The rationale for outsourcing certain manufacturing and supply chain processes, such as transportation management, fulfillment, and more to logistics companies is evident and clear. Logistics companies help manufacturers and shippers improve customer service and satisfaction, global expertise in trade, reduce risk, enable rapid expansion and start-up, and reduce current and future costs. Recently, the Global Supply Chain Institute published a guide, “ Selecting and Managing a Third-Party Logistics Provider.” This report details instructions for properly selecting and managing third-party logistics companies or 3PLs. However, not everyone has time to read through and analyze each part of the report. So, let’s take a stroll through the reports most important parts.
Why Does Selection and Management Processes Matter?
The need to meet the Holy Trinity of Manufacturing (having the right product, at the right time, and at the right price) is only growing. 80 percent of manufacturers or shippers in the US use a a logistics company for domestic and international transportation. 67 percent use third party logistics companies for customs’ brokerage benefits and insight. 51 percent take advantage of third party logistics companies’ freight forwarding capabilities, and the use of third-party logistics companies increased 72 percent in 2015.
Organizations who utilize 3PLs typically experienced a 9 percent cost reduction. Similarly, agile supply chain solutions and lean processes are continuing to stand out as buzzwords across the internet. Blindly selecting a third-party logistics company could lead to devastating financial and physical consequences for a company, and constraints on shipping, warehousing, and transportation industry are set to tighten in the coming years. The key to making a successful selection rests in understanding what the 3PL brings to the table and how it will benefit the entity. As a result, shippers need to know how to select a third-party logistics company.
How to Select Third-Party Logistics Companies
1. Conduct an Internal Assessment.
How does an organization figure out their own needs and current resource deficiencies without an assessment? Shippers must review what is currently taking place before attempting to select a 3PL company. Furthermore, the entity must ensure the measured factors in current processes are accurately used and reflect actual processes within the existing structure. This helps make sure all potential third-party logistics companies are vetted before making a selection.
2. Plan the 3PL Selection Criteria
An organization should have a clear path for determining how to select a 3PL. These steps refer to the process of what is evaluated when reviewing the offerings and services of potential 3PL. Since some organizations may not necessarily specialize in outsourcing services through third-party logistics companies, the organization may opt to hire a consultant to help with the selection process (we recommend Chuck Intrieri of the Lean Supply Chain). In fact, 33 percent of organizations outsource potential expenditures of the organization, i.e. hiring the consultant should cost less than trying to change the 3PL without help.
3. Narrow Down Selection to Four Third-Party Logistics Companies
3PLs can be fickle. Statistically, a 3PL only has a 20 percent chance of being selected by a prospective organization. As a result, the 3PL does not necessarily have a vested interest in providing as much information as possible. Consequently, a smaller pool of potential 3PLs will serve to encourage those third-party logistics companies to work in reverse of this idea. Furthermore, the 3PL will work harder in negotiations to secure the contract in this scenario.
What Types of Requests Can Be Made?
When an organization selects a 3PL, a request is made. Each request represents the potential level of conversation between the organization and the 3PL, and each request helps to define what type of relationship will exist.
- Request For Quote reflects a short term solution to an organization’s needs. This simple request does not include the potential benefits of a strong relationship with the 3PL.
- Request For Proposal functions similar to a request for quote, but this request offers long-term solutions. Yet, the responsibility of defining 3PL-responsibilities rests with the organization.
- Request For Proposed Solutions places the responsibility of understanding, assessing, and implementing potential solutions in the hands of the 3PL.
- Request For Partner is considered to be one of the most effective requests of a 3PL. This long-term solution emphasizes the need for a strategic partner relationship between the 3PL and the original organization
How to Manage a Third-Party Logistics Company
3PL management is actually quite simple. It revolves around contracts, performance measurement and management, and governance of the relationship between the 3PL and the organization. The contract sets the standard, but performance measurement and management, such as a detailed set of key performance indicators (KPIs), helps to ensure contractual obligations or improvements are met.
Meanwhile, governance refers to how well the shipper and the 3PL interact. The best solutions do not place all responsibility in the hands of the 3PL or the client exclusively. Instead, the best solutions create a symbiotic relationship between the 3PL and the organization, encouraging a continuous-improvement environment and strengthening the bond between the parties.
The demand for faster, more effective, better, more visible, disciplined, and cost-effective solutions in the supply chain will continue to grow. For organizations currently considering outsourcing certain processes to third-party logistics companies, few decisions carry a greater risk or opportunity. By understanding the major points within the Global Supply Chain Institute’s report, your organization can make the right decision.
BONUS INFOGRAPHIC: Emerging Trends In Logistics Technology
We were fortunate to be sent this great infographic containing information from our post we did earlier this year predicting the logistics technology trends for 2016. The graphic was made by 2Flow, a logistics company out of Ireland. We hope you enjoy it! Feel free to share: