Learn about the many details important to selecting, contracting, and implementing 3PL fulfillment and logistics.
Read on or skip to a relevant section:
In working with companies to evaluate and select the right 3PL company, we are often helping management to understand the benefits and advantages of using the right 3PL to continue to grow their business and meet the customers' expectations. To continue to support internal fulfillment, a company must continually invest in:
These investments can come at a high cost and divert resources and capital away from potentially other critical investments to grow top-line sales or in merchandise development.
In addition, with increased customer demand and order volumes, the challenge of recruiting, training, and employee retention becomes harder for companies to manage in addition to the increased employee HR costs.
The benefits of utilizing a 3PL include:
With so many 3PLs in the marketplace, it can be difficult to determine which 3PL is the right partner for you. One way to compare the capabilities is to develop a comprehensive list of business requirements in a formal RFP that all vendors can evaluate. By documenting your business requirements, all vendors are seeing the same data and information which creates a consistent set of discussions with vendors.
Your 3PL requirements should incorporate the following:
There are hundreds of Third-Party Logistics providers. How do you select the provider that’s right for your business? At a high level, here are the steps we recommend following to select and contract with a 3PL:
As you think about management’s objectives, turn those into the business statistics, process, and systems requirements for the prospective 3PL.
One of the major factors in 3PL selection is the proposed fulfillment costs for the current year’s business and projecting the fulfillment details forward three years. These costs and details are used by the 3PL to estimate the cost of services.
Total fulfillment costs are based on four major categories of costs:
Typically, outbound shipping costs are quoted separately and should be analyzed separately to determine if you should remain on your own contracts, or take advantage of the 3PLs carrier rates.
At the heart of accurate pricing is collecting, analyzing, and projecting the details of your fulfillment operation for the expected contract duration to get accurate costs by year.
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:
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:
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:
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:
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:
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:
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:
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.
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.
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.