationship is managed and how the end results are measured. When implemented correctly, outsourcing can bring huge benefits and prove to be a win-win situation for both the customer and the outsourcer. Among the benefits of a successful outsourcing relationship are:

Reduced costs

Improved service level and service offering

Strategic flexibility

Greater focus on core competence

Business continuity

Improved customer service levels

The benefits of outsourcing can truly be achieved by putting aside fears over loss of control, visibility, internal competency, and of being too dependent on a 3PL. Investing time and resources in the design and deployment of a proven outsource process and comprehensive service level agreements that balance costs and risks will help companies to experience the payoffs of working closely with a 3PL provider.

IT capability gap

Logistics and IT are inextricably linked; the information that IT systems provide is critical in supply chain planning and execution processes. IT-based logistics services are an essential part of the client-3PL relationship. However, there is a gap between client's expectations for their provider's IT capabilities and their satisfaction with those services. Only a minority of customers are satisfied with their 3PL providers' information technology capabilities. IT issues in client-3PL relationships include:

Inadequate performance reports. A larger issue here is the failure of current technology to deliver all of what shippers need.

Lack of sufficient project management processes and trained personnel.

Inability for some 3PL's to provide sufficient order/shipment/inventory information.

Each of these issues stem from the need for 3PL's to modernise their internal systems and adopt industry standards-based tools for integration to exchange data, coordinate business processes and collaborate more effectively.

As a result of these IT issues, companies are experiencing a lack of the key performance indicators, alerts and visibility required for an adaptive supply chain. 3PL's face similar difficulties in getting their clients to provide the data and commitment they need. On top of that there's an issue of trust and risk on both sides of the relationship. But the good news is that all these issues can be overcome through investment in open, cross-industry integration platforms that will allow for functional flexibility while preserving existing IT investments and limiting costs.

Why do some outsourcing initiatives fail?

Unfortunately 3PL relationships are always not successful. According to a recent Warehousing Education and Research Council (WERC) survey, 55% of logistics outsourcing alliances are terminated after 3-5 years. The most often cited reasons for failure include:

LACK OF CLEAR OUTSOURCING STRATEGY. Specifically, many companies fail to identify the advantages, challenges, cost benefits and organisational impacts of outsourcing.

ABSENCE OF A SCIENTIFIC SELECTION PROCESS. Inability to document expectations, processes to be outsourced, current performance standards and costing information in clear terms are critical, yet are often overlooked in the selection process.

INEFFICIENT COSTING METHODOLOGY. Collecting detailed data on the true costs of receiving, storage, pick-n pack, value-added processing, special packaging, staging and despatch is a challenging, yet fundamental task to performance assessment for an organisation. Whilst Activity Based Costing (ABC) enables organisations to accurately align and establish ‘in-house' costs, many organisations rely on less detailed and therefore less accurate methods to track outsourcing costs.

UNCLEAR LEGAL DOCUMENTATION. Many companies overlook critical areas when they define their contractual relationships. The aim of a legal document is to clearly articulate what is agreed and what is disagreed to avoid ambiguity in the relationship. All to often, in the absence of clarity, confusion prevails and confusion leads to inefficiency and inefficiency leads to a breakdown in the relationship.

LACK OF PROJECT IMPLEMENTATION STRATEGY. Lack of project implementation strategy will negate advantages of outsourcing. Many organisations believe that Project Management is the responsibility of the 3PL. Lack of project management skills and dedicated resources (from both organisations), unrealistic timelines and expectations are commonly cited as reasons for failure in 30% of all outsourcing implementations.

ABSENCE OF SPECIFIC PERFORMANCE MEASUREMENT SYSTEM. Absence of an efficient performance measurement system is a direct contributor to the failure of outsourcing initiatives. Despite the fact that logistics competency is commonly viewed as a competitive differentiator and a key strategic resource for any firm, most firms do not comprehensively measure, and more importantly, fail to realise their productivity and service potential available from performance measurement.

Common strategies that should be used in outsourcing

A successful transition to outsourcing with a 3PL is a process that depends on a variety of factors that differ from business to business. The decision to outsource will depend on the company's operation plans, goals, product lines, expansion, acquisitions, etc. Before making this decision, it is necessary to conduct a comprehensive study and document the advantages, challenges and cost benefits of outsourcing.

Once a decision has been made to outsource, the next step is to adopt a scientific selection process and appoint a team of consultants who are specialist in this area to assist in short listing and recommending the suitable 3PL that fits all your requirements at the best possible price. Evaluating and selecting the right 3PL partner is a challenging and risky process for even the most experienced companies. While this process can be challenging, a systematic approach and a well developed outsourcing strategy will clarify your needs and alternatives and positively impact the final decision.

The following strategy can be used for selecting a 3PL for your company:

SET OBJECTIVES. Clear business objectives for choosing a 3PL provider should be developed and prioritised. This will guide the selection process and assist in evaluating the success. The type of provider relationship that will be needed should also be determined.

DETERMINE CUSTOMER SERVICE REQUIREMENTS. Conduct upfront research to identify a select list of preliminary 3PL candidates. All eligible 3PL companies should be surveyed to determine facility locations, warehousing and distribution strengths and weaknesses as well as their service areas. This will help in eliminating companies that cannot adequately address your functional specifications. Developing a detailed method for critically evaluating the capabilities of 3PL candidates can make or break an outsourcing selection process.

SOLICIT REQUESTS FOR QUOTATION. The request for information (RFI) or quotation (RFQ) is a tool to gather information and measure the strengths with respect to capabilities and cost effectiveness of outsourcing. When selecting a 3PL, the RFQ document should be as detailed as possible and it should be accompanied by all relevant documents about the project and expectations. The RFQ should include a detailed description of the areas to be outsourced including: the scope of the contract, locations, facilities, departments; information on volumes involved, number of deliveries, warehouse sizes, number of items, etc.; the logistics tasks to be performed; the level of performance required. Furthermore, the RFQ should indicate a format for price quotation and a timeframe for responses.

VISIT THE POTENTIAL PROVIDER'S FACILITIES. Facilitating tours of a potential 3PL provider's facilities and interviews with their existing clients is an important next step. Experiencing the company's facilities gives you a chance to determine how flexible their operation is and their willingness to work to meet your needs as they change.

PREPARE LEGAL DOCUMENTATION. Contract negotiation is a pivotal step in a 3PL relationship. It is necessary to document what is agreed and what is disagreed clearly in order to avoid ambiguity in the relationship. It is also necessary to determine if the 3PL is accountable for the level of accuracy and product conditions and establish what party will finance improvements if system upgrades become necessary. The contract should address all possible friction points and address them with remedies. Exit strategies such as mediation and arbitration should also be part of a 3PL contract.

DEVELOP PROJECT IMPLEMENTATION PLAN. There should be a detailed logistics outsourcing project implementation plan as well as periodic reviews in place to make sure everything is on track and there are no drastic deviations in the scope of the project. The project implementation is the process of translating thoughts into actions and it requires active co-operation and co-ordination on both sides of the relationship. Project implementation includes IT integration, operating procedures customisation, understanding the service measures, defining the escalation process etc. All these activities require precise handling and a dedicated team. The 3PL companies usually have their own project implementation methodology. What is critical here is customisation, to suit the specific requirements and deliver agreed service levels.

DESIGN EFFICIENT PERFORMANCE MEASUREMENT SYSTEM. During the startup phase of the outsourcing relationship the customer must take the initiative to develop performance measurements and reporting methods that support the company's business goals for the outsourcing strategy. The 3PL's performance should be measured on qualitative and quantitative performance measures regularly. Ideally, financial, productivity, utilisation, quality and cycle time measures should be considered. One of the objectives of performance measurement is not just to measure the performance but also initiate necessary corrective actions with regard to negative performance and explore the possibility of gain sharing in the case of positive performance so as to encourage continuous improvements. Regular performance measurement presents the perfect opportunity for both the customer and the 3PL to communicate effectively to make the outsourcing relationship a great success.

TRUST AND COLLABORATION. The success of an outsourcing relationship between a company and the 3PL provider requires a combination of trust and collaboration. Trust determines the level of flexibility a company can allow the 3PL in managing the operations to the best of their capability. The outsourcing arrangement can be truly successful only when there is a high level of trust between both parties in the business relationship. Unless there is this sense of trust and collaboration in the client-3PL relationship, it most certainly will fail.

Companies who have managed to build a healthy structure of trust within their organisations are able to create a healthy structure of trust with their 3PL providers. Key to this is the understanding within the client organisation that there is a single set of goals and there has to be a commitment to support and live the goals. Once this infrastructure of trust has been created, then the client-3PL relationship can start to produce magnified value, and prove to be true win-win.

In order to build trust in your relationship with a 3PL it is crucial to select the right 3PL partner that can meet your particular requirements and with whom you can strengthen your relationships. Thus, the key to a successful logistics outsourcing is a well-organised process of selecting and communicating with the potential 3PL providers.