The Complete Guide To Third-Party Logistics (3PL)

During the selection process, it is important to compare 3PL costs to your internal expenses. These costs are typically calculated using a few metrics such as:

• Cost per transaction – Depending on your business, this could be on a cost per order fulfilled basis, cost per outbound shipment, or even cost per unit fulfilled.  
• Fulfillment costs are a percent of net sales.

Use the RFP process discussed above to receive the detailed bids from 3PL vendors.  Be sure to take your assumptions regarding orders, lines, units, receipts, etc., and extend them to build out the annual costs for the initial year as well as subsequent years. 

You will find that not all 3PLs invoice for the same line items, which makes the comparison challenge.  This is why you will want to distill the bids to a cost per order, shipment, or unit fulfilled based on your business characteristics.  

Your internal costs will also be in a different format than the 3PL vendors.  Most likely your internal costs will be in more of a P&L view which means you will need to distill the data to the same level as the 3PL vendors – i.e., cost per order, shipment, unit fulfilled, etc. 

For example, fulfillment managers using internal fulfillment approve expenses for leases monthly, but generally don’t incorporate them into their cost per order thinking. This may represent 15% to 20% of the fully-loaded costs. They rightfully focus on costs they can control that impact order processing, such as direct labor and packing supplies.

To be comparable, over and above direct and indirect labor costs, a fully loaded cost must include the following:

• Lease costs, taxes, common area maintenance, and utilities.
• Depreciation or amortization of facilities, systems, and assets.
• IT costs or allocation of management expenses.

Will a 3PL partnership allow you to avoid facility expansion or a move to a new facility, or eliminate projects requiring capital expenditures for technology and automation? If so, a 3PL strategy may positively affect your company’s future growth, the capital needed, and business requirements. Include this in your analysis and comparison between internal and 3PL costs. 

Some businesses may be apprehensive about turning overall, or part of the fulfillment functions to a 3PL.  However, with the right due diligence, companies can build the confidence needed when making the decision.  

Once you have narrowed down your preferred 3PL vendors to one or maybe two vendors, your due diligence should include understanding the following components:

• Does your preferred vendor have a culture that fits well with your business?  
• Do you get the sense that you are not too small of a client for the 3PL vendor, or perhaps too large?
• Do you get the sense that they see you as just an additional revenue stream?
• Do you believe that they will be a partner which will help bring ideas to your company to help scale and streamline costs? 

• When you visit the vendor's facility, does it appear well organized and maintained?  
• Is there care taken to keep the facility clean and free of excess trash and empty cartons?  
• Do the workers take care of the facility they work in?  
• Does the 3PL take care of its employees? Simply seeing some areas like break rooms will give you a sense of how well the employees are looked after. 
• Is there room for growth within the facility, or is it overly full?

• Speak with clients of similar size currently being fulfilled by the 3PL, ask how well they support their business.
• How quick are they to respond to different challenges?
• How well have they kept to pricing? 
• Were there unexpected prices or challenges that weren’t known ahead of time? 
• Ask them, if they had to do it all over again, would they select the same vendor?

Pricing is an important component to selecting the right 3PL vendor, but it isn’t the only aspect that should factor into the decision.  Make sure that you understand the other facets that could impact your growth.

Many new users are concerned about turning over a critical part of their customer service (order fulfillment and distribution) to an outside third party.  They’re afraid that a 3PL won’t provide the same level of care or attention to detail.  

Building a strong relationship with the right 3PL begins with the proper level of due diligence, an often-overlooked aspect.  This due diligence should include:

• Reference checks to ensure that the level of care and attention to detail is being met with other clients.
• Site visits to the 3PLs facility – is the facility well organized and clean, are other customers' inventory well maintained, etc.
• Discussions with the vendor will tell you whether there is a cultural fit, or whether you are just another client.  
• Before contracting with the vendor, set your expectations for quality and services – these should then make their way into the contract. 

Assuming you have selected the right vendor for your business, it is critical to dedicate the right level of resources to keep things running smoothly.  This first starts with having a dedicated resource within your company that is the liaison between your company and the 3PL vendor.  This resource is responsible for:

• Notifying the 3PL of any product, packaging, or shipping changes.
• Training the 3PL on your products, receiving through packing processes, and dealing with returns.
• Reviewing the 3PL invoices and reconciling any problems. 
• Providing regular updates to your internal management team.
• Performance monitoring of the 3PL.  Many of our clients outsource fulfillment cost-effectively by managing 11 key indicators important to keeping 3PL service at high levels. 
• Working with the 3PL on any problems that arise in the operations. 

A second important aspect to making this work effectively is developing a strong partnership with the 3PL’s management and ownership.  Give them every opportunity to help you understand and help grow your business.  Be open with your strategic objectives, what the merchandise direction will be in the future, and the sales plans you wish to achieve. 

One recommendation for keeping service high and costs in line is to write measurable standards into the contract.  Every month have a brief standing call where your senior management and the 3PL review the successes and areas of needed improvement.  While liaisons between companies will be meeting via phone and email daily, it’s crucial for the management of your company and the 3PL to step back and briefly take the checkpoint monthly.

Once you select a 3PL vendor, you will want to negotiate certain aspects of the pricing to be in line with the Service Level Agreements (SLAs) and review the vendor's contract, working towards executing a mutually beneficial contract that encapsulates all the promises and expectations discussed throughout the sales process. 

For standard legal language, the 3PL will likely use a contract that is standard among its clients (known as a “master agreement) which vendors will be open to some changes but will resist language that is only one-sided towards the client or overreaches. 

Addendums to the master agreement are typically your opportunity to customize the contract to your business. Typical addendums include the statement of work, pricing, standards for performance, processing procedures, and schedules.  Spend the time analyzing and planning the three years’ business proforma so that you don’t incur higher-than-expected costs.

One of the most critical aspects of any 3PL contract is the language surrounding pricing and rate increases.  It is vital to ensure that the language is fair for both the customer, as well as the 3PL.   Negotiating the agreement takes time and a combination of business sense and legal guidance.  

You’ll want to discuss the contract with all stakeholders, upper management, and your attorney. Speaking with an experienced 3PL consultant can help you think through the consequences of various actions and potential problems.

Project management and planning are critical to implementing the 3PL transition.  Some 3PL implementations could be done in as little as 60 to 90 days, while others take four or six months depending on the complexity.  During that time, you’ll need a full-time project manager to plan out and track the status of the tasks daily and report to all stakeholders weekly.  This is not the responsibility of the vendor, although they will keep you updated on the status of their tasks.

Another major task in making this transition is planning and executing the move of inventory to the 3PL.  This involves counting, preparing, palletizing, transporting, and efficiently putting the inventory away in the new facility with high accuracy. It also includes minimizing shipping downtime. 

One of the most important aspects of transitioning to a 3PL is the data integrations, these will include:

• Inbound purchase orders and ASNs from your system
• Item and vendor updates from your system
• Inventory movements from the 3PL
• Shipping notifications and details back from the 3PL
• Integrations to various marketplaces
• EDI transactions 

It is important to have resources available to assist with the integration specifications and testing process.  These could be your own resources that understand your ERP system, or resources from the ERP vendor that can assist with preparing the files, etc. 

The 3PL vendor will also need to understand various aspects of your business so that the facility can be set up, and their people can be trained. You will need to educate and train the vendor on the following:

• Inbound inspection of the product during the receiving process. How products are to be picked – are there kits on the fly, or VAS that are required.
• Your packing standards and processes for customer orders.
• Returns processing and inventory disposition processes. 
• Refurbishing of the returned product if necessary.

In order to get the processes you want, you need to work closely with the 3PL, sharing your documentation and standards. 

Many multichannel and e-commerce businesses use profitably 3PL for fulfillment and distribution.  Third-Party Fulfillment can reduce the capital required to grow your business and reduce/stabilize costs.  To do so, you must clearly identify your business requirements and key data about your business and project these forward three years. 

Establishing a positive relationship with a 3PL requires good planning and control. Service levels and management processes should become part of contractual agreements to keep customer service high and at the budget you expected. Using an experienced 3PL fulfillment consultant can help you select and implement the right service provider to gain the benefits discussed. 

Additional 3pl Resources From f. Curtis Barry & Company

As part of 3PL Selection Projects, F. Curtis Barry & Company helps businesses identify their requirements and a short list of qualified vendors for your business. Click here for some 3PL providers you should consider researching their capabilities.

Of course, if your business is considering the transition to a 3PL and you'd like expert assistance considering, planning and navigating that transition, we're available to help. You can request information here or click the button to below to start the conversation.